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Although the deal hardly seemed irresistible, it still turned Amy DuBois's head. DuBois, a 27-year-old saleswoman in State College, Pa., opened an online savings account in January 2005 at ING Direct when ING was paying 2.33%, or about a percentage point more than she could get at her local bank. At first, she used her ING account as a rainy-day fund. Then she saved at ING for her wedding last August. She still has the account, which now yields 4.5%. More important in the competitive world of banking, DuBois has no qualms about stashing cash in cyberspace indefinitely. More and more of us appear to feel the same way.
About 10 million U.S. households save online, according to Celent, a market-research firm, which predicts 23 million by 2010. To lure customers, e-banks pay much higher rates on savings accounts, money-market accounts and certificates of deposit than traditional banks do. That may be true even within the same institution. If you open a traditional savings account at a Citibank office, you'll get about 0.7%. Sign up with Citibank eSavings at Citibank.com and you can score 5%. Savings is just one aspect of e-banking, however. Are online banks' checking accounts and loans competitive with those of traditional banks? They're not bad, but not thrilling enough to keep you from considering all your options.
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Behind the high rates
Chalk it up to technology and creativity. ING Direct, the granddaddy of high-yield savings, first offered high-yield savings accounts in Canada by phone and mail in 1997. Arkadi Kuhlmann, who was then with ING in Canada and is now chief executive officer of ING Direct USA, remembers that some early customers drove a couple of hours from their home in London, Ont., to ING's offices in Toronto just to make sure the operation was legitimate. "They wanted to know that we weren't some second-story boiler room," he says.
Soon, technology let ING open accounts on the Internet. In 2000, ING introduced the first U.S. online high-yield savings account with no minimum balance and no monthly fees. Today, ING Direct USA, part of Dutch financial conglomerate ING Groep, has more than $62 billion in assets and is the fourth-largest savings bank in the nation -- and it doesn't have a single walk-in office, just a handful of orange cybercafes.
ING and other virtual banks can pay high yields with few strings because it is six times cheaper to offer savings online than at a fully staffed branch, Celent estimates. That leaves plenty of room for new-age banks to pay out more and still gush profits. Rivals here and abroad have noticed ING Direct's success. For example, London-based HSBC has opened HSBC Direct. Small U.S. banks, such as Cleveland's Ohio Savings Bank (through AmTrust Direct), and gigantic ones, such as Citibank and Washington Mutual, introduced high-rate online accounts to guard their flanks. Mortgage lenders, credit-card companies, insurers and brokerages have joined in to sell online banking services to existing customers.
If you receive a solicitation from an Internet bank, it may be worth reading. One-third of consumers who hold more than $10,000 in liquid assets in the bank never check rates on savings accounts, according to Forrester Research. "They have no idea about the amount of money they are leaving on the table by not moving their savings balances to a higher-yielding account," says Forrester analyst Catherine Graeber.
Nuts and bolts
When Amy DuBois opened her account, there wasn't as much competition. Now, the sheer number of choices can paralyze you. Bankrate.com, which lists more than 20 online banks that pay above-average yields, is a good place to compare accounts.
Cyberbanking is still banking, so some things don't change. With a certificate of deposit, you tie up your money but typically earn more interest than in a savings or money-market account. Money-market accounts have check-writing privileges, but you're often limited to just three a month. HSBC Direct, Citibank Direct and others issue widely accepted ATM cards, but some banks -- most notably ING Direct -- do not link to ATMs, so you cannot get cash easily. That means you may need to transfer money out of savings to a standard bank account.
Another annoyance is the time it can take a transaction to post to an online account. An initial deposit might take up to 15 business days to show up. However, subsequent deposits and transfers should post much faster.
DuBois is used to the two-day lag for most deposits to ING Direct, but, she says, "it's still a pain." Around the industry, it takes an average of three to five days before you can access new deposits. That should give you pause if youure eager to quit dealing with regular banks altogether.
More than CDs
Still, that radical step could be in your future. Software engineer Ing-Jye Hwang, 39, is thinking about going completely online and closing his local bank account. "I hardly use it," he says. Hwang, of Campbell, Cal., used to save at ING Direct before switching to Countrywide Bank for a higher yield. He pays bills from an online account at Ameriprise Financial, so he doesn't write many checks. If you use a lot of paper checks, find an e-bank that won't charge you extra to do so. Online banks' checking accounts often pay 3% interest, an excellent deal compared with interest-bearing checking at traditional institutions.
