High yield savings… smaller banks offer better APY, is there a downside?

I’m looking into opening a high-yield savings account to keep some liquid funds, but I’m stuck trying to figure out if there’s a catch with the lesser-known banks that have higher APYs. I’ve checked posts on this forum, asked friends, and read articles, but I’m still not sure.

Big names like Capital One, AMEX, Discover, and Marcus are offering around 3.8%, but banks I’ve never heard of, like CIT and OpenBank, are going over 4%. All of them are FDIC insured, so that’s not the issue.

Does choosing a smaller name mean worse user interfaces or customer service? I don’t need physical branches, so online-only banks are fine by me. I’d love to hear your thoughts, experiences, or any tips!

This is pretty common. The bigger banks are trusted, so smaller ones have to offer better rates to compete. I’ve been using Ally for years. I don’t bother chasing every small rate increase unless it’s significant.

@Piper
Makes sense. I did see some people mention shady practices where smaller banks create new accounts with higher APY and lower the old ones, forcing you to keep switching. Ally has come up a lot in recommendations, so I’ll keep them in mind!

@Piper
Yeah, the big online banks are all pretty similar. Don’t expect those high promo rates to stick around forever. I’ve seen some at 5%, but they don’t last long.

@Piper
CIT’s Platinum Savings is 4.25% right now, but you need at least $5K to get that rate.

@Piper
CIT did that to me back in 2021. They dropped my rate to something tiny even though I kept adding to my balance. Switched to Wealthfront and haven’t looked back.

Smaller banks are more likely to run into technical issues, fail, or suddenly change their rates. Even if they’re FDIC insured, you might have to wait weeks or months to get your money if something happens.

Personally, I’ve stopped playing the HYSA game. My cash is in SGOV ETF at Fidelity (4.3% yield). It’s not FDIC insured, but if the U.S. Treasury ever defaults, FDIC won’t matter either. Plus, SGOV is state income tax-exempt, so that’s a bonus.

I’ve had a HYSA with CIT for years. It’s owned by First Citizens Bank, which has been around forever. I feel safe keeping my money there.

I’ve been with Wealthfront for a decade. It’s a fintech with a program that spreads your money across FDIC-insured banks. My APY is 4.5% right now, but at one point, I hit 6%. There are no gimmicks or minimums, which I love.

@Dakota
Wealthfront is solid, but I moved everything over to SWVXX in Schwab. Works better for me.

We’ve used big names like Marcus in the past but ran into issues getting money out. Customer service was a nightmare. We switched to smaller banks like Forbright and Everbank, and they’ve been great so far. Both are FDIC insured.

You might want to look into short-term T-bills. They’re tax-exempt and often pay higher than HYSAs.

The problem with no-name banks is that they don’t have branches. If something goes wrong, you can’t talk to someone face-to-face.

Big banks rely on older customers and brick-and-mortar branches. That lets them pay lower rates while keeping their customers because switching feels like a hassle. Online-only banks have to be more competitive, which is why they offer higher rates.

If a bank is offering more than the three-month Treasury rate, they’re likely using it as a way to attract customers and make money elsewhere. It’s kind of like how Schwab offers free ATMs. You stay on their platform, so they win long-term.

Wasn’t there an online bank last year that collapsed and left people in the lurch? Even if they’re insured, it seems like a headache to deal with.

I recently opened a HYSA with Barclays at 4.25%. I didn’t want to risk going with an online bank with no history, even if they offered slightly higher rates. Ally used to be great, but their customer service has gone downhill, and their rates just don’t compare anymore.

Big banks have the overhead of physical branches, which drives up their costs. Online banks can pay higher interest because they save on those expenses.