While most banks are still lowering their interest rates, Ally Bank increased its rate today, November 13, 2009, to 1.64% APY. Although the rate is up, it is only 0.09 percentage points higher than the rate of 1.55% last month, the lowest rate from Ally Bank or GMAC Bank since I started watching interest rates at the beginning of this decade.

It seems like savers are being punished with these low rates, but I don’t see it that way. Inflation is still low, for now, so savers aren’t quite losing ground. But savings accounts aren’t meant to be appreciating investments, anyway. The low rate is the price we pay for safety and quick access to the money.

To compare Ally’s rates with other banks, and to see how the rates have changed over the past two years, check out this list of historical savings interest rates.

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Ally Bank Increases Interest Rate to 1.64% APY

With Congress threatening to create new consumer protection agencies to protect the public from customer-unfriendly banking practices, the Federal Reserve stepped in today to prove it is still relevant and involved with banking regulation. The Fed announced that as of July 1, 2010 for new bank accounts or August 15, 2010 for existing accounts, banks must have received permission from their customers before charging overdraft fees.

Overdraft protection will only be an opt-in service. There are some exemptions to this new rule, however. The only type of overdraft protection requiring customers’ consent is the type in which the bank covers the overdraft to cover the debit. If your overdrafts are covered by a linked savings account or credit card, you could still be charged a fee. Usually these fees are lower, such as $5 rather than $35.

Also, only overdrafts caused by transactions with debit cards or ATM cards qualify for opt-in only. If a customer writes a check that causes an overdraft when cashed, the bank is still free to charge an overdraft fee without the account holder’s permission. Banks still argue this overdraft coverage is a benefit that customers want and don’t mind paying the fee. Customers would rather have their rent or utility check go through if it costs $35 to cover the overdraft than to have their check bounce.

According to a recent survey by ING Direct, 24 percent of Americans are angry about overdraft fees. Are you angry? I can’t bring myself to get worked up about these fees, myself; avoiding them is pretty simple:

• Don’t let your bank account get anywhere close to a zero balance. Always keep a buffer in any account you use for making payments. If you get close to zero, you are much more likely to fall into a bank’s trap, including multiple overdraft fees on the same day.
• Don’t count on money you deposit into your account actually being there until you confirm that the cash is available. Sometimes check deposits take more than a week to clear, and banks can still pull back the funds for weeks after the deposit if there is a problem.
• Here are ten tips for avoiding overdraft fees.

Banks will earn almost $40 billion from overdraft fees this year, and you can be sure the industry doesn’t want to see that practically free revenue disappear. When one door closes, another opens. Banks will innovate and find news ways to collect fees. We already see Bank of America planning to charge annual fees to credit card users who pay their balance in full every month. I expect the news will be full of stories about new fees for the next year.

Photo credit: smith
Fed: banks need customer consent on overdraft fees, Associated Press, November 12, 2009

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Federal Reserve Issues New Rules for Overdraft Fees

It’s not every day that I find a bank account offering more than 2% APY, but as of October 30, 2009, I’ve discovered one thanks to a reader. “Ski Naut” contacted me yesterday to ask about SFGI Direct’s offer of 2.25% APY. I had not heard of the bank, so I looked into it.

SFGI Direct is the online banking division of Summit Community Bank, based in Moorefield, West Virginia. Deposits at Summit and SFGI Direct are covered by the FDIC as you would expect for any legitimate bank in the United States. To open the online savings account at SFGI Direct, customers will need to provide the typical personal information including Social Security number and employment information. The account requires a $500 minimum balance and initial funding deposits are limited to a maximum of $25,000.

For some people, SFGI Direct may be one of the fastest bank account opening processes from application to use. Like a small number of other banks, SFGI Direct allows “Instant Verification.” Most banks still offer only “Micro-Deposit Verification,” or the even more antiquated “Check Verification.” This means that after your application for opening an account is approved, if you link your new SFGI Direct account to an outside bank that supports this feature, rather than waiting two to three days for Micro-Deposit Verification, you can provide your account access details for the linked account. SFGI Direct will securely and privately confirm your account details with the external bank and allow you to immediately initiate your initial funding deposit.

I attempted to use the Instant Verification option to fund a new SFGI Direct account from ING Direct. Unfortunately, ING Direct’s verification process requires the customer to choose ten identifying questions. I don’t believe I set up ten questions and answers at ING Direct initially, so I was relegated to the slower Micro-Deposit Verification. After the weekend, I will be able to confirm my ownership of my linked account and initiate my funding transfer.

With this generous interest rate in comparison to other savings accounts, I have added SFGI Direct to the list of high-yield savings and checking account interest rates. You can SFGI Direct here.

Update: New customers are not currently welcome at SFGI Direct. As of Friday, November 6, the bank has closed its online application and presented this message on their website:

On Friday, November 6th SFGI Direct will again remove the “Apply Now” button from our website. As many of you noticed in July we removed the “Apply Now” button for approximately 2 months. It is our philosophy to deliver a competitive product to our clients.

SFGI Direct has chosen a strategy to slow down account growth by limiting the application process for new clients instead of dramatically cutting the rates on loyal customers.

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Opening an SFGI Direct Savings Account Earning 2.25% APY (Updated)

Here in the Untied States, ING Direct, a banking arm of the large financial company ING Group from the Netherlands, offers more than just high-yield online savings accounts. The bank also offers investments and mortgages, and some of the latter may have been too risky, like those sold and packaged into securities by domestic banks.

ING Group received a taxpayer bailout of €10 billion ($14.9 billion) and the European Commission is forcing the financial company to restructure in order to repay this loan. Part of this deal involves taking ING’s insurance companies public and selling the United States’ ING Direct by 2013.

The effect of this sale remains to be seen. Some time between today and the end of 2013, ING Direct will be owned by another company. This bank was one of the first to operate without any brick-and-mortar branches and the first to be an unmitigated success. When I first started paying attention to my finances at the start of this decade, the recommendations for ING Direct flowed from every information channel. With the highest interest rates in the savings account business, unusually capable customer service, and a slick and functional website, the bank was a favorite among the die-hard personal finance fans at the Motley Fool discussion boards.

More recently, ING Direct has moved from excellent to very good. I still recommend this bank to people who want a hassle-free experience, but their rates are no longer as competitive and their electronic checking account is not the best in class. For those with more money to put in savings, those who would benefit from a higher interest rate, I usually offer additional options.

ING Direct’s corporate message in response to those customers concerned about recent news of the impending sale is that your money is safe. I don’t think safety is the real concern. Accounts at the bank are insured by the FDIC, so even if the bank fails safety isn’t a problem. These are the questions you should have right now:

• Who will purchase the bank and will ING Direct’s core values change?
• If the core values change, will they be for the better (more competitive interest rates, for example) or for the worse (scaled back operations and customer service, for example)?
• What new account fees will be introduced?
• ING Direct employs about 1,200 in Delaware and another thousand more across the country. Will they have jobs and for how long?

These questions will not be answered for some time.

I do not see the announcement of this sale as a reason to move money out of ING Direct now. I will be watching developments closely, however. With the bulk of my savings in ING Direct, I am very sensitive to the fact that they do not offer the highest interest rate available. For years, the bank has counted on customers like me: those who first deposited when the interest rates were high and competitive and who have stayed around as other banks consistently offer higher rates. But I do not owe my loyalty to a company and will be quick to shop around if I am no longer getting a good deal considering cost, return, and service.

Photo credit: diaper
ING to sell Delaware-based bank in [sic] 2013, Eric Ruth, The News Journal, October 27, 2009
Post-Bailout Blues as Europe Orders ING Group to Sell 2 Units, Eric Dash, New York Times, October 26, 2009

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ING to Sell Online Bank ING Direct By 2013

As of October 26, 2009, over 100 banks have failed this year. Most of these are smaller regional banks who, in order to compete with larger banks, offered risky loans and are now facing customer defaults. Larger banks were offered government bailouts to prevent failure, but these smaller banks whose failures are not seen as major risks to the economy are left without taxpayer assistance.

The FDIC covers savings accounts, checking accounts, and certificates of deposit to ensure that customers hardly notice when one of these smaller banks fail. As long as a bank is a member of FDIC, and most are, customers should be confident that even if a bank fails, they will be able to withdraw their deposits within the coverage limit. Predicting the increase of bank failures this year, the FDIC decided over a year ago to increase its insurance limits. In 2008, only 26 banks failed compared to 106 so far this year.

Although there is often worry in the press that FDIC is underfunded and might run out of money, that situation is highly unlikely. The FDIC is requiring banks to start paying their FDIC premiums which have largely been ignored for decades to increase its available funds. The FDIC also has an extensive line of credit with the Treasury, and because Congress will always vote to make sure the FDIC will be able to cover necessary expenses, it is in effect a limitless credit line.

Here is a full list of banks that have failed since 2000. I will update this list as necessary.

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List of Failed Banks, Updated October 26, 2009

We told you last month about banks deciding to let customers opt out of overdraft fees, first announced by Bank of America and JP Morgan Chase, and then the next day by Wells Fargo (and Wachovia, which it owns).

These big banks made the changes very soon after lawmakers announced an intention to try to regulate the extent to which customers are punished for spending money they don’t have.

Here’s a summary of the changes already made:

* Fee will also be charged for overdrafts maintained longer than 5 days, regardless of balance.

Not satisfied, Senator Chris Dodd is still pursuing a new law that will enforce some limits on all banks.

Proposed legislation

The law introduced yesterday aims to prevent:

• more than one overdraft fee per month;
• more than six overdraft fees per year;
• fees that are more expensive than the cost of processing an overdraft;
• banks from manipulating the order in which they post transactions in order to rack up extra fees;
• fees if an overdraft is due solely to a bank hold, such as the hold placed on funds when reserving a hotel, if the hold is greater than the actual amount of the transaction; and,
• enabling overdraft protection on customers who don’t explicitly sign up for it.

In addition, automated bank systems (SMS, e-mail, etc.), ATMs and bank tellers would be obligated to warn a customer if they were in danger of going negative (presumably with the current transaction), and be given the option to avoid that result.

Analysis

Opt-in

I am all in favor of “opt-in”. I want opt-in everything, but as we saw when Windows Vista was new, it’s maddening to be asked for your permission after initiating every single activity. Some things are perfectly innocent and should be opt-out instead. Frankly, I find it thrilling that for the first time, customers can opt out of overdraft fees. Apparently, it took the threat of new legislation to prod banks into introducing this, so sure, let’s make it all consistent.

Fee instances per year, and per month

One overdraft fee per month and six per year seems arbitrary to me. If I had to guess, I’d say this is related to the fact that banks stand to earn over $38 billion this year on overdraft fees, and they weren’t in danger of losing anywhere near that much from accounts which went negative and then stayed that way.

But I’m enough of a capitalist to admit that it seems wrong to limit profits just because it can be done, which this seems to smack of. When the full text of the bill is available, I’ll try to find more about where these numbers came from.

Fees more expensive than the cost of processing

To be sure, it’s part of a bank’s operation to process an overdraft, deal with a negative account, and pay the salaries of people who write the software and maintain the literal and figurative machinery.

But as was explained to me while working the phones at Bank of America, part of the fee is also meant to dissuade the customer from going negative, and failing that, to encourage the customer to bank elsewhere. Clearly, the fees are adding up to lavish profits at the expense of probably-well-meaning customers. In my opinion, it’s simply not right to profit because someone else fails, especially when that someone is your customer.

Manipulating the order of posting items to create extra fees

This should be obvious as a disgusting practice performed by a heartless behemoth of a corporation.

Overdraft fees because of a bank hold

This also seems like common sense. If a hotel has reduced your available balance by $250 when you’re only going to be paying $110, it’s unreasonably for the bank to punish you for being overdrawn. You had no intention of spending more than you have.

The same is true if there’s a hold placed on a deposit. I’m sure the vast majority of deposits that have holds placed on them end up being legitimate, probably at least 98%. A check made out to you isn’t the same as cash, but why not give your customers the benefit of the doubt, or at least avoid punishing them when you don’t and you end up being wrong?

Warning customers who are in danger of going negative

This just seems like excellent customer service. If a bank truly finds it inconvenient to process overdraft fees, they’d all be doing this today.

Sources

Dodd Introduces Legislation to Curtail Overdraft Fees, Jeff Plungis, Bloomberg, Oct. 19, 2009
Dodd Unveils Bill to Protect Customers From Abusive Checking Account Overdraft Fees, Sen. Dodd’s Official Web site, Oct. 19, 2009
Photo Credit: Tom T

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Senator Dodd Going Ahead With Overdraft Legislation

Yesterday, Bank of America and J.P. Morgan Chase Bank announced they were changing their policies to allow customers to opt out of overdraft protection. Wells Fargo decided to follow in their footsteps late yesterday, announcing a number of changes at this bank. The following changes also apply to Wachovia, the bank that was acquired by Wells Fargo several months ago.

Wells Fargo is eliminating overdraft fees if the account is overdrawn by less than $5 and are limiting overdrafts to only four per day. Customers will be allowed to opt out of overdraft protection, so they don’t incur fees but transactions that would bring their accounts below zero will be declined.

All of these changes are improvements, although I see no reason for a bank to charge more than one fee per day. Regardless of what a bank charges, customers have the responsibility to monitor their own accounts. Accidents and emergencies happen, but in the end we should all be aware of what we have in the bank. The best defense against excessive bank fees is to pay attention and give the banks no reason to charge them. Here are some tips for avoiding overdraft fees.

Wells Fargo Announces Changes to Overdraft Practices, September 23, 2009

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Wells Fargo Joins Bank of America and Chase With New Overdraft Policies

Almost everyone has an story about the annoyance of overdraft fees.

We all had cause to rejoice after reading Smithee’s recent post about banks backing off of overdraft fees. However, banks, being the business that they are, are already scheming for new ways to wring money out of us.

An AP article on a local news site about new ‘business ideas’ banks are considering caught my attention. Obviously, banks exist to make money, and the quickly-fading overdraft fees are an easy source of income for these businesses. The AP article I read highlighted the fact that now that some banks are becoming more lenient and allowing for a bit more wiggle-room when it comes to overdrafts, they might be trying to stick it to you in other ways.

Banks may begin adding fees or minimum balances to checking accounts, or may charge for other services they offer. One way banks may look to make the best of this situation is to offer a variety of new products, all very similar but with different fees and charges built in.

Interestingly enough, the recent credit card legislation may have paved the way for new regulations on debit cards, as well.

The days of automatically enrolling every customer in overdraft protection may be at an end.

“Such changes could help offset the steep losses banks face as they overhaul their overdraft programs, which have come under intensifying scrutiny in the past year. Critics say automatic enrollment in overdraft programs, which has become an industry standard, is deceptive because most people assume they can only spend money they have when using debit cards.”

While banks will begin placing a whole new emphasis on attracting new customers and driving them to their more ‘lucrative’ products, it’s important to monitor your accounts and statements carefully over the next few months to be aware of any new charges or requirements placed on your accounts.

Being aware will help you save money and will avoid any of those annoying fees.

Source: Where Will Banks Make Up Lost Overdraft Fees?

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Vanishing Overdraft Fees Pave Way For New Charges

JP Morgan Chase Bank is offering a $100 bonus for new customers who sign up for the Chase Checking account. If you are not a current customer of Chase, you can qualify for this $100 bonus with an initial deposit of $100 and by initiating a direct deposit or five purchases using your new debit card within 60 days. You will receive your $100 bonus 10 days after your direct deposit or fifth debit card purchase.

Like most account opening bonuses, the $100 is considered interest, so it will be reported to the IRS as interest income. You might owe taxes on the bonus as you would owe taxes on other interest earned in bank accounts.

Keep in mind that in order for this account to remain free, you have to abide by Chase Bank’s rules. Keep your direct deposit or make five debit card purchases each month to avoid a $6 monthly fee.

Also, if you close your account within six months, Chase will take the bonus back.

You can either apply for the account online or at a branch. To generate and retrieve your coupon, click here. This coupon expires December 31, 2009, but if there are more coupons after that point I will post them here.

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Generate Your Own Chase Checking $100 Bonus Code: Updated October 15!

Overdraft fees are nothing to sneeze at. Having not always been a model bank customer, I know how it feels like an unfair punishment to have roughly $30 taken away when my account is already negative. I’ve also worked for Bank of America, and I can see why they use a dis-incentive to drive away bad customers.

I was a pretty generous Customer Service Rep., and would refund overdraft fees to as many customers as I could. But sometimes there’d be an awkward conversation when a customer would ask, “How can I stop getting these overdraft fees in the future?”

Naturally, I’d go into my speech about keeping a balanced checkbook (or something similar) with you, and how the “available balance” you’d get from an ATM or the phone service was often a lie. Some customers persisted (as well they should) and felt like there should be a way to not be allowed to go negative. It was tricky, and unlikely, but not always impossible to get your branch manager to agree to put that kind of hold on your account.

But now, any Bank of America customer can opt-out of overdrafting. If you’re down to $2.12 in your checking account, and you go to buy a Frappucino, you’ll have your card rejected at the register.

In addition, Bank of America also decided it won’t impose an overdraft fee if your account is above -$10, unless you don’t fix it within five days. And the limit of overdraft fees you can get in one day is now four, instead of ten.

JP Morgan Chase also announced that they’ll be changing their policies:

Starting in the first quarter of 2010, the bank will make overdraft protection opt-in for all customers, post transactions to accounts as they occur, and eliminate fees when accounts are overdrawn by $5 or less. It will also reduce the maximum number of fees per day to three from six.

Bank Of America Backpedals On Overdraft Fees, Huffington Post, Sep. 22, 2009

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Overdraft Fees: Some Banks Let You Opt Out

Most of us need only a fraction of what the Federal Deposit Insurance Corporation is willing to protect. For most people, the FDIC covers up to $250,000 per depositor. If you have up to $250,000 in a regular bank account offered by a typical bank that participates in the FDIC program, you’re protected against the bank’s possible failure. With FDIC coverage, your money will be there when you need to withdraw it.

The above statements are a bit simplified. Here are more details on FDIC coverage limits and what is protected by the FDIC.

If you require FDIC coverage above and beyond the $250,000 maximum, and the other limits specified in the links above do not cover your needs, there is another option. This option might be a good choice for a company with millions of dollars of cash that is not destined for investment or for a multi-millionaire who wants to keep a good portion of money in a safe investment. Certificates of deposit are good options for any portion of your portfolio that you want to ensure will not lose money and will earn interest. If that portion is more than FDIC will normally cover, you have another option.

If you diversify your CDs across multiple banks, you can extend your FDIC coverage. As the FDIC will protect up to $250,000 per depositor per bank, by spreading your money in CDs across four separate banks you easily increase your covered amount to $1,000,000. But if you have many millions of dollars to invest in CDs — and let us all have this “problem” some day — administering your investment grows in complexity.

This is how you can gain FDIC coverage for up to $50 million instead of managing accounts at 200 separate banks.

Certificate of Deposit Account Registry Service

The Certificate of Deposit Account Registry Service (CDARS) is a program that allows you to purchase CDs at different banks, providing up to $50 million of FDIC coverage rather than the typical $250,000. You work with only one service and you receive only one statement. The whole system is simple.

To sign up, you can work directly with any bank that is a member of the CDARS network. The member bank will take your deposit and invest it among other banks in the network. The amount invested with each bank will be less than the FDIC maximum to allow for the interest you earn to be within the coverage limits as well. As the depositor, you’ll receive only one statement even if your money is distributed across more than a hundred banks. The statement will show you where your money is deposited.

Also simplifying the experience, you earn one overall rate rather than different rates at each bank, and you can choose a maturity ranging from 4 weeks to 5 years. There are no fees of any kind for using this service, but the aggregate rates offered may be slightly lower than if you managed the full diversification yourself.

Find a bank that participates in CDARS by using this search tool.

CDARS is not practical for me right now, but it appears to be a useful tool for anyone or any company that has a large amount of money they would like to leave in safe, liquid investments. I do plan on using certificates of deposit at some point in the future, and I will likely build a CD ladder when I do.

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How to Have $50 Million Covered By FDIC: CDARS

This is a guest article by Jim. Jim writes about personal finance at Bargaineering.com. You can also find him on Twitter (@bargainr) causing a ruckus.

Consider two individuals trying to save for the future. John saves a hundred dollars a month into a magical investment that gives him 6% a year. After forty years, he ends up with a nice chunk of change: $199,149. Joe starts one year later, saves a hundred dollars into the same magical investment that gives him 6% a year. Do you know how much he gets after 39 years? $186,417.

$1,200 and an extra year gives John an additional $12,732 in savings. That’s over a ten times what he original contributed.

Let’s wait another year, what then? Let’s say we let Joe contribute the extra $1,200 and John stops his contribution. What then?

Joe ends up with $199,149, because forty years is still forty years, but John, with an extra year of savings, finishes 6% ahead – $211,098. For those keeping track at home that’s nearly $12,000 for almost nothing except waiting.

It’s Year 40, Not Year 1

Compound interest helps the person who saves early not because they started earlier, but because they have more time at the end for their money to grow. After year one, when Joe has saved nothing and John has saved $1,233, the difference looks so minor. Joe is only a little bit behind. The problem is when you look at year 40… after Joe has come to his senses. By then, the small little head start that John had in year 1 has magnified itself over forty years.

If you want a good sports analogy, golf is the perfect one. Small minute changes in your golf swing can dramatically change where the golf ball goes. If you don’t hit it square or have the club face tilted, the ball will hook or slice. Over even a hundred yards, the difference is great. The same is true for saving money and compound interest. Save early and you will reap the benefits later on.

Save Anywhere, Just Save!

One thing that hamstrings people is deciding how much to save and where to save it. Start small, just $1 a day means $30 a month. If you can manage $3, that’s $90 a month. Any amount greater than zero is better than nothing; action is better than inaction.

Where you save is up to you. If you want to put it in the stock market, invest it in index funds. If you are afraid of the stock market, put it in an online savings account or a high yield certificate of deposit where it’s 100% FDIC protected (up to $250,000). It doesn’t matter where as long as you start saving.

Don’t be like Joe, be like John and you’ll thank me in forty years. :)

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Compound Interest is More Powerful Than You Know

As banks search for methods of increasing profits, increasing fees is a popular option. In the last year, overdraft fees have been the targets of increases designed to help banks boost revenue. According to recent research, banks project earning $38.5 billion from overdraft fees alone in 2009. Ninety percent of these fees come from only ten percent of customers, so it would be fair to say that it is more likely to be a serial offender than a one-time offender.

You may find that it has been more difficult for those one-time offenders to talk their way to a reversal of a fee through customer service. In times like these, when the banks want to protect their money as much as possible, it makes sense for consumers to avoid overdraft fees in the first place.

If you follow these suggestions, there should be no reason for you to be charged an overdraft fee unless you make a mistake.

1. Balance your checkbook. There is a disconnect between the checking account balance according to the bank and how much money you have to work with. If you have a traditional personal checking account, the bank doesn’t know when you write a check. It’s your responsibility to know how much money you have available at any one time. The best way to do this is to keep a register. Start with your opening balance, and subtract from it every time you write a check and add to it every time you make a deposit.

2. Don’t forget about your debit card. It gets difficult to balance your checkbook if you also use a debit card to get cash or to pay for purchases. When you sit down at your desk to write checks to pay your bills, all of your financial information is in front of you and you can easily enter the check amount in your register. But when you use a linked debit or ATM card, you need to hold onto your receipts so you can enter the transaction into your checkbook at a later time. If you remember.

3. Access your checking account online. Online banking is one of the greatest benefits of the internet. Rather than waiting for your monthly statement in the mail, you can log onto your bank’s website and check your recent transactions at any time. If nothing else, checking the bank’s records for your account more than once a month helps you become familiar with the transactions that flow through your account and how low you like to keep your balance.

4. Keep your balance well above the minimum. Some checking accounts charge a fee if your balance dips below a certain minimum, but almost all will charge a fee if that minimum is $0. Give yourself a buffer. If you withdraw an average of $2,000 each month for your mortgage and other bills, don’t let your bank account float below $2,000. This way, you always have a month’s worth of expenses ready to protect you from $0. Since checking accounts often offer lower interest rates than savings accounts, particularly high-yield savings accounts, you will be giving up a small amount of interest income, but the protection might be worthwhile.

5. Link your checking account to a savings account. Many banks offer the option of linking a checking account to a savings account. In the even that your checking account dips below $0 due to a cashed check for which you have insufficient funds or a charge on your debit card, the bank automatically transfers money from your savings account to cover the withdrawal. Some banks will charge a fee for this service, but the fee is often lower than an overdraft fee.

6. Link your checking account to a line of credit. If you have good credit, this is a legitimate option. Rather than withdrawing funds to cover your overdraft from a savings account, the bank taps your line of credit. You will owe interest on the amount you borrow from your credit line, and you may owe an annual fee for use of the credit line, but the total fees could be substantially lower than a typical overdraft fee.

7. Ask to remove overdraft protection. Banks believe overdraft protection, even for a fee, is a service customers want. In many cases, that is true. If you send your mortgage or rent payment, you might prefer the large check not to bounce. Bounced checks cause problems for the recipient and the sender; overdraft protection eliminates this hassle. If it is not likely that you will bounce a major payment, it might make sense to ask your bank to remove the overdraft protection feature for your account. Keep in mind that you will still be charged a “returned check” fee if you bounce a check.

8. Track your finances electronically. There are many tools now that let you connect directly to your bank’s databases to download and list your transactions automatically. My current favorite is the desktop version of Quicken, but even with its robustness, this type of software may be more than what is necessary for avoiding overdraft fees in a checking account. I suggest signing up for a free service like Quicken Online, Mint, Thrive or Wesabe to put all your financial accounts in one place.

9. Create reminders and notifications. Many banks continue to improve their technological offerings for checking accounts. I know of at least one bank that will, if you enable this feature, send you a text message if your bank account decreases to a balance you define. For example, you might receive a notice when a cashed check reduces your balance to $95, five dollars below your established warning minimum of $100. If your bank doesn’t offer this feature, one of your linked services will. Although I don’t use this service often, I receive an email from Mint when my Wachovia personal checking account balance dips below $2,000.

10. Look for free overdraft protection. Some credit unions offer checking accounts with free overdraft protection. You can start at the Credit Union National Association’s credit union finder.

Overdraft fees happen to the best of us, because we are all human and make mistakes. The best thing we can do is reduce the occurrence of these fees to a point at which it will be much easier to talk with the bank when the mistakes do happen. Opening a line of communication can help, and if you maintain a good conversation with customer service representatives, you may be able to convince banks to make an occasional overdraft fee disappear.

This negotiation works best when you have a positive history with the bank. The more overdrafts you have on your record, the less likely the bank will be willing to forgive your fees. If you prove yourself to be a good customer, you have a better chance of being rewarded.

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10 Tips for Avoiding Overdraft Fees

When I started formally tracking high-yield savings rates, with a shared online spreadsheet, it was common to see banks offering interest rates above 5.0% APY. That was in January 2008, and the economy is in a different situation now. According to the government, there has been no measurable inflation, and now interest rates for lending are held low to stimulate the economy. Savers suffer in these conditions.

Bankers were livid this past spring when Ally Bank, a re-branding of GMAC Bank which had been tainted by the bailout of General Motors, rose like a phoenix and maintained the same interest rate it had been offering in its previous incarnation. The director of the FDIC got involved to prevent Ally from using its bailed-out position to create an unfair competitive advantage over other banks.

The bank must now be confident that it is no longer on the FDIC’s bad side. Click here for the latest interest rate from Ally Bank. It’s a small increase, resulting in only 50 cents more a year on an initial $1,000 balance. It seems to be a signal, though weak, that Ally wants to be considered a stronger bank than others, but I don’t think it’s a signal that we should expect to see more banks raising interest rates.

I do have an account with Ally Bank and you can read my review of the Ally Bank savings account here.

Today’s interest rate increase should not be enough to convince someone to move all of their money into this one bank, but if you have the inclination, Ally is a good choice for a diversified portfolio of savings accounts because at this time, I would expect they will continue offering one of the highest interest rates for highly liquid accounts and despite FDIC’s funding woes, your money should be safe.

See the review of the best online savings accounts – updated November 13, 2009.

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Ally Bank Increases Interest Rate

Update: The waiting list is currently full. Keep reading Consumerism Commentary (or subscribe) to be notified when the waiting list is open again.

ING Direct is one of my favorite banks due to their savings account. While ING Direct’s Online Savings Account does not offer the highest interest rate, they are consistently towards the top offering much more to savers than a typical brick and mortar savings bank, have a fantastic website, and offer a smooth experience when dealing with customer service.

While I have started exploring other high-yield savings accounts like FNBO Direct (review), Ally Bank (review), and EverBank (review) I still use ING Direct for the bulk of my cash management.

Here are some of the ways I currently use ING Direct:

• Every two weeks, my pay check is automatically deposited in my ING Direct checking account (known to the locals as “Electric Orange”).
• Each month, several services deposit money directly into a couple savings accounts at ING Direct.
• My money at ING Direct is split into twelve sub-accounts, ten personal and two business, with names like “Orange Vacation Fund” and “Orange Emergency Fund.”
• I have two PayPal accounts, and one sub-account at ING Direct corresponds to each. This way I can maintain very small balances in the linked accounts to prevent problems with PayPal. When I withdraw money from PayPal into ING Direct, I can move the money to a different sub-account immediately.
• ING Direct works with Quicken’s Direct Connect feature, which means I can download my bank transactions from the software and reconcile the account automatically.
• My credit cards are configured to automatically deduct the full amount of my bill from my ING Direct checking account on the date the payments are due.

Although ING Direct’s interest is not competitive with the newest online banks, you can match or exceed the income generated by this savings account by using the bank’s referral feature. For each friend you introduce to the bank, ING Direct will thank you with $10 for you and $25 for your friend in the form of an interest bonus. You have 50 opportunities to earn the $10 bonus for a total of $500.

Unless you’re extremely well-connected, it is unlikely you have 50 friends who are interested in opening an account in ING Direct (though they should be). So for the last year or so I’ve been helping Consumerism Commentary readers by connecting them with potential new ING Direct customers. Through this announcement last year, I’ve already helped over 300 readers earn some extra money towards their $500 limit.

I am running out of names of readers waiting for their turn to earn a bonus so I am re-opening the waiting list. If you are interested in earning bonus interest from ING Direct, comment here (comments on this post are now open) or on any earlier article about ING Direct and mention you’d like to be added to the waiting list. I will cut off the waiting list at about 100.

Update: The waiting list is full again as of 11:15 PM ET on August 18, 2009, eleven and a quarter hours after this notice was posted. Thank you, everyone. I’ll post a new message in a few months when the waiting list is open again.

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Earn $500 By Referring Friends and Readers to ING Direct

If you are disappointed with the low interest yields offered by even the highest-yield savings and money market accounts, but you don’t want to tie your short-term cash in a riskier investment, consider certificates of deposit (CDs). CDs, however, generally carry penalties if you withdraw your cash before they mature. In other words, you invest in a CD designated with a length of time that represents when you would like your money, plus interest, back. But if you need to liquidate the CD, a bank may take away some or all of the interest that has accrued since the time of the deposit.

A certificate of deposit is considered a “deposit account” just like a savings account or money market account. You are allowed to earn interest, and if the bank enrolls in the program, your cash will be protected by the FDIC up to the limits allowed by law.

There is a way to structure your certificates of deposit in a form that reduces the risk of losing a large portion of your interest, and it is called a CD ladder. At staggered intervals, you buy CDs with staggered maturity dates until you only need to buy CDs with the longest maturity date. The result is every few months, a CD matures and you can roll the cash into a new CD or use the cash for your short-term expense needs.

The process consists of two phases. For this example, we’ll use the latest rates from Ally Bank which does not have a minimum balance requirement.

Setting up the ladder

These are the CD products and interest rates (effective November 6, 2009) we will be dealing with:

We can use this combination of maturities to create a ladder that provides us with a roll-over, or a chance to withdraw part of the cash, every three months. During Phase 1, this will require a combination, but by Phase 2, all CDs will be of the 5-year maturity, which usually offers the highest interest rates. Remember that five years is as long as you want to go; any money that you won’t need for more than five years can stand to be in a slightly riskier investment.

Assume that we have $10,000 that we’d like to begin rolling into certificates of deposit. Since the longest we want to go is five years, we can split this evenly over time at $2,000 per year. Our shortest maturity is three months, so we can tackle this in terms of $500 a quarter.

In the first phase, start on day zero by buying CDs in the following pattern:

• $500 in the 3 month CD
• $500 in the 6 month CD
• $500 in the 9 month CD
• $2,000 in the 12 month CD
• $2,000 in the 2 year CD
• $2,000 in the 3 year CD
• $2,000 in the 4 year CD
• $500 in the 5 year CD

At the end of the each of the first three quarters, withdraw each quarter’s $500 plus interest and use the funds to buy new 5 year CDs. For the sake of the example, we’ll withdraw the interest and place it in another bank account to use as income. To make more of your money, “reinvest” your interest each quarter.

Watch out for automatic renewal. At Ally Bank, CDs are automatically renewed for the same duration when they mature. During this stage, you will need to be proactive to withdraw the funds at maturity and use them to buy the next appropriate CD.

After one year of doing the above, this is what we have:

• $2,000 maturing today (original 12 month CD)
• $2,000 maturing in one year (original 2 year CD)
• $2,000 maturing in two years
• $2,000 maturing in three years
• $500 maturing in four years
• $500 maturing in four years, three months
• $500 maturing in four years, six months
• $500 maturing in four years, nine months

With the $2,000 maturing today, buy:

• $500 in the 3 month CD
• $500 in the 6 month CD
• $500 in the 9 month CD
• $500 in the 5 year CD

Do the same with the $2,000 that matures each year until you have 20 CDs, each maturing every quarter for the next five years. Once this process is complete, you can allow the automatic renewals to take effect except for when you need to withdraw your money.

Drawbacks of the CD ladder

You may notice that, as long as rates for long-term CDs remain higher than short-term CDs as they do most of the time, this method results in earning less than simply investing your entire $10,000 in a 5 year CD. But the CD ladder provides you some protection against losing interest if you need to withdraw your funds early. At Ally Bank, the penalty is not significant. This bank will charge you the amount of three months’ interest if you withdraw a CD with a maturity of 12 months or less or 6 months’ interest if you withdraw a CD with a maturity of longer than 12 months.

Another possibility to consider is that you might earn more interest in a high-yield savings account than you would in a short term CD. Ally Bank’s Online Savings Account earns 1.55% right now, making it more attractive than the 3, 6, and 9 month CDs. When this is the case, use a specially designated savings account rather than the short term CDs.

We could have made this process easier by setting up a ladder that results in a turnover of $2,000 once a year rather than $5,000 every quarter. This method allows you to decrease the possibility of losing interest because you will always be able to access a portion of your investment within three months. In combination with a savings account, which is liquid at all times, you can earn consistently higher interest rates with less risk than using five-year CDs that mature only once a year.

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How to Create the Ultimate Certificate of Deposit (CD) Ladder

See the review of the best online savings accounts – updated August 18, 2009.

A few weeks ago, I noted the interest rates offered by EverBank and decided to open the “Yield Pledge Money Market Account” to take advantage of the generous “bonus” interest offered in the first three months of holding an account. The account opening process, beginning on July 8 and culminating late last night, July 23, was more of a chore than I planned, but there is an explanation for most of my dissatisfaction.

Initial online banking application

The beginning of the process was much like that for any other bank. I visited everbank.com and proceeded to apply for my account online. The first step was to choose the account type. Everbank offers a number of products, including a money market account, a checking account, certificates of deposit, credit cards, and investment accounts. I like starting small, so I chose the aforementioned Yield Pledge Money Market Account, noting the $1,500 minimum deposit required to open the account. (Many online banks do not have any minimum deposit requirement.)

After choosing the account, I provided my personal information. EverBank asked for the same information I usually see on other banking applications including Social Security Number and my mother’s maiden name as security measure. I was also asked to provide an additional security code and hint.

Everbank asked for my employer’s name and phone number, though they offered alternative responses such as self-employed, retired, homemaker, and student. I could not choose both self-employed and name an employer, so I named the company I work for during the day. Questions about employers are occasionally asked on banking applications, so this did not raise any concerns.

The next step required a credit check. Applicants can choose whether to allow an instant credit check during the application process or to delay this part of the process. I was anxious to begin banking quickly, so I authorized a real-time credit check. In order to further validate my identity, a number of questions were generated based on the information on my credit report and I answered all to satisfy EverBank’s requirements. Though I am starting to forget old addresses, employers, and loan issuers, I succeeded in answering the questions correctly. This is a common method for proving identity.

Funding options

Having satisfied all of EverBank’s curiosity, or so I believed, I was offered with the options for funding my account. My initial $1,500 could be deposited with a written check or by bank wire. There were no ACH or EFT options provided to me. This would be explained to me later, but at the time of application, I was disappointed.

With modern online bank accounts, I expect technology to provide me with instant options. I expected the entire account opening process might take three business days at most, with the bulk of that time spent waiting to verify an external account for transfers.

I chose the check option, and wrote a check from my personal account. Note that I wrote the check for $1,500, the amount listed as the account minimum. If my average balance were to fall beneath this amount during any month, I would be charged a fee. I know this because EverBank required me to agree that I read about their rates and fees before continuing. Keep this in mind for later.

EverBank asked me whether I’d like to print the application or received an application in the mail within five to seven days with my information pre-filled. Again, this was too much paperwork for what is supposedly an online bank account.

Filing the application and troubleshooting

On July 12, four days after beginning the process, I received the pre-filled application in the mail. I signed and dated the documents, included my check for $1,500, and mailed the package back to the bank. I received no further communication for more than a week, when on July 20 I received an email to let me know that my application was received and my account had been opened, but I would not be able to access my account until I received a second package from the bank in the mail to welcome me as a customer.

After receiving this email, I expressed my disappointment with the account opening process here on Consumerism Commentary. This article attracted the attention of the bank, and on July 21, the same day I posted the article, I received an email from the Vice President of EverBank in charge of “acquisition marketing” at EverBank. He was concerned with the delay I was experiencing and he said he would look into my application to determine if there was a problem.

The next day, we spoke on the phone. This was Wednesday this week. He explained that my credit report showed that there is a business registered at my mailing address. Although there was a typo in the name of the business, there is certainly a registered business here, representing this blog and other internet development work. As I signed up for a personal account and there was a business associated with my address, that produced a red flag.

Due to the fact that my address is “mixed-use,” I was not able to take advantage of the ACH initial funding option or electronic signatures. According to the VP, most new account holders will not have to go through the lengthy process that I experienced.

I would be interested to hear from those who have had a smoother experience opening and funding their account. I do have to wonder whether I received attention from the bank that other customers without popular personal finance blogs might not receive.

This story is not yet over, however.

Accessing the money market account

I received the welcome packet last night and used the information provided to access my new money market account online. Once logged in and viewing my balance, I immediately double-checked the fee schedule to ensure I would never be charged fees for maintaining this account. To my surprise, the minimum average daily balance for the Yield Pledge Money Market Account was now $5,000 instead of $1,500! The welcome packet I received contained a schedule of fees that does not match the schedule online, which I linked to above and will link to again. At the time I am writing this — because anything can change — the PDF linked here lists $1,500 as the minimum average daily balance required to avoid a $4.95 monthly fee. The document I received in the mail lists $5,000 as the minimum average daily balance required to avoid an $8.95 monthly fee.

I hope that the mailed schedule of fees (with the higher minimum balance and the higher monthly fee) is older than and has been superseded by the schedule I see online. Here is visual proof of this discrepancy.

Does anyone else see the problem here? I’m preparing this article, like I do many for Consumerism Commentary, in the middle of the night. It’s unlikely that customer service is available to settle the dispute between documented fees, but I will update this article once I receive an explanation. Note: I have included an explanation at the bottom of this article.

Linking an external account for transfers

Anxious to ensure I was avoiding a fee for using an account in a banking environment in which it is so easy to find fee-free money market accounts, I immediately began configuring a linked external bank account to transfer $3,500 more into my EverBank money market account, which was looking decreasingly like a good account to maintain. I chose to set up a link between EverBank and ING Direct.

There were two options to create this link. I could either enter my ING Direct login information or wait for EverBank to deposit two small dollar amounts into the ING Direct account which I could then verify later. I chose the instant option, but ING Direct did not accept my login information as I entered through EverBank. I think this is related to ING Direct’s security policy that restricts other applications, like Mint and Quicken Online, from linking to ING Direct. (You can hear ING Direct’s chief operating officer Jim Kelly explain this on this coming Sunday’s Consumerism Commentary Podcast).

I resorted to linking the account via the slower deposit verification method, and it will be a few days before I can complete the process of adding to my balance.

Conclusion, thus far

I decided not to wait for the final transfer before writing this review. While I understand that it is possible that having a business registered at my address will raise warning signs to the bank I realize that EverBank’s anti-fraud policies have been successful for the company, the process has been inconvenient overall.

If you have experiences with EverBank, whether positive or otherwise, please feel free to share.

Update: Explanation of the minimum balance and fee discrepancy

On July 8 when I first accessed everbank.com and began my application for the Yield Pledge Money Market Account, I was re-routed to a back-up or redundant server, and that server had not been updated with the latest fee schedule. With my luck, I managed to access the redundant server when I activated my online access as well. Perhaps this is due to my tendency to work late at night when redundant servers are more likely to be active while the main production servers undergo maintenance.

It was actually this post that brought the issue to the attention of the server administrators at EverBank. At 1:00 pm on July 24, the back-up server was updated to link to the new fee schedule, which includes the minimum $5,000 average daily balance and the $8.95 account fee.

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EverBank Money Market Account Review

Last I checked, this is the twenty-first century. In the last few years, I have developed certain expectations for the banks I deal with, particularly those that offer online banking. On July 8, I signed up for an account with EverBank, a money market account offering a high bonus interest rate for the first three months after opening. I’m aware that the PATRIOT Act established “Know Your Customer” regulations that require banks to protect themselves against laundering, identity theft, and theoretically, terrorism, but this is ridiculous.

After signing up for the account online, I received a pre-printed application in the mail four days later, July 12. I returned the application, signature card, and check — EFT or ACH funding was not an option — through the mail the next day. I received no further communication from the bank until July 20. This communication came in the form of an email to let me know my paperwork had been received and I must want until I receive a welcome packet in the mail. The welcome packet will include my account number, and like a wild goose chase, I won’t know my next steps for establishing this account until I receive this next communication.

It has been two weeks so far, and I do not have access to my account. Other modern accounts provide access and funding within days. While EverBank does not describe their High-Yield Money Market Account as an online account other than to say that online access is available, the amount of paperwork is reminiscent of the 1990s.

At some point, I hope to provide a full review of the opening process and accessing money through EverBank, but it’s taking longer to get to that point than I anticipated.

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Still Waiting for EverBank to Open My Account

The state of California is in poor fiscal shape. Without an agreed-upon budget, the state has resorted to sending people and businesses IOUs rather than the money owed. California has distributed $335 million in the form of these documents. The IOUs look like checks with “Registered Warrant” printed in the top corner, carry an interest rate of 3.75% and they can theoretically be cashed or deposited in October or earlier if the state comes up with the money.

Many banks and credit unions have been accepting the IOUs for deposit for recipients who are willing to forgo the interest. But on Friday several banks have begun refusing the IOUs. Wells Fargo, Bank of America and JP Morgan Chase no longer accept IOUs issued by the state of California. It is their intention to encourage the government to resolve the budget crisis as soon as possible and they believe this move will put pressure on the state to get closer to resolution.

Individuals who have cash now are taking the opportunity to buy IOUs from people who need the money. A marketplace has popped up. People are buying and selling the IOUs on Craigslist for less than face value, which surprises me as there are enough banks still accepting the IOUs for full deposit. Some buyers are just looking for a guaranteed investment.

Just like any new investment, this process is susceptible to fraud. If you find yourself in possession of an IOU that is not addressed to you, make sure you have a notarized bill of sale; otherwise, according to the California state treasurer, the state may not honor the transferred agreement. The Securities and Exchange Commission is getting involved, too.

Paper money was originally intended as an IOU, to be exchanged for something of “inherent” value, such as silver, at some other time. Eventually it became accepted that objects of “inherent” value were not needed as long as everyone had faith in the paper money. These IOUs from California would not be much different if everyone believes the government will eventually pay up and banks would accept them for deposit.

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California IOUs: Buying, Selling, and Inherent Value

I enjoyed Tom Dziubek’s discussion with Jon Gaskell, the CEO of SmartyPig, in the latest episode of the Consumerism Commentary Podcast. If you have a chance, listen to the part discussion in which they discuss SmartyPig’s interest rates. Tom asked how SmartyPig can continually offer high interest rates. Jon Gaskell intimated that SmartyPig’s restrictions and requirements result in a banking relationship in which customers’ accounts are much less liquid than a typical savings account.

According to the CEO, the average saver using SmartyPig is saving for a goal over four years away (fifty-one months). Customers are generally not withdrawing their money early, so they are “sticky deposits.” SmartyPig therefore offers a savings product that has more in common with certificates of deposit (CDs) than with savings or money market accounts.

Keep this in mind when shopping for banking products. As of today, SmartyPig is offering a 2.75% APY, but if you are going to let your money sit without withdrawals for four years, consider some better priced options like Ally Bank’s 48-month CD, currently offering 3.0% APY.

To be fair, SmartyPig does have an advantage over certificates of deposit. You can (and must, according to SmartyPig’s rules) make additional deposits towards your goal each month. If you consider your goal as a fixed point in the future, each month, you are earning the current interest rate on a decreasing term length. With a certificate of deposit, each monthly contribution would mature one month later than the previous month’s deposit.

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SmartyPig Should Be Compared With CDs, Not Savings Accounts

I plan to open up an account with EverBank within the next week to take this bank for a test drive. I like what I see of EverBank’s interest rates, but I have to admit the structure is not as simple as I like to see.

As of October 23, 2009 the savings product, “Yield Pledge Money Market Account,” sports a 1.51% APY, but thanks to a 2.51% APR bonus rate for three months, the effective rate over the first year of having money in this account can be as high as 1.77% APY. If you’re confused, review the difference between APR and APY.

The checking product, “FreeNet Checking Account,” offers tiered rates from 0.76% to 1.51% APY. Again, money from new customers earns a 2.51% APR bonus rate for the first three months. With this bonus, if the regular rate does not change, you would theoretically earn an APY between 1.20% and 1.77%.

EverBank also offers certificates of deposits (CDs) with maturities varying from 3 months to 5 years. Like most CDs, you will be penalized if you withdraw your funds before maturity. A minimum deposit of $1,500 is required for any EverBank CD. The rates range from 1.15% to 2.96% APY as of today.

Also notable are the foreign currency CDs available at EverBank. With foreign currency a change in exchange rates can either work for you or against you by increasing or decreasing your effective interest in terms of US dollars. If you believe the Mexican peso is due for growth, you may wish to invest in a CD denominated in pesos to take advantage of the 3.79% APY and the increase of the worth of a peso against the dollar.

I’ll post a full review of the account opening process shortly.

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EverBank’s Confusing Array of Interest Rates

In February, I wrote that the United States was suing Swiss bank UBS in order to get the offshore institution to release the names of the wealthiest 19,000 of the 52,000 American bank account owners. These depositors have managed to evade paying United States income taxes on the interest earned within these foreign accounts.

The New York Times is now reporting that the U.S. Justice Department plans to drop the case due to lobbying pressure from the bank and the Swiss government. Many tax evaders, fearing the bank would release their name publicly, have already come forward to claim the interest they earned and perhaps pay the income tax owed to the government.

Some smaller accounts have been transfered to domestic banks.

Settlement Anticipated in UBS Case, Lunnley Browning, New York Times, June 22, 2009

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U.S. Will Likely Drop Case Against Swiss Bank Accounts

It has been awhile, but I now have a new set of $25 bonus referral links available for new customers of the ING Direct online savings account. ING Direct is currently, as of June 16, 2009, offering an interest rate yielding 1.5% APY on this savings account.

Here is how this works. If you open an account using one of the referral links available here and deposit at least $250, you will receive a $25 bonus, and the bonus is considered interest. Although ING Direct’s interest rate is not the highest among high-yield savings accounts, depending on how much you deposit you could earn more with this bonus and ING’s interest than you would with just interest from another bank.

The referral links posted on Consumerism Commentary have been provided solely by other readers. When you earn $25, the reader who donated the link will receive a $10 referral fee. After you sign up, you will receive your own referral links to share. Everybody wins! I have a long waiting list of readers who are waiting to have their links posted. The waiting list is closed at the moment, but when I need more links I will post an announcement and allow people with new referral links to be added to the waiting list again.

The Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

New ING Direct $25 Bonus Links Available

The American Bankers Association (ABA) has not been happy with Ally Bank. A few weeks ago, the organization on behalf of its member banks sent a letter to the Federal Deposit Insurance Corporation complaining about Ally’s interest rates. With Ally planning to receive bailout funds through its enrollment in the government’s Treasury Liquidity Guarantee Program (TLGP), the bank used the opportunity to offer higher interest rates on its savings, money market, and certificate of deposit accounts than its competitors.

The letter from the ABA admonished the FDIC for allowing Ally Bank, formerly GMAC Bank, to offer the highest rates or rates among the highest in the country in order to seek more deposits and grow their business. It is unfortunate that the ABA should want to see banks lower interest rates on savings products and to let FDIC force them to do so. Millions of people rely on savings interest for living, and banks should want to encourage higher rates whenever possible.

I do see where the ABA is coming from. Regulations such as interest rate limits, if imposed, should be imposed fairly to all banks. In any other situation, the ABA would be fighting regulation and be interested in competitive practices that allow the banks to set whatever rates they feel their business can handle.

The FDIC responded to the ABA’s complaint by sending a letter to GMAC, Ally Bank’s parent company, warning the bank to “focus on reducing Ally Bank’s overall deposit costs,” where “deposit costs” is a term we would recognize better as “interest rates.” Even before GM’s bankruptcy and the rebranding of the bank from GMAC Bank to Ally Bank, the bank offered one of the highest interest rates available, but now the high rates are unacceptable to the government.

The letter also stated that the amount of guaranteed debt available to GMAC from the government will rely on disclosure of Ally’s interest rates in comparison to the other top banks, signifying that Ally Bank should not find itself at the top of the list. SmartyPig, on the other hand, offers a significantly higher interest rate, though there are some strange restrictions when you compare the account with a traditional bank account.

So where does that leave customers?

• It would be nice to be able to find a liquid savings option that pays consistently high interest rates.
• The American Bankers Association should continue to focus on the needs of banks but shouldn’t try to stifle competition.
• Customers of Ally Bank, lured by higher interest rates, will see some of those benefits disappear.

Should the FDIC continue going after banks, even if they are well-capitalized like Ally Bank and its parent GMAC, to prevent them from offering high interest rates to attract customers? Who benefits if the ABA and the FDIC win the fight against high interest rates?

Here are links to the letters mentioned above.

Letter from American Bankers Association to Sheila Bair, chairman of the Federal Deposit Insurance Corporation, May 27, 2009
Letter from Federal Deposit Insurance Corporation to Alvaro de Molina, CEO of GMAC, June 4, 2009

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FDIC Steps In to Keep Ally Bank’s Interest Rates Lower

This morning an article appeared on Forbes.com with suggestions and warnings about online-only accounts. I have to disagree with an important statement by the author of the article, Asher Hawkins. Hawkins is offering misguided information regarding the number of withdrawal transactions a customer is allowed to make from an account designated as a “savings” or “money market” account.

Here is the author’s claim:

For some online accounts, known as money market accounts, you’re allowed a maximum of six withdrawals per month, with checks or debit cards accounting for no more than three of them… Choose an online account with the familiar tag of “savings,” and you’ll often get an unlimited number of transactions, which lets you link the online account to other accounts you have in different banks.

This statement is unfortunately incorrect. Accounts designated as “savings” or “money market” accounts are both limited to six withdrawals per month. If you go beyond that limit, the bank may hit you with a warning or a fee, they may prevent the transaction from being processed, or they may close your account. Neither savings nor money market accounts are transaction accounts, even if the bank sends you a debit card or check book to access your money market account. Only transaction accounts such as checking accounts allow unlimited withdrawals.

Savings and money markets accounts are considered deposit accounts, and the banks intend for you to keep the money there rather than use it for spending.

Ask anyone (like myself) who has accidentally scheduled more than six withdrawals from an ING Direct account — an account designated with the familiar tag of “savings.”

There is one exception: the Negotiable Order of Withdrawal (NOW) account. Some banks may offer a NOW account and call it a “money market account,” but this is rare. It is more common for banks to call NOW accounts “interest-bearing” or “high-yield” checking accounts. Check with your bank to determine whether your account is a NOW account before withdrawing funds more than six times within a month if you have concerns.

The article also implies that it is common to find online-only bank accounts that are not insured by the Federal Deposit Insurance Corporation (FDIC). I have never seen a legitimate online savings account based in the United States that is not insured by the FDIC. Usually, a bank provides a link to their FDIC certificate in a prominent location on the bank’s website. This is rarely a concern.

Update: Asher Hawkins, the author of the article in Forbes, contacted me to let me know he has clarified the language in the article. You can see his email in the comments below. We also discussed the strange case of HSBC Direct. HSBC Direct’s online savings account limits transactions to six withdrawals or transfers, except for ATM withdrawals. Savings accounts should not permit more than six withdrawals, including ATM withdrawals, per Regulation D of the Code of Federal Regulations. Therefore, HSBC Direct’s savings account must be a transaction account. If it were a transaction account, however, it would not need to limit non-ATM withdrawals.

Amidst all this confusion, it’s always better to check with a knowledgeable customer service representative if there are any questions about the number of allowed transactions.

Five Highest-Yielding Online Savings Accounts, Asher Hawkins, Forbes, June 10, 2009.

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Forbes Gets it Wrong About “Online-Only” Bank Accounts