If high fees and low yields at your bank have made you wonder why you're keeping your money there, it may be time to switch. And if, like most people, you haven't set foot in a bank branch in months, you're a prime candidate for an Internet bank.
When you compare fees and yields, Internet checking accounts beat brick-and-mortar bank accounts, according to Bankrate.com's fall survey of 1,300 checking accounts. Internet banks spend millions of dollars less each year than traditional banks on operating expenses, says Mark Jaindl, president and chief executive of American Bank, an Internet bank based in Allentown, Pa., that ranked second in Bankrate.com's survey. So they can pass along the savings to customers through higher yields on deposits and lower fees on services.
What they offer
High yields. Although the average yield of 1.5% on checking accounts at Internet banks won't even keep pace with inflation, it beats the puny 0.57% average yield offered by traditional banks, according to Bankrate.com's study.
For one of the highest yields currently offered, check out Virtual Bank's introductory 3.05% rate on its High Yield Checking account. But take note: The introductory rate applies for only 90 days after opening an account. After that, your rate will vary depending on your account balance. To get Virtual Bank's top rate of 2.75%, you must have at least a $50,000 balance. A more manageable balance -- $1,000 -- gets you just 1.75%.
Most people will be better off with American Bank's e-Checking account. It offers a 2.4% yield that starts compounding as soon as you make the $100 minimum deposit. You'll have to keep a $1,000 balance to avoid fees.
Low fees. You won't see as many fees eating away at the interest on accounts at Internet banks. The average monthly service fee on interest-bearing Internet accounts is $8.24, versus $10.59 charged by traditional banks. In fact, twice as many online checking accounts (20%) as those at brick-and-mortar banks (10%) have no monthly service fees or per item charges.
NetBank and Stonebridge Bank both offer checking accounts with no monthly service fees. When you have money in the accounts, NetBank offers a 1.5% yield, and Stonebridge pays 2.2%.
Free services. Many online accounts -- especially interest-bearing ones that require a higher balance -- offer free services. For example, American Bank's e-Checking account gives you free online bill payment, as long as you maintain a minimum balance of $1,000, and a number of other free services.
In addition to free online banking and bill paying, online accounts might offer a starter kit of free checks, unlimited check writing, and debit cards with no point-of-sale charges. But watch out for services that expire, usually after 90 days.
ATM reimbursements. Only half of the Internet banks surveyed by Bankrate.com own ATMs, so there's a good chance you might have to use another bank's ATM for transactions. Most Internet banks don't charge their customers for using another bank's ATM, but you'll still have to pay the other bank's charges.
Fortunately, more than half of online banks reimburse for ATM charges -- usually up to $6 a month. With ATM fees running $1.50 on average, you could make four transactions a month without paying any fees. Umbrella Bank's Basic Interest Checking account reimburses five ATM surcharges up to $1.50 each.
Another smart way to avoid ATM fees: Get cash back when you make a purchase at the supermarket. More than 80% of Internet banks don't charge for such transactions.
Minimum balance requirements. The average minimum to open an account and earn interest at an Internet bank ($953) is nearly a third higher than that at a traditional bank -- partly to offset the cost of paying higher yields. But online accounts tend to require a lower balance to avoid fees than do traditional banks -- $1,300 versus $2,600.
NetBank's NetValue Checking account has one of the lowest minimum deposits to open an account -- $50 -- and no minimum balance requirements to earn interest or avoid fees. However, the yield on the account is only 1.5%.
Is an Internet bank right for you?
Before you choose a bank, be sure to price other fees and services that are important to you. For example, if you tend to bounce checks, see what you'd pay for a returned check.
Some people shun online banks because there's no branch to visit. But think about it -- when was the last time you actually stepped inside your bank? Bank hours aren't convenient, and many now charge for visiting tellers.
On the other hand, many online banks offer 24-hour customer service. Plus, you can access your account online at any time. Some, such as Virtual Bank, have affiliates in cities across the country so customers have an actual building to go to if necessary.
However, "a lot of people aren't comfortable having their bank out there in cyberspace," says Laura Bruce, Bankrate.com's senior reporter who compiled the special report on the study. But any financial institution with an online presence could be a victim of hackers, so Internet banks aren't any less secure.
To be safe, though, consider an Internet bank ranked highly in surveys by Bankrate.com (see the table) and Gomez. Make sure the bank is FDIC insured, and look for security measures such as those provided by VeriSign.
Internet Checking Accounts | These are Bankrate.com's top five online checking account deals.
Source: Bankrate.com | rates are as of 10/24/02
*Charges refer to fees for using another bank's ATM. Reimbursement amounts refer to monthly refunds banks pay for ATM surcharges.
