If you're still picking your bank by whether there's a handy branch nearby, you haven't joined the 21st century. Branches are nice, especially when you've got a good book to read while you're waiting in line. But for real convenience, speed and a simple financial life, the very best bank accounts await online. Even better, they're paying far higher interest rates on savings accounts than you'll find at traditional banks. New online checking accounts are also springing up, with interest rates and terms you can't get anywhere else. To me, that's free money. What are you waiting for?
Internet banking first appeared in the 1990s—regular, full-service banks transplanted onto the Web. Back then, however, communications weren't speedy enough, or the advantage clear enough, to collect a crowd. Some banks failed. Others settled for small niche businesses.
All that changed in 2000, with the launch of what's known today as "direct" banking. You're offered a limited range of low-cost, do-it-yourself financial options, available only online. ING Direct led the way, by creating a simple, high-interest savings account, with no fees and no minimum deposits, that's federally insured. A true "people's choice." You can link it electronically to your regular checking account at any bank. With the click of a mouse, you move your money back and forth (the transfer takes two or three days.) You can bank by phone or mail, too.
Today, ING Direct, with more than $50 billion in cybersavings, has plenty of competition, not only from online banks (HSBC Direct, EmigrantDirect) but from insurance companies (MetLife), mortgage banks (Countrywide) and brokerage firms (Etrade, Univest), offering high-yield banking to their customers.
Even a few traditional banks offer direct accounts. At Citi, for example, the people waiting in line in the branches are earning 0.7 percent on their basic savings. If they went home and opened their laptops, they could sign up for Citi's online Ultimate Savings Account—no fees, no minimum balance and paying 4.65 percent. Most banks don't give you this choice, for fear that you'll take it. Rates can go higher at online banks because they don't have buildings and tellers to support.
What can you earn on basic savings today in online accounts? HSBC Direct, EmigrantDirect, Etrade Financial and Univest pay 5.05 percent. ING Direct pays 4.5 percent. That compares with 0.45 percent at the 50 highest-paying traditional banks, Informa Research Services reports. Hot-money artists switch from bank to bank to get the best rate of the hour—they're "day savers," says Catherine Graeber of the tech marketing firm Forrester Research. The steadier money settles into one account. Arkadi Kuhlmann, ING Direct's CEO, says that 30 percent of his customers save automatically every month, with money moved to ING from other accounts.
Most of these high-yield accounts are pure savings vehicles, so they don't offer check writing, says Greg McBride, senior financial analyst at Bankrate.com. So now, online banks are expanding into checking, too. Most banks already allow you to use your checking account to pay bills online. But you probably earn no interest or earn only a nominal amount. At the top 50 banks, it's a meager 0.45 percent.
So how would you like to earn 4 percent on a checking account, with no fees and no minimums? That's the yield on ING Direct's new paperless checking account. Everything is paid online or by debit card. If you have to send someone a check, you fill out an online check form; ING creates the check and mails it for you the next day. Schwab's checking account pays 4.25 percent. HBSC will announce its own new checking account by June.
Online checking and some of the savings accounts come with free ATM cards. But you may pay a fee to the bank that owns the ATM you use. Online banks often refund some of that fee. Schwab refunds it all. At ING, you have free use of Allpoint ATMs, in stores and smaller banks.
Cyberbanks offer other services, too—certificates of deposit, mortgages, home-equity lines, auto loans, credit cards, retirement accounts and mutual funds. The best of them emphasize low costs, simplicity and full disclosure of fees. That puts them well ahead of a lot of bank officers in business suits.
What's next for online banking, once checking accounts get tucked away? Probably more help in managing your money. Intuit, owner of the Quicken personal finance programs, has developed money-management software for banks to include with their online sites. Among the options you'll be offered, says Intuit director Paul Rosenfeld: an online check register, so you can deduct written checks from your online account, and a program to help you with planning and budgeting.
Some banking customers worry that online accounts are open to hackers and theft. But I bank online myself, so clearly I think they're secure enough. I love the convenience, not to mention the higher rates. Besides, it's the 21st century. If you snooze, you lose.