Personal Finance

Online banks are hot, just ask Goldman Sachs

With growing market share and low costs, it's no wonder the online retail banking industry is booming — and that's good enough for Goldman Sachs.

Goldman announced recently it would start its own retail bank, effective immediately, after acquiring the online deposit platform of GE Capital.

With the explosion of financial technology, this is an opportunity for Goldman to compete for low-cost deposits to boost the bank's funding, said Kenneth Leon, global research director with S&P Global Market Intelligence.

"It doesn't surprise me that a firm like Goldman would get into this business," added Charles Schembri, vice president of financial services at market research company TNS. "There's massive amounts of growth potential."

"Direct banks are earning a larger share of new primary bank relationships, and a good part of the growth they are experiencing is coming from the millennial generation," Schembri said. It's "a more desirable demographic of younger and more affluent customers."

In fact online-only banks were the only category of banks to gain share in the past decade among retail customers establishing or moving their primary banking relationships, according to TNS research. Online-only banks now attract approximately 12 percent of all new primary banking relationships in the U.S., compared with only 4 percent a decade ago, according to TNS.

Goldman's new GS Bank hit the ground running by offering a competitive savings account rate of 1.05 percent APY. That puts GS Bank at an advantage over some other online banks, including Ally Bank, Discover Bank and Capital One 360 (formerly ING), which currently offer online savings rates of 0.75 percent to 1 percent.

But all of those offers are much higher than the average interest rate on savings accounts nationwide, which is only about 0.08 percent right now, according to

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Like the other online banks, because GS Bank has no brick-and-mortar branches, "the lower cost of delivery translates into better costs for consumers," said Greg McBride, Bankrate's chief financial analyst.

"Rather than try to out-market big bank competitors, paying an attractive rate of return is an effective way to grow the deposit base," McBride said. Goldman declined to comment beyond a press release issued Monday.

Generally, with savings accounts, as opposed to checking accounts, "you don't necessarily need branch access," McBride said. Banking customers looking to park some cash in a high-yield savings account can still maintain their current banking relationship where they have their checking account, bank card and safe deposit box, he said.

Even with interest rates low, consumers can get hundreds of dollars in interest earnings by choosing the savings account with the highest return, Leon said. "It ends up being meaningful."

In many cases, however, these are also variable rates that can change at any time.

Are you as good at saving as millennials?

For those shopping their money around for the best competitive rates, it's always imperative to check the fine print, including the bank's terms. Most important, make sure your account is protected by the FDIC.

GS Bank's deposits are insured by the FDIC with no minimum deposits and no transaction fees but a limit of six withdrawals per statement cycle. Other online banks may have a balance cap or other restrictions.

"Consider any penalties for early withdrawal and your ability to leave the money on deposit for the length of the term," cautioned Ric Edelman, an independent financial planner.

Failing to meet the requirements in a given month can trigger a much lower default interest rate. The average default rate is only 0.06 percent, according to Bankrate, so it's important to make sure that the bank's terms are met.