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Online savings accounts have not been immune to the long slow grind downwards that has affected both term deposits and cash accounts.
Because online savings accounts can generally be opened and managed online, they involve less bank staff interaction than other savings accounts and consequently cost the banks less to administer. Notionally, these savings are passed on to the customer in the form of interest rates that are higher than can be found in normal savings accounts and term deposits. Another general feature of these accounts is that they have no, or low, fees associated with them.
In many cases these online savings accounts come with special headline ‘honeymoon’ rates to lure savers in and pay extra interest for a limited period of time and many also come with additional terms and conditions that cover things such as minimum and maximum balances, the requirement that savers deposit a minimum amount each month as new money, a cap or a floor on the amount that can be kept in the account, a limit on the number of such accounts that savers can have and so on.
Online savings accounts have also been used aggressively by the banks themselves as a means of attracting new customers from the competition as well as for retaining existing customers by stopping them switching providers. They can also be a useful way for banks to simply lift their deposit base in a post-Basel III world.
In recent months, however, as term deposits and cash accounts have come under increasing pressure with the cash rate remaining at a stubbornly low 2.50 per cent, many online savings accounts have seen the same drop in rates.
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