Thursday, February 22, 2007

Online Banking Showdown

What is an Online Bank?
The premise is simple, but frightening for some. A banking institution which in most cases does not have a traditional brick and mortar branch. The bank has lower overhead costs since there are no branches. In theory the bank can pass these savings on to you in the form of higher rates of return.

How Does it Work?
Generally an individual will begin by open a free checking account at a brick and mortar bank that has many nationwide locations (Chase, Bank of America, WaMu etc. - or a smaller one). The person will then link this account to the online bank by entering information found on a check such as routing numbers and account numbers at the bank website. This linking allows for electronic funds transfer between accounts. After verifying the account the bank will activate the online account and you will be able to make an initial transfer. By logging into the online bank’s secure website you can easily schedule transfers to send money both in an out of the account which usually takes 3-5 days each way depending on the institution.

Are They Safe or Reliable?
It depends. Like anything it pays to do a little research before you set down some of your hard earned cash. Look for a bank that is FDIC insured (insuring deposits up to $100,000 and is either a subsidiary of a larger bank or one that has been around a relatively long period of time. All reputable online banks use encryption to protect sensitive information and financial data.

The Players
The number of new entrants into the field seems to grow every day. This is good because increased competition generally leads to better deals for you. I’ll start with the established banks and then mention some of the new players entering the fray. The most popular online savings banks are HSBCDirect, INGDirect, and EmigrantDirect. These three are all well established and are “safe” bets for potential investors. Recently many of the major banks like E*Trade, CitiBank and others have jumped in offering similar rates and services.

I’ll compare the three major online banks only because those are the ones I’m most familiar with.

INGDIRECT: Offers rates of 4.5% APY currently and offers the widest range of online banking services such as home mortgages, CD’s, and mutual funds. They are a subsidiary of a very large dutch financial services company and has “Cafes” in a few major cities. ING has also recently introduced electronic checking accounts (which I don’t have any experience using). ING is the hands down leader in terms of user interface and is very easy to use especially for beginners. There are no fees or minimums, and it generally takes about 3 days to make transfers in and out of the account.

HSBCDIRECT: Offers rates of 5.05% APY currently and has a deal running where it will pay a rate of 6.00% APY on “new money” transfered into HSBC accounts. HSBC is a subsidiary of a large bank headquartered in London. The company is aggressively pursing new clients and offers a ATM card linked to the online account. The user interface is not as easy to use as ING, but works in a similar manner. Similar to ING there are no fees or minimums. I find that it generally takes about 4 days to move money to a linked account.

EMIGRANTDIRECT: Offers rates of 5.05% APY. The bank is not well known for having a great user interface but it gets the job done. EmigrantDirect is a subsidiary of Emigrant Bank which has branches in the NY metropolitan area. The account has no minimums or fees, and transfers take about 4 days in and out of the account.

My Take
I have used ING extensively and HSBC and Emigrant consistently but for a shorter period of time. Based I my experiences I would recommend two of these companies based on what kind of user you are.

If you are somewhat skeptical of online banking or just like things that are easy to use - INGDirect is probably the right online bank for you. The rates are good, transfers are quick and customer service is great (if you ever need them).

If you are a power user who wants the highest rate HSBCDirect is probably best for you. The company has slow transfers (4-5 business days in my experience) and a more difficult to use interface but also has the highest rate. Users can also overcome the slow transfer time by accepting the optional ATM card and using that to draw money from the account.