alex.moskalyuk

Interest Junkie here asked about the catch with Emigrant Direct high interest rate. For a while the question has been asked about ING Direct Orange Savings accounts - the interest rates advertised by ING were not just higher than your regular bank’s, they were much higher. Generally on the market where there’s a stable rate or price for a given product, you should get suspicious if you’re being pitched a deal that’s too good to be true. Like a guy meeting you in the alley offering to sell some excellent audio speakers for a very low price will probably turn out to be a scammer.

So the feeling of uneasiness is reasonable - I also thought I was going to be screwed by mysterious charges and sudden balance withdrawals. However, in all my years with ING Direct I have not had a single problem. And the reason they can offer the low rate is quite straightforward - they keep the expenses down. There are no branches, no drive-through windows, no ATMs with ING logo on them and no promotions at your local grocery store. The bank attracts the money via the Web site and call center (that I though were in India, until an ING employee below corrected me that everything is US-based).

How the banks make money

How do they make money? ING, for example, is pretty open about it. They sell mortgages for 4.95% variable APR and lend against equity at 5.5%. Your regular bank does the same. They borrow money from you at one rate, selling you a checking, savings, or money market account, and then lend the money for mortgages, car payments or business loans at higher rate. If your neighbor Jim just won $250,000 in state lottery, and he comes to the bank to deposit the whole thing to his savings account, he will get an interest rate of close to 0.5%. When you show up at the bank willing to borrow the money for a new house, they will lend you the same $250,000 for something close to 6-7% fixed APR or some other variable rate.

Banks generally tend to be pretty competitive on the loan rate and provide little or no details on their checking or savings account rates. The reason being that it’s rarely a selling point for them (hard to get excited about 0.25% yearly interest), and usually they can get you in via free checking or some other trick, so you simply won’t ask for the checking or savings account interest rate. So ING and your local bank are basically on the same market - hunting for people with money and people willing to borrow the money at interest. What they make in difference is their revenue.

The size matters

But wait a minute. Don’t you need a load of money to make profits if your margins suddenly squeeze, like you start paying 2.60% APY or 3.00% APY for deposits? Yes, and the only way to get a load of money is advertise your high interest everywhere, hence ING Direct and Emigrant Direct banners on any financial Web site you visited recently. How much money do you actually need to make money? According to publicly available information about ING:

ING DIRECT USA has over 1.5 million customers and more than $18 billion in assets, making it one of the top ten largest thrifts in the U.S. ING DIRECT USA is one of eight direct banks operated globally by ING; the other locations are Canada, Germany (where ING DIRECT is known as DiBa), Australia, France, Spain, the United Kingdom and Italy, with a total worldwide customer base of more than eight million (including U.S. customers).