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?