Online savings rate jumps to 6%

NEW YORK (CNNMoney.com) -- HSBC Direct raised the annual yield on its online savings account by nearly one percentage point to 6 percent Monday, the latest move by an online bank to attract customers as competition heats up for deposits.

The special offer rate, which expires April 30 and only applies to new deposits, is part of the bank's efforts to move into the forefront of Internet banking, said Kevin Newman, head of retail banking for the U.S. unit of HSBC (Charts).

"We want to build into a leading, if not the leading, direct bank," Newman said. "A competitive rate is an important part of that strategy."

HSBC Direct has attracted about 300,000 customers with $7 billion in deposits since it launched in 2005. By comparison, ING Direct, the largest direct bank in the U.S., has more than 4 million customers and more than $60 billion in assets.

Besides increasing its rate, HSBC Direct recently overhauled its Web site and plans to introduce new products, including a checking component, later this year.

The promotional rate exceeds the yields offered by HSBC Direct's biggest competitors.

ING Direct currently offers a 4.5 percent annual yield, Citibank pays 5 percent on its online savings account and Emigrant Direct offers a yield of 5.05 percent. Before the hike, HSBC Direct paid a yield of 5.05 percent.

It also comes at a time when online banks face an increasingly crowded field.

"Traditionally, rate is the field on which battle is waged in terms of garnering deposits," Greg McBride, senior financial analyst at Bankrate.com, said.

But the unfriendly rate environment could tie the hands of banks that otherwise might quickly match their competitors, he noted. Banks generally make money by borrowing at lower, short-term rates and lending at higher, long-term rates. The spread between those rates has been narrowing, pressuring bank margins in the process.

ING Direct said it aims to be competitive with rates but that it doesn't "play the rate game" and follow other banks.

Citibank Direct said it closely monitors market conditions and the competitive landscape when setting rates.

While high yields are a big driver for customers, savers also tend to be loyal, McBride said. "Investors aren't always necessarily expecting that their account will always have the highest yield. But they do expect the yield to be competitive with others," he said.

Newman said he expects the offer to spur existing customers to make more deposits as well as draw customers who bank elsewhere or who don't currently park their cash in online savings accounts.

After the promotion expires, the rate on HSBC Direct accounts will return to a standard rate, Newman said. He declined to say what that would be, but said it would be "competitive."

Attracted by high yields and low balance requirements, customers have flocked to savings accounts that are accessed practically entirely online.

Financial research and consulting firm Celent estimates that $120 billion in deposits were gathered online as of the end of 2005 and expects that figure to more than triple to $380 billion by 2010.

ING carved a foothold in the market when it launched ING Direct in the U.S. in 2000. HSBC USA and Citibank, a unit of Citigroup (Charts), are among the banks to jump into the fray more recently.

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