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Five years ago, Greg Downing looked into online banking but balked at his bank's $5 monthly fee to pay bills online. This year, Downing read about a Web-only bank that charged a much lower price: free. "I gave NetBank a chance, and I've never looked back," says Downing, 33, a project manager for Acambis, which makes smallpox vaccine. Does he miss his old brick-and-mortar bank? "Only when I have a jar of coins to deposit," he says.
As Downing discovered after he opened his NetBank account, paying bills with a mouse click is only one labor-saving feature offered by online banks. Other attributes include viewing images of canceled checks, transferring money to accounts at other banks and brokerages, and receiving e-mail alerts if, say, your balance runs low. And in the past few years, some online banks have cut the time it takes for electronic payments to clear from five business days to two.
Downing went with an online-only bank. But your best bet could be the same institutions you see every day. Brick-and-mortar bankers are also the largest online players, with the resources to bring a wide range of services to their natural customer base. (The two largest are Wells Fargo, with 6.8 million online-banking customers, and Bank of America, with 13.6 million.)
Best of both worlds
Watchfire GómezPro, an Internet research firm, ranked the top ten online banks (see table at end of story) based on the features that consumers find most important. Competition is stiff, and that's caused a rough parity in services. All of the banks provide the key services that customers want most, including guarantees against computer fraud and late bill payments, according to Watchfire. Among the top five, in particular, the differences are minor.
Wells Fargo is ranked first, in part because of its Quicken-style tools for viewing your spending habits. Then again, second-place Citibank is better than Wells or third-place Bank of America at "money movement" -- the ability to funnel funds to another account, user or bank. Fourth-place E*Trade Bank provides excellent alerts (such as letting you know when your balance is low), but it doesn't allow you to stop payments on checks. Reverse that for fifth-place Huntington: no low-balance alerts, but it will let you stop payments. E*Trade also does an excellent job integrating its online banking and brokerage services.
Internet-only banks are giving the big bank sites a run for their money and adding customers quickly. Because of low overhead, they often pay better rates on savings accounts. For example, a Citibank money-market account with $15,000 recently paid 1.5%. A similar account at First Internet Bank of Indiana paid 3.04%.
And an online-only bank can offer some personal touches. Adam Megacz, a dreadlocked, 26-year-old University of California at Berkeley graduate student, likes First Internet Bank's old-fashioned customer service. "You really do get the small-bank feel when you call them," he says. Megacz, who has been a First Internet Bank customer for five years, often transfers funds electronically through the banking industry's Automated Clearing House network. "I can call up the bank and talk to Mark, the ACH guy," he says.
One drawback to online-only banks is making deposits. For payroll checks, this usually isn't an issue because most customers use direct deposit. But if direct deposit isn't available, you'll have to mail deposits to the bank (envelopes are provided), use an ATM that accepts deposits for your bank, or transfer funds from an account at another bank.
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