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.

As more employers promote direct deposit and more merchantsaccept plastic for payments, some customers have little need forchecks and cash, giving them more reason to sever ties with theirlocal branches.

David Schandler, 41, a real estate consultant in Reston, Va.,uses the Internet to move money around three virtual accounts -- atPresidential Bank FSB, ING Direct and HSBCdirect.com -- depending onwhich offers the best deal.

ING Direct has so far been the most successful of the virtualbanks, drawing nearly 4 million customers since opening in 2000.

Although it is part of the Dutch banking and insurance companyING Groep NV, ING Direct only has four "cafes" in the UnitedStates. Customers can learn about accounts and drop off deposits,but those get sent to a processing center in St. Cloud, Minn.

Going online gives banks the ability to operate nationwidewithout having to open branches across the country.

Although VirtualBank -- whose slogan is "Building Wealth. NotBranches" -- has to staff a service center, it doesn't have to"overstaff at branches" just to have tellers waiting around for arush, said Grace Dahl, a senior vice president.

Bruce Cleveland, chief executive of Presidential Bank FSB, saidthe bank gets about half of its customers outside the Washington,D.C., area, where it has nine branches.

"We don't have to add branches to grow," he said.

Likewise, HSBC launched its virtual offering in November toexpand beyond its current base of New York and a handful of otherstates, spokesman Stephen Cohen said. Unlike Citibank's offering,HSBCdirect's customers may not use a teller.

Virtual banking isn't for everyone.

"Only so many people have balances large enough to make thisworthwhile," Bruene said.

Lower-income families who live from paycheck to paycheck mayfind mail and other delays untenable, said Frank Trotter, presidentof EverBank Financial Corp.'s EverBank Direct.

Anyone needing to drop off coins, exchange bills or rent a safedeposit box won't find virtual banks appealing, either.

For customers with flexibility, the payoff comes in higherinterest rates.

According to Bankrate Inc., the average interest-bearingchecking accounts earn 1.96 percent at a virtual bank and 0.32percent at a traditional bank. Citibank Direct pays 4.5 percentcompared with 0.7 percent for a basic savings account. Manybrick-and-mortar banks don't pay interest on checking at all.

But consumers should read the fine print, said Laura Bruce ofBankrate. She said virtual banks generally require higher balances,and some, like Citibank, require opening a traditional checkingaccount, too, subjecting the customer to potential fees.

"Don't be swayed by just looking at the interest rates," Brucesaid.

Internet users should also check to make sure the bank islegitimate. Virtual banks in the United States have the sameinsurance requirements as traditional banks, and the FederalDeposit Insurance Corp.'s Web site lets people check.

Many banks themselves will perform various checks, too. Bank ofInternet, for instance, asks customers to mail in a check from anexisting account, while Presidential asks for a photocopy of an ID.

Once the account is opened, virtual banking should be as safe asonline banking with a brick-and-mortar account. Perception,though, is another matter, prompting E-Trade Financial Corp. topromise to refund any lost money, even when the customer is atfault.

"Online banks are regulated just like traditional banks," saidRob Shenk, E-Trade's vice president of retail cash management."They all have the same safeguards in terms of protecting andsafeguarding your cash."