Break the bank: Go online

(Money Magazine) -- Here's a familiar scene: Lunch hour at the bank, and you're waiting in line for a teller. You're there to deposit a few paper checks, as well as to ask about a service charge you noticed on your last statement (which annoyingly wipes out any interest you earned). The minutes tick by as your stomach growls, and you begin to think: There's got to be a better way.

Well, there is, but you won't find it at the bank around the corner. Instead you have to go to financial institutions that exist online and only online.

The first virtual banks were generally limited to high-yield savings accounts, but today's "pure play" Web banks such as E-Trade and EverBank offer free ATMs and check writing. (Click here to see Money's picks for top online banks.)

There are no branches, but you probably use those less frequently anyway: 41 million households now do some form of banking online, a number that's expected to nearly double by 2011, according to Forrester Research. (Even some old-style banks are trying to get into the game by setting up Web-only divisions.)

But without an expensive branch network, Web banks can offer higher yields and charge lower fees. Why sacrifice a fatter balance just so you can wait in line? For the illusory sense of security a branch offers? For some lollipops at the door? Here are four reasons why it's time to make the move.

Even though the Federal Reserve has kept short-term rates at 5.25 percent for more than a year, the yield on most money-market accounts remains stubbornly low, on average less than 1 percent. Not so with virtual banks.

"Pure-play banks are deposit specialists," says Jim Bruene, publisher of Online Banking Report.E-Trade (Charts) was recently paying 5.1 percent on its savings accounts; HSBC Direct wasn't far behind with a yield of 5.05 percent. And neither bank requires a steep minimum for the privilege.

Online banks also tend to keep accounts refreshingly simple: no fees, few minimums, no strings whatsoever. In other words, you make more money and don't have to jump through hoops to hold on to the cash.

Do a few percentage points make a big difference? Over two years, a $10,000 balance at 5 percent could grow to more than $11,000 online. In that time at the typical branch you'd earn just $200.

A slew of Web banks have also rolled out checking accounts that pay from 1 percent to 4 percent, compared with a mere 0.28 percent on average at conventional banks.

These accounts aren't as carefree as savings (you may have to maintain a minimum balance or sign up for direct deposit in order to earn interest or avoid a monthly fee), but the same holds true for traditional checking accounts.

Bank of America (Charts, Fortune 500), for example, waives the $12 monthly fee on its regular checking only when you meet its minimum-balance requirements and you don't earn interest. There are always going to be checking-account rules and minimums, but why not earn a little extra money for the hassle?

The early versions of online banks were great at paying high yields, but getting your money in and out of an account (unless it was via electronic transfer) used to be tricky.

Today that obstacle has all but vanished. Online-only checking accounts now come with ATM cards that work in virtually every machine. Ah, you say, but what about ATM charges? With no network of their own, won't any savings I get by banking online be wiped out by cash-machine surcharges?

Again, the online-banking community is generally superior. Most virtual banks reimburse ATM surcharges (typically up to $6 a month, though E-Trade and Charles Schwab (Charts, Fortune 500) have no cap). That's a better deal than at most brick-and-mortar banks, which a) rarely give you a refund and b) sometimes levy an additional fee of $1.25 on average for using some other bank's machine.

As for getting cash into your account, you can either make an electronic transfer, set up direct deposit or mail in checks (often by using prepaid envelopes, so making a deposit is as simple as finding a mailbox).

Anyone who's spent half a lifetime caught in a phone conversation with a clueless customer service rep knows that traditional bank service is a far cry from even minimally tolerable. And since Jimmy Stewart is no longer your friendly local banker, it's not as if things are that much better in the branches.

A growing trend in traditional banking is to move in the direction of the airlines (those paradigms of customer service) by making more things self-service. With an online bank, all you're giving up is the opportunity to sit with someone in a poorly decorated cubicle. There are still ample customer reps available, not to mention far more efficient e-mail systems.

E-mails that Money sent to several virtual banks were answered within one business day, often sooner. Plus, many banks specify when you can expect an answer, so you're not checking your e-mail every half-hour to see if that credit has come through.

Once you're a customer of an old-fashioned bank, there's a likelihood you'll stay with it for a while (direct deposit and automatic-payment plans only strengthen the bond). The sheer hassle of switching accounts to a new institution is enough of a barrier that most people stick with what they've got.

The beauty of banking online is that you can be a more informed shopper and easily take your savings elsewhere if there's a better deal. You can compare rates and fees from your laptop, and making the switch doesn't require waiting in line at a branch during your lunch hour.

"Information has become very transparent," says Larry Freed, president of ForeSee Results, which tracks online customer satisfaction. "The power has shifted from the banks to the customers."

There are also a number of online resources to help you find the best deals, in the form of discussion boards, safety ratings and yield trackers.

Click here to see Money Magazine's picks for top online banks.