The old saying “If it sounds too good to be true, it probably is,” still applies in today’s online and mobile banking world. New high-yield accounts are being introduced on the internet and in the mobile world that offer around 1.5 percent on checking accounts (vs. the national average of 0.2 percent) or(vs. the national average of 0.3 percent). But they’re often not the great deals they first appear to be once you understand the details.
Keeping an eye out for these four red flags can help you identify potential issues before you decide to give one of these accounts a try.
The high-yield account isn’t from a bank
The first red flag is if the financial company offering a high-yield account isn’t a bank or credit union, but that doesn’t mean the offer is a scam. It may be an investment account that a brokerage company is offering, which shouldn’t be confused with a deposit account. Deposit accounts, such as a checking or savings accounts, are well-known to be risk-free because of federal deposit insurance.
In addition, banks and credit unions must follow specific regulations designed to keep these accounts safe. Different regulation and insurance requirements apply to investment accounts.
The high-yield account doesn’t exist yet
Several financial technology (fintech) companies have been trying to enter the banking industry, typically by partnering with banks. This allows them to offer checking and savings accounts while the bank actually holds the deposits. Often these fintech companies are overly aggressive in their launch schedules and promise more than they can deliver in terms of account yields.
A common practice is to use a waiting list before launching an account. Instead of applying for the account, interested new customers provide their contact information so they can be early applicants. The time from when the accounts are announced with waiting lists to when the general public can actually apply for one can be years.
In summary, it’s easy for fintech companies to claim they will be offering a high-yield bank account. Actually doing so to the general public is another story.
The high-yield account doesn’t have a long history
Banks have long used teaser rates as a strategy to garner new customers. Unless the account disclosures contain specific time guarantees, banks are free to adjust rates on checking and savings accounts. So it’s common for a bank to offer a very competitive rate for a few months to attract new customers — and then adjust the rate down to less competitive levels.
Internet banks have used several different variations of teaser rates. One approach is to continually come out with new promotional accounts with high yields. The banks quietly end the promotional rates on existing accounts while they introduce new promotional accounts for new customers.
Another strategy is to create new websites with new internet bank brands. Instead of raising the yield on existing accounts available at one website, a new website under a new internet bank brand is created with a higher-yield account. Existing customers must open a new account at the new website to take advantage of the higher yield.
Before opening an account, review the account rate history to ensure it does have a record of remaining competitive over multiple years.
The high-yield account has balance caps
A high-yield account may not earn substantial interest if the high yield applies only to a small balance. For example, a savings account with a 5 percent interest rate may sound like an exceptional deal, but if the rate applies only to account balances of up to $500 with no interest earned on the portion above $500, the maximum annual interest that can be earned is only $25.
Banks and credit unions often market high-yield accounts that have balance caps, and those balance caps often aren’t apparent.
Make sure to grasp the details
Finding any of these red flags doesn’t mean the institution or the account is a scam, but it does mean the account may not be the good deal that it appears to be. Evaluating the value of an account requires understanding the details. Any one of the red flags can make a high-yield account a bad deal that won’t be a good fit for your saving and banking needs.
Ken Tumin is founder and editor of DepositAccounts.com, which has been tracking and rating the savings, CD and checking account offerings of banks and credit unions for more than a decade.