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Ken Tumin founded the Bank Deals Blog in 2005 and has been passionately covering the best deposit deals ever since. He is frequently referenced by The New York Times, The Wall Street Journal, and other publications as a top expert, but he is first and foremost a fellow deal seeker and member of the wonderful community of savers that frequents DepositAccounts.

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Do Internet Banks Offer Enough Advantages?


I know many people who still refuse to open an internet bank account. They are comfortable with their local brick-and-mortar banks, and online banking worries them. They may see some advantages of internet banks, but the pros don't outweigh the perceived cons. So they stick with their local banks and credit unions.

This had me thinking: what are the "real" benefits of internet banks? The most important benefit for most of us savers is the interest rate. For many savers, the added convenience and the lower fees at internet banks aren't that important. Savers often have the time to make branch visits, and they have enough savings to qualify for fee waivers at their local banks. So the main benefit of an internet bank is the higher interest rate. Is that really a big advantage?

Rate Advantages of Internet Banks?

If you keep most of your "safe money" in CDs, you may be able to do pretty well in your local area. This depends on your area and the local economy. The local rate environment can change. I've noticed this in Central Florida and in Austin, Texas. I remember local credit unions and banks in those area used to offer CD rates inline with the best internet bank CDs. Local CD deals in these two areas have dried up quite a bit in the last couple of years.

The main advantage I see with internet banks is the online savings account or money market account. Local banks and credit unions rarely offer rates comparable to the best internet savings account rates. You can sometimes get good promo deals in your local area, but the high rates don't last.

The higher internet savings account rates used to be a major incentive to go online, but this awful interest rate environment has reduced the interest rate advantage. The spread between online banks and brick-and-mortar banks has gone way down. For example, in 2007, you could get 6% APY at internet banks. The spreads between this rate and brick-and-mortar banks were often over 3 percentage points. Now that most internet banks pay less than 1% APY, the spreads are under one percentage point.

Making It Possible to Take Advantage of More Deals

Another important advantage of online savings accounts is the ability to move money via ACH transfers. This can make it much easier to take advantage of credit union CDs and reward checking accounts. For credit union CDs, you can often fund CDs with money in your credit union savings accounts. Just use your online bank to deposit money into your credit union savings account. Once the money is in the credit union savings account, it's usually easy to open a CD and fund it with that money. And when the CD matures, an internet bank can make it easy to pull the funds.

As an example of pulling funds after a CD matures, I just had a CD mature on Monday at one of my Austin credit unions (I'm going to miss the 4.5% APY). Since I now live in Florida, a visit to one of their branches wasn't an option. I was easily able to close the CD by calling the credit union. I asked the CSR to close the CD and transfer the funds into my checking account that I also have at that credit union. I then initiated an ACH transfer from my Ally Bank account which will pull those funds and deposit them into my Ally savings account. I could have written a check and deposited that money into my local bank, but there aren't any local banks that offer liquid accounts with rates close to Ally's rate (Unfortunately, Ally's rate became closer to my local banks on Monday).

In addition to managing CDs, Online banks often make it much easier to manage reward checking accounts (RCA). Banks that offer RCAs rarely have their own ACH transfer service. Using an online bank to deposit and withdraw money from your RCA is very convenient. Also, for the vast majority of RCAs, an ACH transfer will qualify for the direct deposit requirement.

Other Important Advantages of Internet Banks?

Do you have internet bank accounts? What are the main benefits they provide to you? Are internet banks important to you in helping you maximize your interest income?



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Comments
10 Comments.
Comment #1 by Anonymous posted on
Anonymous
I think the big advantage to an internet bank is receiving a combination of a fee-free no-minimum balance or very low minimum-balance feature coupled with an efficient ACH transfer option. The combination is hard to find with a brick-and-mortar bank, and a retired banker from a large, very solid bank told me the brick-and-mortar branch is much less profitable for a bank to operate, thus explaining some of the lack of benefits offered for savings accounts. The interest rate for regular savings--by which I mean savings accounts and money market savings accounts but not CDs--isn't that critical unless a depositor has large balances in regular savings (which I don't). I even prefer a regular savings account s opposed to a money market savingss account because I don't like to mess with the money market checks and find it really easy to transfer money via ACH from savings in an internet bank to a checking account at a credit union or brick-and-mortar bank.

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Comment #2 by Anonymous posted on
Anonymous
I have the exact opposite view from the "many people" you mention in your post.  The only reason I see for having a local bank is for my safe deposit box.  In fact, I'm amazed that I see all these new local branches (like Chase) popping up that don't offer the boxes, so they'd never get my (admittedly meager) local business. 

 

 

3
Comment #3 by Anonymous posted on
Anonymous
No bank or CU will share the profits with their customers, ever. It is all about greed and selfishness. In this low rate environment, they all struggle to survive and comply with FDIC rules.

Speaking of FDIC, they are not allowing better rates from some banks and CU to be different from their order of compliance. FDIC wants uniform interest rate pricing across the board or within -0.5%, otherwise they receive letter of cease and desist order.

11
Comment #4 by Maecl posted on
Maecl
I still like my small branch community bank for checking.  I was there with my father today.  He is having a difficult time handleing his finances.  I wouldn't be able to get the personal service I received from an internet bank.  They are there for me when I need them.

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Comment #5 by Wil posted on
Wil
My primary motive for using "brick-and-mortar" banks is for making deposits, which I prefer to do in person. For everything else, I definitely like the convenience of online banking, plus the better deposit rates.

9
Comment #6 by Interested Party (anonymous) posted on
Interested Party
As mentioned in the origianl article, both institutions have their place. I personally prefer the online institutions rather than the "old school" brick and mortars. Unfortunately, Ken is right, the spread has become less generous over the last few years.

3
Comment #7 by cumulus posted on
cumulus
Better rates and ACH transfers to facilitate movement of funds
are the main attractions for me.  Even though it might not be
true for all, I've found it easier and less time consuming to
resolve glitches via e-mail or phone with online banks.  24X7
phone service (Ally, Alliant) can sometimes be a nice perk
(eg. What's the exact rate associated with that APY) of some
online banks.

2
Comment #8 by darkdreamer4u posted on
darkdreamer4u
All of the above, but also: many brick and mortar banks don't have an as elaborate and sleek and user-friendly web presence as most online banks. That includes foremost the billpay feature about which I'm very picky and have high standards.

I keep one or two brick and mortar banks at hand, one in particular as it has branches inside our grocery stores with extended hours (incl. weekends), so deposits are going there and then get transferred to my regular checking account.

3
Comment #9 by Anonymous posted on
Anonymous
To Wil, comment #5, I had the same sentiment about local check deposits (especially for large checks), but I'm having good luck with my online bank's "scan to deposit" process. 

The other nice online feature I forgot to mention is billpay, even if the receipient only accepts a mailed paper check. My online bank gives me an easy way to fill out the check on their website, then they print the check and mail it for free.  This really helps with my IRA account servicer that requires quarterly paper check payments. 

 

1
Comment #10 by RJM posted on
RJM
Havent had a local "bank" for many years. Other than for a safe deposit box. Oh and one that used to have a rewards checking account that they allowed us to transform into 3.5% 5 year CDs.

Local credit union has much smaller boxes and they dont have any openings anyway.

Have 2 reward checking accounts at a local credit union. probably not worth the trouble. Even tried to make one of them my primary checking for billpay and their billpay was the worst I have ever seen.

Cant beat credit unions for any kind of cash deposits though because you can make deposits at ANY credit union, not just the one you belong to.  I often visit one thats closest to my house. Not account there but its closer than the 2 credit unions I do belong to.

I was using ING for my checking. But after I removed nearly all my money, I tried the credit union and its billpay looked like something out of the stoneage and the money was held like a week in advance.

Then I opened an Ally checking and didnt like their platform either.

So I went back to ING despite the low rate.  I just keep zero money in there except when I have bills due.

I had over 6 figures at ING, now they are cap1 and I have less than $2000. Between low rates and my hatred for cap1 going back 10 years, it was an easy choice to move most of my $$ out.

But, I like their platform the best for checking & deposits & so forth.

So I keep a little in my savings there and transfer just enough to pay my bills. And some bills, like my credit cards, I just have them PULL it from one of my mutiple internet savings/money market accounts. (A total of 18 monthly withdraws between them)

 

Honestly, I think the country could use 50% less banks AND credit unions.

So much duplication & waste.

 

Vote with your feet.

 

 

 

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