Rates at Web Banks Beckon -- But Wait
Michael A. Pollock
Apr 23, 2006
Amid higher interest rates, banks are offering the best returns on savings in several years.
The juiciest returns are at banks that do business only online, without any branches. Some pay more than 4.5% on savings or money-market accounts, compared with 1% or less on savings at many branch banks. That's a nice gain for anyone with a big balance. On $20,000, you could earn more than $700 a year in additional interest.
But there are downsides to Internet-only banking.
The eye-catching rates some banks offer are "teasers" that drop after an initial period. Online banks also may limit access to your funds by not offering check-writing and by restricting the frequency of transfers from the online account to your regular checking account. Unwary consumers also can fall prey to online fraud, such as by inadvertently turning over personal information to a scammer instead of a real bank, although banks say they are working to cut fraud risks.
For some people, though, the biggest difference is having to navigate online without the personalized service they're used to at a branch. Internet banks expect you to be your own teller, and some close the accounts of people who call several times a week to ask questions.
"If you need a lot of hand-holding, or you want to have coffee every day while you talk with our staff, this isn't the place for you," says Jim Kelly, chief operating officer of ING Groep NV's ING Direct unit, which ranks among the largest Internet banks, or "I-banks," with some four million customers.
Online banks have been around since the mid-1990s, but have seen the greatest growth since 2000. Traditional banks also now offer online access to accounts, as well as services such as online bill paying.
I-banks that don't have a branch-based parent represent a small part of the total bank market, with just 1% of the $6.2 trillion in U.S. deposits, says Jim Bruene, editor of Online Banking Report, in Seattle. But some have seen rapid growth. And old-line banks are capturing some of that online growth. Last year, after it began offering a high-yield savings account in February, the HSBCdirect.com unit of HSBC Holdings drew in about $1 billion in deposits.
Nearly 40% of U.S. households do some kind of online banking, either at a virtual or traditional bank, bankers estimate. Bank of America says it has the largest online banking unit, with around 15 million customers. "We have more interaction online now than we do across our telephone and bank branches combined," says Sanjay Gupta, Bank of America's top electronic-commerce executive.
Branch, Web Rates May Differ
Deposits at online banks, like those at traditional branch banks, are protected by Federal Deposit Insurance Corp. coverage, notes Greg McBride, senior financial analyst at Bankrate.com, which tracks rates. But rates can be very different, even between an online bank and a corporate sibling that is a traditional branch bank.
Last week, one of the highest savings-account returns listed on Bankrate.com was HSBCdirect.com's 4.8% annual percentage yield. In contrast, HSBC branches pay from 0.25% on regular savings to 3.5% for an account of at least $25,000.
But the high online rate is effective only through April 30 and may drop after that, a spokesman says. HSBCdirect customers can tap their accounts at the bank's automated teller machines, but not using tellers at its branches.
Opening an online account isn't difficult. I-banks have applications on their Web sites and generally require the same personal data as other banks. While you can typically link an online account to your existing checking account, see if there is a monthly limit on the number of times you can move money. Note that transfers can take as long as five days.
Check the Fine Print
Attractive online rates may have strings attached. Citigroup's Citibank unit recently rolled out a virtual bank that provides the full range of its products and pays 4.5% on savings. But getting that rate requires also having a Citibank checking account. And to avoid fees on checking, customers must keep a $1,500 combined minimum balance or do a certain number of transactions electronically each month.
Bricks-and-mortar banks can provide services online more cheaply than in a branch, says Peter Kovalski, a senior bank analyst at Alpine Woods Capital Investors, Purchase, N.Y. But after some security breaches involving banks and credit-card companies, consumer confidence in the safety of online banking has fallen, a survey by Informa Research Services, Calabasas, Calif., found.
Bank of America is trying to reassure people about the safety of online banking, says the bank's Mr. Gupta. Among upgrades, it has added an extra step to its online sign-in routine. Customers logging on may be asked one of several personal questions that they previously provided answers to when setting up an account.
Banking online can actually help detect fraud, he adds. "By going online regularly and looking at your balance and transactions, you would be in a position to spot fraud, should any take place."
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