Wire Transfers versus Automated Clearing House (ACH) Transfers

In the many years since BestCashCow was founded, we have received a fair number of emails from readers asking various technical questions about how their online savings accounts operate.  Perhaps the most common question relates to the difference between a wire transfer and an Automated Clearing House (ACH) transfer.

I have hesitated to write an article on this topic because the issue has become less and less important to those using online banks for their savings and CD products, and ACHs have generally become more transparent and faster.  The largest online banks (Goldman Sachs Bank, Purepoint Bank, Ally Bank and others) now process all inbound and outbound transfers instantaneously (and free).  As a result, transfer speeds and times have become less burdensome for those banking online and occasionally transferring cash to a separate savings or checking account at a branch where they do most of their daily financial transactions. But, we nonetheless seek to clarify this matter further here.

Wire transfers are a direct bank-to-bank process that technically moves money instantaneously between two financial institutions and can only be initiated by the institution holding the account from which cash is being transferred.  Since the process may not be completely automated and a bank employee at the receiving institution may review all transactions before an account is credited for an inbound transfer, it may take several hours to a day for the money to move from one account to another.   Otherwise, however, a wire transfer is basically an electronic cashiers’ check - payment received in an account is treated as cleared money and may be withdrawn immediately (and for this reason there is obviously also risk in this process).  Likewise, the funds must be available in the outbound account before the payment is issued, and will be immediately debited from the sender’s account as the request is processed.  Banks may charge to send or to receive wire transfers, but the fee on either side is ordinarily not greater than $35 for a domestic wire transfer (international transfers may be a little higher).

ACH transfers are similar to a wire transfer, except that they use a clearinghouse and a batch process and may be initiated by the outbound or the inbound account.  Since a clearinghouse and a batch process are used, transactions are stored and reviewed and the money may not actually be transferred for a day or even several days (as pointed out above, the largest online banks process these transactions through the clearinghouse immediately, but the smaller ones may take several days – look to the comments in BestCashCow’s tables to see what types of speeds users experience).  Even if the money is received immediately, the recipient bank may not allow the account holder to withdraw the money right away, especially when the transfer is initiated through that bank’s interface, as they need to protect themselves from fraud liability laws that ordinarily apply to ACH transfers.  When initiating an ACH transfer from an incoming account at an online bank, there is a risk of overdrawing from the account from which you are pulling cash (and being charged an overdraft fee). 

BestCashCow believes that smaller banks that offer slower outbound or inbound ACH transfers can still make sense for the consumer.  Assuming that you can prepare for transactions where there may be a day or two delay in moving your cash, the extra yield in a higher savings or CD rate may more than offset your loss of interest over that day or two.  Often, this delay can be avoided by initiating the transfer at the recipient bank (although you will ordinarily be subject to a hold there too).

In the 21st Century, the ACH process is ordinarily completely free to the user for both outbound and incoming transfers.  We strong encourage all consumers to avoid the few financial institutions, such as Salem Five Direct, that still charge for ACH transfers initiated through their websites.  


ATM Fees Go Through The Roof - How To Avoid Them

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ATM fees hit a record high for the 11th year in a row, according to a recent Bankrate.com study.  According to the study, the average total cost of an out-of-network ATM withdrawal is now $4.69, up 2.6 percent from $4.57 last year.  In New York City the average ATM fee stands at $5.14, and in Pittsburgh it is still 5 cents higher.  ATM fees have now risen over 55% over the past decade.  It seems like an extraordinary burden to have placed against you for the convenience of accessing your own money.

The obvious first line of defense for avoiding ATM fees is to maintain an account with a bank or credit union that has a branch and/or ATM network that is convenient to you.  You can see a map showing all banks near you here, and all nearby credit unions here.  BestCashCow recommends keeping only the minimum amount in these accounts necessary to access the bank or credit union’s ATM and transactional network, and to put your remaining cash balances in the highest yielding accounts you can find so that your money works for you.  Often, but not always, the highest yielding accounts will be online savings accounts, and you can find a list of the highest yielding accounts here.

The obvious second line of defense for avoiding ATM fees is to use credit cards whenever possible.  Having the right card enables you to be earn reward points or cash back for your spend.

However, sometimes, it simply is impossible to find an ATM network easily when you need cash.  That’s when a strategy like going into a grocery or drug store and making a small purchase on your bank’s debit card can enable you to get cash back.  For those times when that strategy doesn’t work, you should also check out the Venmo app which enables you to quickly transfer cash to anyone.  Finally, if you really find yourself paying out-of-network ATM fees too often, you might want to consider the tried and true strategy of carrying a checkbook.


You Are About to Get Killed in Bonds

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Many investors, commentators and financial managers have perpetuated and subscribed to the fiction that those who want to protect themselves from an overvalued stock market should be moving to bonds.  In fact, a recent New York Times piece, described here, even mistakenly assumed described investors’ choices as being binary – stocks versus bonds.

The idea that bonds are somehow a safe investment comes from the fact that long-term bonds have appreciated dramatically over the last several years as interest rates have come down and expectations of their rising have diminished.  

With the 10-year Treasury yielding 2.10% and with the Federal Reserve guiding towards a Fed Funds rate of 3% in 2019, I would argue that the only way long-term interest rates do not rise, and rise dramatically, is if we fall into an economic depression and the yield curve becomes inverted.   Also, oil and commodity prices are currently tremendously suppressed because the monarchy’s policy of opening up reserves is causing too much supply to reach markets.  An impeachment trial will change this, causing commodity prices and inflationary pressure to rise, and driving 10-year Treasury rates to levels that those in their 20s and 30s have never seen.

The impact of a turn in interest rates on bond prices will be dramatic.   You can ask anyone who tried to sell a long-term bond in 1970’s how many pennies on the dollar they received for it.  Alternatively, you can speak to anyone who bought a long-term bond in July 2012 when the 10-year Treasury was at 1.52% how much their brokerage account valued it in August 2013 when the 10-year Treasury was at 2.90%.  Bond investors can quickly lose 30% to 50% of their principal should they need liquidity during a period of rising interest rates.

My view that another dramatic move up in 10-year Treasury yields – and dramatic fall in bond prices – is likely upon us is not unique.   It is shared by Leon Cooperman and Alan Greenspan.

Your safety is found in savings accounts and short-term CDs.


Portfolio Drift

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While Donald Trump has certainly caused concern to some over his style and actions as President, few have been anything but jubilant over the impressive rise in the stock market since January.   Actually, if one looks back to late 2008 when the market dropped 37%, we have all since enjoyed a spectacular ride up between then and now of around 300%. 

There was a very interesting, recent article in the Business Section of the New York Times on one very important aspect of the huge rise since 2008 – portfolio drift - and the related implications for everyone in the market at this time. Obviously, one of the implications is that those of us in the market during some or all of that time have enjoyed handsome appreciation of stock assets and, by implication, feel ever more comfortable financially.  But the Times’ article points to a related and worrisome impact of the steep rise in the markets to which most of us probably have not paid as much heed as we should have.  And that is the relationship or portfolio mix between safe assets, like cash and CDs, and far more volatile stocks.   (Actually, the Times articles speaks of bonds as a safe investment which is a serious error – bonds are especially likely to decline in value as much if not more than stocks as interest rates rise.)  Most of us who own stocks balance our risk by also owning CDs and cash and, by so doing, ensuring that our investments are at least somewhat protected by the lower volatility of these reserves in the event of another large drop in the stock market.

But by now, given the huge increase in the stock market over the last eight years, the balance between stocks and cash and CDs in our portfolios, if we have not been paying attention, has shifted considerably.  As the Times points out, an allocation of 60% stocks in 2008 would be far more likely – if no cash reserves were added – to be around 75% stocks.  And this kind of allocation is risky for all but the most daring among us.  Yet, this is also likely where most of us are at this moment.

And, that is not a good place to be under the best of circumstances.  And, we are not anywhere near the best of circumstances at this moment in the nation’s history.  In fact, it is hard to imagine a more vulnerable time for the market than right now – given all that is happening in the U.S. polity.  The Times’ article is a clarion call to action, but one, I bet, few will act on.  The market has just been too good for too long, and most of us, present company included, can’t wrap our minds around how volatile things are now and how likely it is that we will have a serious decline in the market in the weeks if not days ahead. 

It is time to get our heads around the dangers ahead.  Those who do, and who at least rebalance assets in favor of cash and CDs in light of portfolio drift, will be in a far better position to weather the storm we are absolutely going to have in the very near future.

See the best 1-year CD rates here.


Goldman Sachs Comes to Market with a 6% Structured Note

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I have written about structured notes before on BestCashCow.   I believe that they may represent a good way to generate income in a fairly low-risk way over time at rates well above the rates offered by savings and CDs.   Or maybe not.  Under any circumstance, they only work for a certain type of investor.  It is easy to get drawn to high yielding instruments after yields of extraordinarily low savings and CD yields.  Yet, these will be inappropriate for most people seeking more yield as they go out for 15-years and may be very illiquid for most of that time. 

What I particularly like about these instruments is that they are generally geared to deliver large interest payments as the long end of interest rate curve rises, unlike bonds and municipal bonds, which will see a strong and pronounced losses of value in 2018 and 2019 and beyond if the Fed continues with its stated plan to raise interest rates.

A common structure in structured notes involves a 15-year period during which the notes pay interest tied to the spread between the 30-year and the 2-year Constant maturity swap rates (“CMS”).   CMS is a rate at which bank’s trade with each other, and basically involves the difference between the stated maturity’s equivalent US Treasury rate and the 6-month US Treasury rate.  The 2-year CMS rate is currently around 1.60% while the 30-year CMW rate is currently around 2.60%.  The spread is currently at around 1%.  (If you don’t have access to a Bloomberg, these rates can usually be found here).

If rates on the long end go up faster than the short end, the spread will widen.  If they go down, it will contract or go negative.   If they spread goes negative, the holder if these instruments foregoes interest.  If the S&P falls by more than 70% from where it is on the pricing date, the holder also forego interest.  With this note, you win if the stock market doesn’t completely crash from the date of issue and the long end of the yield curve goes up.  

Over the last several years, this structure has outperformed savings and CDs, but hasn’t been a big winner since long rates haven’t meaningfully gone up.   Since holders sometimes require liquidity, it has been possible to buy notes on the secondary markets at a significant discount to par.

This offering by GS Finance Corp. is guaranteed by The Goldman Sachs Group and follows this same structure generally.  It pays a fixed rate of 6% in the first year, but unlike most other offerings it pays 6x the spread (most other offerings pay only 4x or 5x).  It is also attractive as the maximum interest rate is capped at 12%  (whereas most Morgan Stanley, JP Morgan and Citibank offerings in the past have been capped at 9% or 10%).   If you buy these notes today, you are hoping that the higher multiple and higher cap will prevent them from trading at a significant discount to par should you require liquidity over the next 15 years.

There is no doubt, the Goldman product is interesting and Goldman is a great credit.  But, anyone investing in these products needs to understand that a product of this length is going to involve real liquidity risk and the real risk of no interest payments for a lengthy period of time.  There are other risk too, detailed in this article.

These notes way be worth a look, but I would continue to have a strong bias towards savings accounts and CDs.  You’ll find the best savings rates here and the best CD rates here.

Editor’s Note: The product discussed above trades under CUSIP 40054LLP7 and ISIN US40054LLP75.   It is offered principally through investment advisors.   BestCashCow does not believe that the product is appropriate for most investors, and does not endorse it.


Should I Open an Online Savings or Money Market Account?

Online banks offer some of the highest savings and money market rates in the banking world but many individuals are still nervous or skeptical about sending their money over the Internet.  Yet today, opening an online savings account or money market account can not only get you a significantly higher rate, but it can come with a lot of convenience and control.

Higher Rates and More

The most often cited reason for opening an online savings account is that online banks can offer savings rates that are over 1% higher than those offline.  Without the need to absorb the costs of branches and branch employees to support, they can operate more leanly, passing their savings on to their depositors.  Even among online banks, there is a range of rates that reflects competing demands for deposit capital.  Competition has become so keen that many major online banks offer their highest rates with minimal or no deposit requirements.  

There are other very compelling reasons to move some of your money to an online-only bank.   Principal among these are 24x7 access to your capital through a website or a mobile app and expanded customer service phone hours.  In addition, some banks offer check writing and a debit card as part of their online account.  Most however still find it most convenient to tie their online savings account or accounts to checking accounts at banks with large branch networks, holding only the minimum required at those banks and transferring capital back in as needed to cover expenses.   

You can see all online savings account rates, balance requirements, and features on the here.    In the reviews section of the table, users comment on their experience with a particular online bank, allowing you to ask questions and read about others experiences with account opening, customer service, transfers, and more. 

Is Your Money Safe?

All of the online banks listed on BestCashCow are FDIC insured.  While being FDIC insured is not a guarantee that a bank is necessarily financial sound, it indicates that the Federal Reserve guarantees your money up to $250,000 in each ownership category.  

In addition, many of the highest paying online banks have been around for some time or are part of larger, better known parent organizations.  Large, well known banks like Goldman Sachs Bank, Barclays Bank Delaware (one of the largest banks in the world), Emigrant Bank, Capital One, and TIAA CREF have rolled out online offerings with higher rates than their offline divisions. 

Is it Convenient?

In general, with an online savings or money market account, you can access your money online all the time, and deposit and withdraw your money using electronic transfers.  Some banks such as Ally now offer remote deposit though the mobile app.  By connecting your online savings account to another account that you have at your main bank - usually a checking account - you can easily transfer money back and forth.  An electronic transfer can take about 2-3 days to be complete, but at some banks, such as Goldman Sachs Bank, they are effected instantaneously.  Banks often have a 5 to 10 day hold period during which money recently transferred electronically may not be withdrawn.   

Customer Service

Almost all the online banks have phone numbers you can call if you have a problem.  You can also send them contact them directly through their interface or by email.

Some Pitfalls

Some online banks have very high introductory rates for savings accounts.  While the rate is guaranteed for a very period of time, it ordinarily is reduced to a lower rate shortly thereafter. Opening an online savings account at one of these banks can be viewed as being equivalent to opening a short term CD while having the money liquid.  BestCashCow however recommends depositors avoid banks that engage in bait-and-switch tactics, and favor those online banks that have a history of remaining competitive and extending their best rates to their longest standing customers, as well as to their newest customers(Ally, Synchrony, Goldman Sachs).

Bottom Line

There are plenty of reasons to continue to do business with banks and credit unions with branch networks that are close to you.   In fact, some of these banks offer savings and CD rates better than the most competitive rates online, so you should always check the rates in your area.

Often, however, the easiest way to gain an extra percentage point or more is to open an online savings account.  They offer high rates, safety, and convenience to those willing to make the jump to cyberspace.  When you consider the value of compounding even an extra one percent annually, your money can really add up over time (see the BestCashCow compound interest calculator here to calculate how much more you could make).

Do you plan to open an online savings account soon?  If not tell us why by commenting below this article.