Looking for better rates? Visit a virtual bank

Herb Weisbaum • Profile • E-mail

Online banking is incredibly convenient and environmentally friendly. It’s also a good way to get the best return on your deposits. If you don’t bank this way now, trend watchers say, there’s a good chance you will before long.

“We predict steady growth as more go online and see the benefit of doing your banking from anywhere at anytime, ” says Steve Shaw, director of strategic marketing at Fiserv, a financial services technology firm based in Brookfield, Wis.

According to a new Harris Interactive survey conducted for Fiserv, nearly 70 million U.S. households – four out of five with Internet access – use some form of online banking service. That’s an increase of more than 2 million households in just the last year.

On Tuesday, Bank of America announced it may shed about 600 branches. Liam McGee, president of Bank of America's consumer and small-business bank, said part of the reason for the move is that more customers prefer online and mobile banking.

Most of us who bank online do fairly simple things, such as check our balance, verify transactions, transfer money between accounts or pay bills. But online banking can also be a smart way to manage and invest your cash assets.

“It’s a lot cheaper for the banks to do business via the Internet,” says money-rates.com columnist Richard Barrington. “As a result you might get better rates and/or fee waivers for doing business online as opposed to the old-fashioned way.”

Greg McBride, senior financial analyst with Bankrate.com, tells me online banks are where you’ll find “substantially higher returns and still have the full protection of FDIC insurance.”

According to this week’s nationwide survey by Bankrate, the average money market/savings account is paying 0.36 percent annual percentage yield (APY).

Rating the banks Consumer Reports rates the largest online banks. 1. ING Direct 2. HSBC Direct  3. Citibank 4. CapitalOne  5. Bank of America  6. Chase  7. Wells Fargo Consumer Reports

You can find much higher yields at Internet-only banks. Bank of Internet USA pays 2.5 percent on its savings account. At ING Direct it’s 1.4 percent. HSBCDirect.com has a money market account paying 1.55 percent.

McBride says you can usually find lower fees and smaller minimum balance requirements if you bank online. Last year, Bankrate surveyed checking accounts at virtual and physical banks.

• The average balance requirement on interest checking accounts was $3,461 at brick-and-mortar banks and $843 at online banks.
• Service fees on these same accounts (if you don't maintain that balance) averaged $11.97 at traditional banks and $4.38 at online banks.
• Online banks paid a yield that was an average of 8 times higher than their traditional banking counterparts for interest-bearing checking accounts.

The top-rated online banks
For its July issue, Consumer Reports Money Advisor rated seven of the largest online banks. The editors evaluated four types of accounts: regular savings, money market savings, CDs and checking. They chose accounts with the lowest balance requirements that did not require additional business with the bank.

INGDirect.com came out on top. HSBCDirect.com was a close second. Consumer Reports says both of these virtual banks pay consistently higher interest rates than traditional the online versions of traditional banks.

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