Interest Rate Hikes Boost Internet Banking

May 23, 2006 — -- Higher interest rates initially drove NickSayers to the Bank of Internet. But he soon realized it's moreconvenient too.

Sayers, 26, a private equity investor in Chicago, is one of agrowing number of Americans ditching their neighborhoodbrick-and-mortar accounts. Others are moving the bulk of theirmoney to virtual banks like Bank of Internet, which can offerbetter rates because they don't have to operate multiple branches.

To deposit money, customers generally mail checks inpostage-paid envelopes, arrange for direct deposit of paychecks, ortransfer funds from other accounts using the Internet ortelephone. To withdraw money, they can go to any ATM. Some banks,including Bank of Internet, will refund most fees another bankcharges.

For Sayers, that means he can drop off checks in any mailbox anduse any ATM without fees.

"I hate paying the two bucks when I take out money," he said.

Virtual banks have grown steadily over the past decade, thoughonly about 2 percent of all U.S. deposits are in such accounts,according to Jim Bruene, editor of the Online Banking Report, anindustry newsletter.

But virtual banks are expected to get more serious considerationas interest rates rise, Bruene said, making itworthwhile to shop around for the best deals. Evenbrick-and-mortar banks like Citigroup Inc.'s Citibank and HSBCHoldings PLC have set up their own online offerings.

According to the Pew Internet and American Life Project, 43percent of Internet users have banked online, generally throughtheir brick-and-mortar accounts, compared with 17 percent in 2000.

"A lot of consumer behavior has changed in the last sevenyears," said Catherine Palmieri, managing director ofCitibank.com.

The bank started Citibank Direct in March; customers must usethe Internet to open an e-savings account but can still visitCitibank tellers. The new offering follows Citibank's Citi f/i, avirtual bank that closed just a year after launching in 1999.