Well, it finally happened. IndyMac Bank has been taken over by the FDIC, becoming the second-largest financial institution failure in U.S. history. I’ve been reading a bunch of new stories about it, and here are what I think are the highlights:

Customers: Don’t Panic!
Most people with regular checking or savings accounts don’t have too much to worry about. The FDIC has set up this official information page for customers. You can still use ATMs. Checks you write will still be processed. Electronic deposits and withdrawals will still go through. Online banking, phone banking and even the physical branches will re-open on Monday. You won’t even lose past interest:

All interest accrued through Friday, will be paid at your same rate. IndyMac Federal Bank will be reviewing rates and will provide further information soon. You will be notified of any changes.

From the LA Business Journal:

The Office of Thrift Supervision transferred control of the company to the Federal Deposit Insurance Corp. The FDIC said it will transfer insured deposits and assets of IndyMac Bank to a new federally operated institution called IndyMac Federal Bank that will open Monday. […] Regulators said that customers of IndyMac will have uninterrupted access to their accounts beginning next week at the bank’s 33 branches.

This is consistent with when I explored What happens if my bank fails? The FDIC seems to do a pretty good job of cleaning things up.

…Unless you exceeded the FDIC insurance limits

Customers are insured 100 percent for deposits up to $100,000. The FDIC said the bank has about $1 billion of “potentially uninsured deposits” held by 10,000 depositors. The FDIC said it will begin contacting uninsured customers on July 14. The agency said it plans to give customers with more than $100,000 at least 50 percent of their uninsured deposit amounts.

Wade Francis, president of Long Beach-based Unicon Financial Services, said there is “very little” chance that uninsured depositors will get all their money back because IndyMac had a large number of home loans, which will be difficult to sell off.

It boggles the mind that so many of the very same people who have enough money to exceed FDIC limits in the first place, don’t bother protecting it properly. The whole point of keeping money in banks is so that it is safe… Instead, people are getting 50% and go home and pray to see the rest again. Ouch.

Ouch For the FDIC, Too
From the LA Times:

Federal authorities estimated that the takeover of IndyMac, which had $32 billion in assets, would cost the FDIC $4 billion to $8 billion. […] The agency’s insurance fund has assets of about $52 billion.

That’s a big chunk of the FDIC’s own “emergency fund”…

Reality vs. Perception of Reality
There is a great quote from the 1992 movie Sneakers:

Cosmo: Posit: People think a bank might be financially shaky.
Martin Bishop: Consequence: People start to withdraw their money.
Cosmo: Result: Pretty soon it is financially shaky.
Martin Bishop: Conclusion: You can make banks fail.
Cosmo: Bzzt. I’ve already done that. Maybe you’ve heard about a few? Think bigger.
Martin Bishop: Stock market?
Cosmo: Yes.
Martin Bishop: Currency market?
Cosmo: Yes.
Martin Bishop: Commodities market?
Cosmo: Yes.
Martin Bishop: Small countries?

This is basically what happened to IndyMac bank. From CNN:

The banking regulator said it closed IndyMac after customers began a run on the lender following the [very public!] June 26 release of a letter by Sen. Charles Schumer, D-N.Y., urging several bank regulatory agencies that they take steps to prevent IndyMac’s collapse. In the 11 days that followed the letter’s release, depositors took out more than $1.3 billion, regulators said.

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Due to comment moderation, your comment may not show up right away. One referral per person. Late night readers get lucky this time. 🙂 Thanks!

I love no-fee no-minimum balance online banks because I can always keep them open in case they kick up another rate promotion. Also, no worrying about making a ton of small debit purchases at the beginning of each month!

HSBC Direct announced recently that they will be paying 3.50% APY on their online savings accounts, guaranteed until August 15th. Man, this big international bank hasn’t had a top rate in a while.

Shortly afterwards, smaller fry FNBO Direct has their their rate at 0.85% APY , though with no time guarantee.

Washington Mutual still has their competitive Free Checking + 3.30% Savings combo, which is where my base camp is (my review).

If you will always have $10,000 and don’t mind a bit of subprime shakiness (the account is still FDIC-Insured up to $100,00), there is also IndyMac Bank with their Online E-Money Market paying 3.85% APY.

UPDATE: Rates have dropped, but these checking account still maintain around 2% APY edge over traditional online savings banks and 3% APY over big megabanks.

You may have seen some billboards or heard a radio ad around town for a local credit union offering a curiously high interest rate. 4% APY? Even 5%? They usually go by names like TurboChecking, Great Rate Checking, SuperRewards Checking, or similar. What’s up?

Background
It would seem that small local banks and credit unions are being squeezed on one side by megabanks offering “free” checking and a million ATMs, and on the other side by lean online savings accounts paying higher interest. It’s hard to compete. But then a company called BancVue came up with a different solution for all those small banks and credit unions who want to differentiate themselves.

The basic idea: Offer customers a really high yield and ATM fee rebates, but only if they jump through certain hoops. Hopefully, this carrot will attract lots of new customers. If they don’t, then they just get a plain “free” checking account with piddly interest. In the meantime, you try to make more money with credit card transaction fees and cross-selling other products. BancVue actually guarantees that “Reward Checking relationships will be twice as profitable as your Free Checking relationships”.

The “Catches” and Requirements
So what are the hoops? Usually you have to satisfy all of these restrictions to earn the advertised rate and get ATM fee rebates:

• Make 8 to 15 “signed” debit card transactions each month (use it like a credit card).
• Make one qualifying direct deposit, auto-debit, or online bill payment each month.
• Receive electronic statements only (no paper).
• Log into your account at least once a month.
• The rate only applies to the first $25,000 (varies). Balances over that earn significantly less.

As you can see, most of these activities strongly encourage you to shift all your banking activities to this new bank. You have to put money in, spend the money, and even check your balance online every month.

The Potential Profit
The interest rate offered varies from bank to bank, but is usually between 4% and 6% APY. I would say the average no-fee, no-minimum high-yield savings account earns about 3% right now, maybe more. Since these are exactly that – no fees, no minimums, no hassles – I’ll use that as one comparison. If you somehow leave exactly $25,000 in your account at all times:

$25,000 x 6% APY = $1,500 per year

$25,000 x 3% APY = $750 per year

So the 3% interest gap results in a maximum gain is $750 of taxable interest per year, or $62.50 per month. Not bad for those with lots of cash available. But lets say your average balance is $5,000. Then your maximum gain is only $150, or $12.50 per month. The monthly number is probably more appropriate because it is anyone’s guess how long the gap can stay this large. To estimate more accurately the potential gain for your situation, you can use my Ultimate Rate Chaser Calculator.

Concerns and Strategies
Here’s the key thought. If everyone satisfied all of the requirements and earned a FDIC-insured 6% yield, the bank would be losing money like crazy. They are either depending on many people to either forget or screw up somehow. And even if you do, there is the potential that you’ll have to argue with some customer service rep about it. This is in comparison to the relatively stupid-proof no-minimum no-fees savings accounts. For every month you don’t fulfill every requirement, you’ll essentially be losing interest. You might even lose money because ATM fees will not be rebated in that case either.

So first of all, you need a reliable system to satisfy all of the requirements every month, preferably early on in each cycle. Some banks treat electronic transfers from other banks as direct deposit, so scheduling a monthly repeating transfer would work there. For the monthly login requirement, perhaps a monthly Google Calendar or IWantSandy e-mail reminder would be a good idea.

Next, you’d want to make your balance large enough to take advantage of the higher interest rate, but not too high as to you exceed the limit and bring your overall effective interest rate down.

The biggest pain is the ~10 debit card purchases per month (ATM visits don’t count). You don’t want to switch all of your purchases because you’ll be losing out on the potential 1-5% cash back from a cashback or rewards credit card. One strategy is to pay bills like your cell phone or cable bill online, but only in partial amounts like $5. Others make repeated small purchases (i.e. a few stamps) at the Post Office. Here’s my silly but practical solution – each month I take a post-it and cut out only part with a sticky backing. I draw 10 boxes, stick it on the card, and I check off a box each time I use the card for a small purchase.

Finally, these rates can drop at any time, and they often do. Which means if you are really a rate chaser, then you might be finding yourself constantly switching banks, waiting for ATM cards to arrive, and trying to satisfy multiple accounts while moving money around. Since these are small banks, most of them have no online interbank funds transfer system. Result: Lots of hassle.

So, Is It Worth It?
As always, I leave this ultimately up to each person. If you are a real rate chaser, have at least $20,000 in cash, and are very discipline and organized, then this is one way to get some extra yield from your money. If you have low balances or tend to get busy at times, then your chances of actually coming out behind a no-brainer savings account are very real.

For me, the hassle hasn’t been worth it until now, mainly because many of these rates seem to drop right after I consider applying. However, the current the gap between the interest rates offered by online savings accounts is still around 2%, my Vanguard municipal money market yields are pathetic again, and also a local credit union I was going to join anyways is now offering one of these accounts, so I decided to try it out with a bit of cash. So far, it’s okay but I really don’t like having to pray each month that I get the proper interest credited.

Local Banks May Be Best
All things considered, I would recommend first looking for a local bank that offers this program at a good rate. This goes back to the fact that banks are counting on lazy/apathetic people to counter the hardcore rate chasers. If they start losing money, they will lower the advertised rate. A credit union with restricted membership may offer a less diligent customer mix. In addition, I continue to find better customer service if you can simply walk in and talk to a real human. You can find a list of participating banks by state here.

When I first heard of SmartyPig, it sounded like a pretty cool idea. Give us back the piggy banks we had as kids, but make it virtual and public so that others can help directly with our goal. But a bunch of fees made it expensive and my enthusiasm disappeared. However, the folks at SmartyPig seem to have really listened to feedback, made some changes, and now I think it is deserving of another look. I opened an account to check things out. So, how is service different from a traditional bank?

Multiple Accounts For Specific Goals
With SmartyPig, you can create as many separate accounts as you want for different goals. Tuition for your kid, a Wii, engagement ring, whatever. Why not, they are all free. Yes, you could simply use one big savings account and a notepad for all of this, but if this convenience helps you visualize your goal better then what’s wrong with that? I use mental accounting like this all the time.

You Must Setup Automatic Contributions
No broken resolutions here. You must set up regular contributions of at least $25 per month from an external bank account. You also must add a $25 contribution to start, and your goal must be at least $250. Here is a screenshot of setting up a goal:

Friends and family can help contribute to your goal. You have the option of making your goal public. Grandma can then send over some money for little Jane’s tuition via credit card, but will be charged a 2.9% processing fee. SmartyPig accountholders can send each other money for free using their bank accounts. (It used to be a $5 fee for each external contribution, but that was dropped.) Now the question is, will Ms. Manners think it’s polite to hint at some Smartypig cash gifts?

Upon goal achievement, you can redeem for gift cards with “up to” a 5% bonus. So if your goal was $500 for electronics, you might get up to a $525 gift card to Best Buy (see update below). You could also settle for a pre-loaded Mastercard for $500. However, these “boost” percentages are not revealed ahead of time. I even called customer service, and they still wouldn’t tell me as they said they can change in the future. I would prefer more transparency, but for now I’ll just assume I’ll be withdrawing cash. If there is appropriate gift card upon my goal completion, then it’ll be gravy.

Update: Reader Tom shares the current gift card boost percentages. Best Buy is actually only 0.75%… but 2% for Amazon.com doesn’t look bad.

Doesn’t it cost money to take out cash?
Up until recently, they did charge $25 to withdraw via a check, which was a big bummer. It basically promoted “spending” on consumer goods and eliminated potential goals like an emergency fund or tuition at many universities. But as of now the check-request fee is gone, and you will soon be able to simply withdraw your money directly back into your funding account for free. I’m glad to see this.

Summary
With the elimination of these fees, SmartyPig might finally rival my current piggy bank setup with Capital One 360. They are paying 0.75% APY right now. Unless your goal is huge, it probably won’t make much difference, but it’s something. Anyone want to contribute to my “Used Jeep Wrangler” fund? 🙂