If you have accounts at many banks and credit unions, a hub account can be very useful. A good hub account will make it easy to electronically transfer money into and out of your other accounts. It's common for internet banks to provide an electronic funds transfer service that allows you to initiate bank-to-bank transfers. This is also called an ACH transfer since the transfer takes place over the Automated Clearing House network.
It's less common for brick-and-mortar banks and credit unions to offer an ACH transfer service. There are many of these banks and credit unions that either have no ACH transfer capability or have the capability but with many limitations. So if you have accounts at these institutions, a hub account can be very useful.
Here's an example of how one might use a hub account. Credit unions typically require you to have a savings account. That savings account can come in handy for funding CDs at the credit union. You can transfer the money into the savings account from your hub account. Once it's in the credit union savings account, most credit unions make it easy to open the CD. This can often be done online or by phone. When the CD matures, it's easy to have the credit union close the CD and transfer the money into your credit union savings account. Then you can pull the funds using your hub account.
This same procedure can be done at banks when you have a liquid account at the bank.
Hub accounts can also be useful to meet the ACH requirements for reward checking accounts. Most reward checking accounts have a requirement of either direct deposit or an ACH debit/credit. You can set up monthly ACH transfers using your hub account.
In addition to funding CDs and meeting reward checking requirements, hub accounts can be useful in keeping bank accounts active. You can set up automatic monthly or quarterly transfers to ensure those other little-used bank accounts aren't hit by inactivity fees.
Features of a Good Hub Account
Even though many banks offer an ACH transfer service, few have all the features that make for a good hub account. The features basically make it easy to link to multiple bank accounts and make it easy to quickly transfer your money. Below is a list of these features:
- Free ACH transfers - ACH transfers are typically free at internet banks. However, large brick-and-mortar banks often charge a fee for outgoing transfers. Examples include Bank of America and M&T Bank
- Unlimited Number of Links - Before you can initiate transfers, you have to set up a link to an external account. Many banks restrict the number of links to only 3. Examples include ING Direct and FNBO Direct.
- Easy Link Setup - Links to external accounts are usually done by giving the bank the routing and account number of your external account. The bank will typically use trial deposits to verify that you own the external account. You can verify these trial deposits and complete the verification process all online. However, some banks require that you mail in a voided check to set up a link. This makes the linking process much slower. An example of a bank like this is Dollar Savings Direct
- Allows Links to Both Checking and Savings Accounts - A few banks don't allow you to link to savings or money market accounts. They only allow you to link to checking accounts. ING Direct is one example of such a bank.
- Fast ACH Transfers - Some banks can take at least 3 business days between the time you initiate the transfer and the time that the money is credited to the destination account. Some banks can transfer as fast as one day. FNBO Direct, Capital One Bank and HSBC Advance have been known for their slow ACH transfers which take at least 3 business days.
- No or Minimal Loss of Interest During Transfers - This is related to the ACH transfer speed. You can lose interest during the transfer if there's a delay between the time the money is debited from the source account and credited to the destination account. I have an example of this from my experience at FNBO Direct. I initiated a transfer on Monday. It was debited from the source account on Tuesday, but it wasn't credited to my FNBO account until Thursday.
- No or Minimal Hold Times - Banks often apply hold times to deposits during which the funds are not available. This is another thing that can slow down your money transfers. If you need to pull funds from one bank and push them into another, you don't want your hub account to have a long hold time. One example of a long hold time is at Sallie Mae Bank which has a 10-day hold time for deposits of $5K+.
- Large Transfer Limits - Some banks will limit the size of the ACH transfers. One of the smallest limits is at Citibank which limits outgoing standard ACH transfers to only $2,000 per day.
- Minimal Restrictions on the Number of Transfers - All savings and money market accounts will be limited to 6 ACH withdrawals. This is due to a federal regulation. However, federal regulation does not limit deposits. Some banks limit transfers to below what's allowed by regulation. Checking accounts are not subject to this regulation
- No minimum balance fees - There may be times when you want most of your money at other banks which currently have the best deals. So you don't want monthly fees to worry about if you fall below a certain balance.
Last Thursday I described several of these features that are available at WTDirect (I also reviewed the current promotion at WTDirect in which you can earn up to a $500 bonus.) Update 5/24/10: WTDirect's promotion has expired.
I've been using Ally Bank as my hub for the last few years. There are no limits to the number of links, and the links are easy to establish. Transfers are pretty fast, usually completing in 2 business days. One advantage that Ally Bank has for use as a hub is its interest checking account. Unlike savings accounts, checking accounts aren't limited to 6 ACH withdrawals per cycle.
What's your favorite hub account? And what features are most important to you?