Five Questions to Ask Before You Bank Online
You can nab great savings rates in cyberspace. But don't ditch your branch bank just yet.
(MONEY Magazine) – You read the papers and are well aware that the Federal Reserve has raised interest rates six times in the past year. So why is your bank still paying you a piddling 0.5% on your savings? No good reason you can think of.
Where can you get a better deal? Head to cyberspace. Online banks, which operate almost exclusively on the Internet, now boast some of the best savings deals in the country, offering as much as 3% on traditional savings accounts--more than seven times the national average--and tantalizingly high yields on money-market accounts and CDs too.
If you are tempted by these higher rates, you're certainly not alone. Savers nationwide are flocking to branchless banks. In just five years, for example, INGDirect.com, the largest online bank, has become one of the 40 biggest banks in the country, with more than $36 billion in assets. And the industry overall is expected to double its deposits every two to three years for the rest of the decade.
To figure out whether an online bank account is really right for you, consider the answers to these questions.
ARE THE DEALS FOR REAL? In a word, yes. "What gives Internet banks an advantage is lower overhead," says Greg McBride, senior financial analyst with Bankrate.com. Traditional banks spend lots of money to operate their brick-and-mortar branches. Virtual banks don't incur those expenses, and so they pass the savings along to their customers. EmigrantDirect.com, for instance, currently pays 3% on its savings account, guaranteed through the end of the year.
IS ONLINE BANKING SAFE? The oldest Internet banks are only about 10 years old, so they don't have a long record. But safety isn't an issue as long as your virtual bank is protected by the Federal Deposit Insurance Corporation. You can tell an online bank has FDIC insurance if it provides a direct link to fdic.gov on its website. Individual accounts are covered up to $100,000, the same as at traditional institutions.
CAN I DO ALL MY BANKING ONLINE? Most, but not all, online banks offer the same full slate of products that you would find at a regular bank: checking accounts, CDs, mortgages and other loans, in addition to various savings accounts. Most are good deals. Rates on CDs, for example, are as much as 40% higher than the national average. Loan rates are competitive to slightly better than average vs. traditional lenders.
There are, however, some online banks that restrict their offerings to savings accounts only. Among them: ING Direct. ING requires customers to link a savings account with them to a checking account at another bank to make deposits and withdrawals easier. So if you're thinking of dumping your traditional bank entirely, first make sure that your online bank offers all the financial services you need.
HOW DO I GET MY MONEY? You can deposit and withdraw money in most of the same ways you can conduct business with a regular bank, except for physically walking into a branch. Many of the major online banks, like EverBank.com and NetBank.com, have cooperative agreements with Cirrus and other ATM networks that allow their customers to make ATM deposits and withdrawals without any fees. In addition, EverBank will credit you up to $6 a month for surcharges levied by ATM operators with whom it doesn't have such agreements. Says McBride: "That gives customers even more freedom than they have with the big brick-and-mortar banks, since they can essentially go to any ATM." At ING and other online banks that offer only savings accounts, though, you first have to transfer money online to your regular bank to use an ATM.
WHAT IF I NEED TO TALK TO A REAL LIVE PERSON? Most virtual banks realize that managing money via the Internet can be lonely, so they operate call centers without the usual layers of touch-tone dialing or annoying voice-activated commands. A money spot-check of the major online banks found that a real person usually answered the phone in a minute or less. (ING Direct also runs Internet cafés in several big cities; you can't conduct any financial transactions, though, other than buying a latte.)
But none of the online banks have physical branches. That's why you might not want to fully sever ties with your existing bank--in fact, 99% of online bank customers still keep accounts at traditional banks. Take advantage of the deals that online banks offer, but in case you someday want to go face to face with a teller again, leave your options open.