One of the ways banks make bread is on the spread – the difference between what they pay you for your cash deposits and the interest they collect on the loans they make. My national bank pays 0.20% APY (yes that is 1/5th of one percent, not a typo) on cash in a regular savings account while charging over 6.00% on home loans. Not bad bread.

Other banks thought so too and decided to compete by paying a little more for your cash in return for only providing online account access. The real competition started back in 2000 with ING Direct and the introduction of Orange Savings. But things have continued to heat up in the online high-yield savings account (HYSA) market, even since Compete issued its last public study in March 2006.

Competitors entering the market in 2006 included Citibank Direct and E-Loan, and returns being offered today provide 20 – 30 times the return of a regular savings account. So how do HYSA account openings compare to traditional deposit account openings online?

• Within the competitive set analyzed*, 37% of all online deposit accounts opened over the six month period were for high-yield savings accounts
• Over two-thirds of HYSA accounts were opened with either ING Direct or HSBC Direct, the two largest “direct” players battling to boost our meager yields

ING Direct has shifted from its strategy of offering the highest rate and now pays a more conservative rate (see Bankrate listing). It hopes to retain and continue to attract customers by making it up with greater service and convenience. The recent introduction of Electric Orange checking is part of this strategy.

Delivering the “access and convenience of checking with the earning power of savings,” Electric Orange checking currently offers a 4.00% APY, a half point less than Orange Savings. For service and convenience, the new account offers free electronic checks and bill pay, a MasterCard debit card and free ATM access the Allpoint network (32,000+ locations nationwide).

ING Direct first offered Electric Orange in a limited release to customers in late November 2006 and netted over 60,000 new accounts before opening it up to the general public in March 2007. The timing was right for opening up the offer as applications started to decline in February.

ING Direct claims to be opening an average of 100,000 new savings accounts per month and had 4.2 million accounts in total as of the end of 2006. The company’s stated goal for Electric Orange is to open 500,000 accounts in the first year.

What do you think? Is this new offering compelling enough? Would you give up all paper checks for a higher rate? Where’s your money at?

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