How do they do it?

[Cash]

Does anyone know how these high yields are possible? I know we all want to take advantage of it, but if the market can't support it, what good is it in the long run. S&P 500 has not had these 5% or 6% gains in years and online banks can only cut so many costs. Any comments would be appreciated.

Cash...

[Ima saver]

Re: How do they do it?

I worked for a small savings and loan in 1977. We charged 9% on mortgages and paid out 6% on savings accounts.

[genchan]

Re: How do they do it?

Part of it is a fundamental structural change in the banks. Notice that it isn't the regular banks offering these rates, but the online banks. Their costs are far less - no buildings or land to purchase, no maintenance of those structures, etc. It's a lot cheaper to run an online bank than a standard bank.

[disneysteve]

Re: How do they do it?

Does anyone know how these high yields are possible? I know we all want to take advantage of it, but if the market can't support it, what good is it in the long run..

You can be quite sure that if they weren't making a decent profit, they wouldn't be doing it.

[Ima saver]

Re: How do they do it?

My local bank is offering 4.14%, but you have to put in at least $50,000.

[msnln]

Re: How do they do it?

with the Fed Funds rate at 5.25%, the banks will do very well to give you 5% interest rate. Fed Funds rate is overnight lending rate between the banks. Technically, what federal reserve will lend at. So, they take your money and pay you 4-5%, then they can turn around and lend at minimum 5.25% to another bank. Banks borrow/lend among each other all the time.

[poundwise]

Re: How do they do it?


Even if you forget about the intrabank lending its still easy to see how they do it.

Consider for a moment walking into a bank and obtaining a loan. A personal line of credit. An auto loan. What's the range of interest on these? What about the credit cards offered through the bank?

They take your money and give you 5%. Then they lend it to someone else at 6.5%, 8%, 10%, or more (especially for credit cards.) Pretty simple to see how they turn a profit. Not to mention any fees, etc. they are able to charge people on these loans.

That's a rough and simplified explanation as there is acutally a lot more to it than that (especially in the case of a giant like Citibank, etc.) but, nonetheless, that is accurate.

[BTC]

Re: How do they do it?

In essence, they take in more than they pay out. That's what banks do.

[Cashguy]

Re: How do they do it?

Does anyone know how these high yields are possible? I know we all want to take advantage of it, but if the market can't support it, what good is it in the long run. S&P 500 has not had these 5% or 6% gains in years and online banks can only cut so many costs. Any comments would be appreciated.

Cash...

Many reasons but I think the yield curve and moderate economy help to keep some bonds steady also.

[irsmun]

Re: How do they do it?

Also keep in mind that for every dollar a bank has on hand they can lend something like twice as much according to the Fed. So your dollar getting 5% is being loaned out at as $2 at 9%.

[Young81k]

Re: How do they do it?

They can support such high interest rates because most of these jumbo interest rate savings accounts are only offered online. Pretty much the whole process is automated, so they don't have to build bricks banks and hire tellers to deal with the financial business regarding your account.

[joseblanco]

Re: How do they do it?

Many banks view their online extensions of their brick an mortar activities as a way of attracting more capital at an efficient cost. The costs of the internet bank + 5% interest = the cost of a brick-n-mortar bank + 0.5% but the former will attract a much larger amount of capital because of the interest rate. Then this new capital is put to work in the ways noted by the previous posts. Thus the bank's revenue stream is enhanced sigificantly by this increase in assets/deposits/cash available for lending but at the same overall costs to acquire and administer. Its a no brainer. The only concern a bank has is cannibalization of its current brick-n-mortar deposits. For a bank like ING its a non-issue for their US activities. Some brick-n-mortar banks will put restrictions on their internet offerings to current depositors, e.g. citibank. However, over all brick-n-mortar banks for now can rely on the pre-net generation, those who are not comfortable with exposing sensitive financial information on the internet, the non-tech savvy and those who do not have internet access.

[jmjj215]

Re: How do they do it?

Also keep in mind that for every dollar a bank has on hand they can lend something like twice as much according to the Fed. So your dollar getting 5% is being loaned out at as $2 at 9%.

Yeah the reserve ratio definitely comes into play. I think it mostly has to do with the lack of brick & mortar on their overhead.

[flash]

Re: How do they do it?

Just a comment, but the B&M banks are not the ones making the hugh interest on the cc's...if you compare how much an online bank gives out in interest vs how much they take in on cc at what, 22% or so...more people take out than deposit in.

[Hypersion]

Re: How do they do it?

Also keep in mind that for every dollar a bank has on hand they can lend something like twice as much according to the Fed. So your dollar getting 5% is being loaned out at as $2 at 9%.

Its closer to 10 times. it's called the Reserve Requirements.

http://www.newyorkfed.org/education/fed/tools.html