Online banking, despite a rocky start, is becoming the rule rather than the exception. And though some consumers remain wary of making financial transactions over the Internet because of security concerns, Forrester Research forecasts that in two years, 76 percent of U.S. households with Internet access will bank online.
How should you select an online bank if you haven’t already? Much like a walk-in bank. You’ll want one that offers the services you need, pays competitive interest rates on deposits, is convenient to use, and doesn’t gouge you on fees. We evaluated some of the largest ones on those criteria (see table).
The way we bank has completely changed over the past three decades. Thirty years ago, when you needed money, you visited a pleasant fortress during weekday “banking hours,” probably stood in line for a while, and had a human teller count out your cash. But just a few years later, banks launched networks of automated teller machines across the country. Visiting the local branch for routine business became the exception for many consumers, and some banks actually discouraged face-to-face interaction with bank tellers.
Now we appear to be in the midst of another huge change. When online commerce exploded in the late 1990s, banks were slow to catch on. And even after the Dutch bank ING Direct started to provide online banking to Americans in 2000, most of our traditional banks acted even less nimbly than usual, suspicious of the online banking “model”—in other words, they couldn’t figure out how to make money from it. When banks tried to fuse online banking onto their traditional savings and checking accounts, they sometimes stumbled. Bank of America, for example, charged its customers for the privilege of paying bills online, and Citibank tried to establish an Internet-only bank separate from its other operations.
Today, online offerings are more robust, giving consumers a wider range of choices. But safety—of both their personal data and their deposits—remains a major concern of many.
The primary reason online banking holdouts avoid it is worries about identity theft, according to Javelin Strategy & Research. Banks are sensitive to those concerns. All the institutions we rated require customers to use Web browsers that support 128-bit encryption for any online transactions. And many banks provide $0 liability in the event that unauthorized transactions are made from your online account, as long as you exercise a degree of security diligence like setting up a firewall on your computer.
Despite the fears, Internet banking might actually be more secure than the traditional alternatives. Javelin points out that online financial transactions can be safer than paper because information is encrypted, and thieves more commonly obtain personal data through low-tech methods like “dumpster diving” and stolen physical property.
Aside from computer security, the safety of your capital is also paramount, especially in today’s economic climate. Thirty-three banks have failed this year as of May 8, 2009. NetBank and IndyMac were early online banking stars, offering customers interest on deposits that was well above the industry average. Unfortunately for the depositors, both banks ultimately failed. NetBank and IndyMac customers who had deposits of more than $100,000 (the FDIC insurance limit in effect at the time) lost a percentage of that uninsured money.
The nuisance and anxiety involved with recovering your money from a failed bank is easily avoided. Whether you’re banking online or at a branch, you should limit your deposits with any one institution to the $250,000 that is currently covered by the FDIC; that limit is set to expire on Dec. 31, 2009, when it will revert back to $100,000. You can also check the financial safety of banks by searching Bankrate.com’s Safe & Sound ratings.
With most banks, the more products and services you use, the more attractive you are as a customer. So you’ll get better deals if you link your online checking with, say, a mortgage, brokerage account, and credit card. If you want a stand-alone checking account with no such links, expect to incur a monthly fee, which might range from a couple of dollars to $25.
For this analysis we looked at stand-alone checking, savings, and money market accounts, along with CDs, at the largest online banks. We rated them based on the interest rates they pay on deposits (minuscule as they now are); service fees; the ease of transferring funds between accounts; and amenities such as cell-phone banking, electronic bill payment, and integration with personal-finance software.
The veteran online banks ING Direct and HSBC Direct landed at the top of our ratings primarily because of their consistently higher interest rates, if you can consider a 1.65 percent annual percentage yield high. In contrast, Chase pays one one-hundreth of a percent on savings and money market deposits you keep with them.
But the online gap between ING and HSBC and other larger banks is no longer as great as it once was. All the banks we reviewed offer cell-phone banking with at least some, if not all, of the major devices and carriers. And all of them support at least one of the two major personal-finance software suites, Quicken and Microsoft Money.
Fees still make us grumpy though, and some of the online banks assess them for not maintaining minimum balances or not integrating with another product of that bank. Of the banks we rated, Chase was the most egregious assessor in both the breadth and depth of fees, imposing, for instance, a $12 fee if your money market balance falls below $1,500.
A look at banking practices abroad provides a preview of some of the innovations we might expect to see in the next several years:
In the U.S. we’re mostly paying for things by swiping magnetic strips through wobbly card readers, just as we did a decade ago, while many clever ways to make quick, contactless transactions are becoming commonplace in Malaysia and Abu Dhabi. Contactless payment lets you wave a card, fob, or cell phone in front of a reader that makes the transaction. Currently, an ambitious contactless project is being implemented in France, as major retail chains begin to equip check-out lanes with the technology.
It may seem like something from a Hollywood action movie set in the near future: an ATM that dispenses cash after recognizing your fingerprint or unique vein pattern in your palm. But such bank machines are already in use in South Asia and Colombia.
Even though check-writing is being supplanted by electronic payments, 30 billion checks were paid in 2006, the most recent year for which data is available. The NCR Corp. has introduced a product that will allow bank customers to deposit checks by scanning them with an ordinary flatbed scanner.
We rated seven of the largest online banks with a nationwide reach, evaluating four types of accounts—regular and money market savings, CDs, and checking. We chose accounts with the lowest balance requirements that did not require additional business with the bank. Fees and annual percentage yields were weighted most heavily, accounting for half the score. The other categories consisted of amenities, like mobile banking, and the ability to make transactions electronically.
||Savings* (%)||Money market* (%)||Fee for low balance ($)||1-yr. CD* (%)||Minimum ($)||Bill pay cost/mo. ($)|
|5||Bank of America||
Source: CR Money Lab. Rates current as of April 30, 2009.
This article appeared in Consumer Reports Money Adviser.