For CFA/Banking/Financial types -- how can online savings accounts offer such...

[gaken2000]

...better yields? I'm currently considering opening an online savings account. The one I'm looking at has a posted rate of 2%. Although I understand all the cost savings related to not having physical branches, no tellers or other staff, etc. -- I am still puzzled as to how they can do this. A money market fund I invest in -- which is also with a "remote" provider and "passes through" the dividend after taking a small cut for expenses -- doesn't come close to touching this rate. Should I be wary that this is just a short term promotion, and that the rate will probably drop like a rock in a month or two?
Well, my intent is to just earn a little more on my cash reserves. Although I agree that worrying about rate on a small balance is "small stuff," the 2% offered is in fact about 10 times what my bank is paying on my money market account now -- so it does make one think about such things.

 

[MVD34]

It depends upon the reputation and backing of the company offering the rate. If you don't know how to determine that or cannot determine that, you should not invest. However, 2% is more likely a teaser rate than a scam (those are usually relatively high..7,15,25,100% etc).

Most "reputable" online giants are paying between 1% and 1.5% right now. Assuming you check the fine print and do your homework, I would assume that 2% is a rate that will "float downward" over the next year if general interest rates do not rise.

The bigger question is how much money are you investing and what it its purpose. Serious money managers consider cash investments "savings" and don't nit pick interest rates unless large amounts of money are involved (generally millions, but at least hundreds of thousands). They go with known and secured institutions. The net interest rate difference expressed in dollars per year on small amount of money isn't worth the time or the risk.