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).
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.
WellsFargo.com came out at the bottom of the ratings because of its low deposit rates and high fees.
Of the seven banks rated, Consumer Reports found Chase.com to be “the most egregious assessor of fees.” For example, you’ll be charged $12 if your money market balance drops below $1,500.
You may want to have accounts at both a traditional and a virtual bank. If you’re paid in cash or by personal check you’ll want a bank with a conveniently located branch or ATM. You’ll also need a physical bank for a safe deposit box.
But this isn’t an either/or situation. You can have a checking account with the traditional bank and a savings account with an Internet bank that’s paying a much higher interest rate. You can link the accounts online and move the money back and forth as needed.
Is it safe to bank this way?
The consumer advocates and security experts I spoke with say online banking is generally safe – if you are careful about all the financial transactions you do over the Internet.
“You could make a good argument that online banking is actually safer than traditional banking because online transactions are encrypted,” says Greg Daugherty, executive editor at Consumer Reports. “Thieves have all kinds of ways to get your paper records from the trash or your mailbox.”
Internet security expert Linda Criddle, who runs the Web site www.ilookbothways.com, describes herself as an avid online banker. She says you need to ask yourself three questions before jumping online.
- Is your computer secure? You must have up-to-date security software, which means antivirus and anti-spyware protection.
- Is your connection secure? Make sure the firewall is on. If you use a wireless network it needs to be encrypted so someone who is lurking outside the house can’t collect your information.
- Do you have a secure password? It doesn’t have to be hard to remember, just hard to guess. Don’t share it with anyone and don’t respond to any e-mail requesting that information. That “urgent” message may look like it’s from your bank, but it’s bogus. A financial institution would never send you an e-mail asking for your PIN or password. Never!
“If you’ve done all of the above, then you’re off to a good start,” Criddle says. “You can have reasonably strong chance of having only positive experiences.”
You also need to be extremely careful when you conduct banking business away from home. Your laptop needs to be secure and so does your wireless connection. Criddle recommends avoiding computers at Internet cafes.
The bottom line: Before you conduct your most sensitive financial transactions you need to be absolutely certain both the Internet connection and the computer you’re using are secure. If you don’t have 100 percent confidence – don’t take the chance.
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