I've recently come across some banks that have started internet divisions with online savings accounts. The rates are above average, but they are not great. So I'm not in a hurry to post on them. Also, I'm not having an easy time learning about the banks' ACH transfer systems. They have little documentation on their websites, and when I contact their customer service, the CSRs have trouble providing more details. This reminds me of a common problem that I've seen over the years with new internet banks. They neglect their ACH transfer capability.
Since you can't go to a branch to deposit or withdraw money, the ACH transfer capability of an internet bank is very important. It's also one of the most overlooked features. Many internet banks provide little information on these features.
Overview of ACH Transfers
If you don't have a lot of experience with internet banking, you might not be familiar with ACH transfers. ACH stands for Automated Clearing House, and it's an electronic network for financial transactions in the U.S. Direct deposit is one of the best known transactions that is done via ACH. An ACH transfer may also be called an electronic funds transfer (EFT).
An internet bank should allow customers to log into their accounts and initiate bank-to-bank transfers via ACH. For example, if you deposited a check into your checking account at your local bank, you should be able to log into your internet bank account and initiate an ACH transfer from your local checking account into your internet account (pulling funds from your local bank). Likewise, if you need money at your local bank, you should be able to log into your internet bank and initiate an ACH transfer to your local bank account (pushing funds to your local bank).
If an internet bank doesn't offer ACH transfers, making deposits and withdrawals probably won't be easy. You might have to mail checks for deposit, or you may have to do a wire transfer which may require faxing forms and/or phone calls. Also, wire transfers for outgoing transfers most always have fees.
Important ACH Transfer Features
Even if an internet bank has an ACH transfer capability, you might still experience problems when you try to initiate transfers. This is why it's important for internet banks to provide clear documentation describing their ACH transfer features. If you're trying to choose a new internet bank, the ACH transfer features should be a major criteria in your decision. Below are a few of the important ACH features that an internet bank should clearly disclose:
- How Links are Established - A link for an ACH transfer is a connection to an external account. This is typically done before you can initiate an ACH transfer. The typical process for establishing a link is to specify your bank's routing and account number. Trial deposits are sent to the external bank account. You then have to verify the trial deposits by entering the deposit amounts. This proves to the internet bank that you own the external account. Some internet banks require this to be done at least twice: once when you initially fund the account and again after the account is established.
- How Many Links Are Allowed - Many internet banks restrict the number of links to your external accounts. If you hit the limit and you need to add a new link, you'll first have to delete an existing link. So if the bank has a small limit, it should make it easy to delete links.
- Type of Accounts That Can Be Linked To - Ideally, the internet bank should allow you to link to checking accounts, savings accounts and brokerage accounts. Some internet banks limit linking to just checking accounts.
- Cost to Initiate ACH Transfers - ACH transfers should be free. I've seen some banks that have a fee for outgoing transfers.
- Dollar Transfer Limits - This is the maximum dollar amount that can be transferred. Banks often have different limits for deposits and withdrawals. There are often limits for a single day and limits for a month. Banks sometimes limit this to small amounts. For example, one internet bank has a limit of $10,000 transferred out per day.
- Restrictions on the Number of Deposits and Withdrawals - All savings and money market accounts limit withdrawals via ACH to a maximum of six per month. If you go above this number, you will likely be hit with a fee. This is due to federal regulation. However, some banks place additional restrictions.
- Allow ACH Deposits/Withdrawals Initiated from Other Banks - If a bank's ACH capability is weak, you may have an easier time to initiate transfers from another internet bank. Most banks allow ACH deposits and withdrawals that you initiate from your other banks. Some have restrictions.
- Hold Times - When you make an ACH deposit, the hold time is how many days it will take before those funds are available. During the hold time, the money is typically earning interest, but it's frozen, and it can't be withdrawn.
- Speed of ACH Transfers - Some banks can take three or more 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. If a bank mentions the transfer time, it will often list a range of time for the transfers or the worst case time. So it's hard to know the true speed until you use it.
Some banks say they have low limits or restrictions on ACH transfers for security reasons. Sometimes they will increase limits for long-time customers or on a case-by-case basis. These limits and restrictions are usually just on ACH transfers initiated from that bank. ACH transfers initiated from another bank usually have fewer restrictions. This is due to how liability is assigned in the ACH system. The bank that initiates the ACH transfer is the one liable for the ACH. If an ACH is received by a bank, regulations allow that bank to reverse the transaction within 60 days.
Regardless of the reason why internet banks have low limits and restrictions on ACH transfers, they should ensure the limits and restrictions are clearly documented so customers aren't surprised by the delay and cost when they want to withdraw their money.