In America we can get Annual Percentage Yields (APY) or savings rates between 3% and 3.5% for money kept in high yield on-line saving accounts. One might feel quite good about earning 3.5% by putting our cash into one of the many available on-line saving accounts, especially when compared to the large negative returns from stock markets over the last year. However, having lived overseas and still having some cash there, I can assure you that here in America we are getting some of the lowest APYs. For example in Australia you can earn an average of 7.5% to 8% in online savings accounts that operate in exactly the same fashion as the ones here! To illustrate the global interest rate differentials I have complied a list of high interest account savings rates from around the world using HSBC and ING Direct savings accounts, because of their comparable local and global offerings. I also feel that these two banks are the leaders when it comes to online accounts per a past article discussing factors to consider when choosing a high yield savings account.

Table : HSBC APY versus ING Direct APY by country

Country	HSBC Savings Rates	ING Direct Savings Rates
Australia	7.5%	7.0%
Canada	3%	3%
Germany	N/A	5%
France	7%	6%
India (1 year Fixed Deposits)	10%	10.25%
Italy	N/A	4.75%
United Kingdom	5.25%	4.75%
USA	3.5%	3%

Information as of September 2008. N/A – Could not find applicable rate.

I think the table above clearly demonstrates the substantial saving account interest rate differential across the various countries, with the US and Canada trailing the pack. The rate differential across the various countries is essentially a reflection of the differing central bank/treasury prime interest rates and prevailing inflation levels in these countries. It is this savings interest rate differential (in addition to low cost online banking model) that allows many banks, especially the global ones, to afford to pay savings interest rates well above the US treasury (risk free) rates and still make a decent profit. Put very simply, if a bank can get money in the US, invest it at 6% overseas and pay 3.5% to depositors here it still nets itself a 2.5% risk free return. When we are dealing with billions of dollars, a 2.5% return means a lot of money. That is why so many banks are rushing to provide online savings accounts and why you see so many new offerings every other day.

Can I open an online foreign savings account to get higher rates? Unfortunately most American residents cannot take advantage of these foreign bank accounts because they require proof of local residence to open account (if I am wrong on this let me know). There are indirect ways to benefit from high overseas interest rates (e.g. foreign bonds) but these are then different asset classes and you lose some of benefits and easy access direct online savings accounts offer.

Also the tax implications, exchange rate differentials and administrative hassles make having a foreign savings account too much of a hassle and generally not worth it for sums less than $50,000. Still I hope this post sheds some light on how these online banks operate and why they can offer such high rates relative to standard checking accounts.

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