Online banks pay higher interest on savings


July 17, 2005|By Eileen Ambrose

LOOKING FOR a little more oomph on the interest you earn on your old-fashioned savings account?

It might be time to try an online bank.

Without the overhead of operating a wide network of brick-and-mortar branches, online banks can afford, in theory, to pass on the savings in the form of higher interest rates. And because it is so easy for consumers to comparison shop on the Internet, these banks fiercely compete on rates and are quicker to raise them than traditional banks, experts said.

"They live and die by the high rate," said Jim Bruene, editor of the newsletter Online Banking Report. "They can't afford not to be on the leading edge of the rate. They get a lot of publicity that way."

FOR THE RECORD - A personal-finance column in the Business section Sunday misstated the annual percentage yield of MetLife Bank's money market account. It's 3.1 percent.
The Sun regrets the errors.

For example, ING Direct pays an annual percentage yield of 3 percent and EmigrantDirect offers 3.25 percent on savings accounts with no fees or minimums. The annual yield on MetLife Bank's money market account is 3.40 percent, compared with a national average last week of 2.17 percent, according to, a Florida-based provider of interest rate information.

Every extra percentage point counts, especially when dealing with sizable sums.

Peter Cacioppo, a California financial planner and former FDIC examiner, recommended an online bank to a pair of clients who kept more than $200,000 in a savings account for a year and a half while deciding whether to buy a house.

"They were earning way below 1 percent," and the online bank paid more than 2 percent, Cacioppo said. Now, the annual percentage yield is more than 3 percent. For them, each extra percentage point means more than $2,000 a year.

There are other money-saving features that online banks have going for them. The average minimum balance required to avoid fees in an interest-bearing checking account was $450 at online banks but nearly $2,300 at their brick-and-mortar counterparts, according to a Bankrate survey released in May. The monthly service fee was lower, too, with online banks charging an average of $4.10 while traditional banks averaged $11.08.

Of course, online banks aren't for everyone. Those who like face-to-face chats with a teller will be disappointed by the computer's lack of small talk. And with an online bank you won't have certain amenities, such as safe deposit boxes or a wide network of free automated teller machines. (Some online banks try to make up for the lack of ATMs by rebating fees customers pay to use other banks' machines.)

Because of these drawbacks, many people will maintain a primary account with a traditional bank, and use an online bank to park savings and earn extra yield, Bruene said.

In fact, some online banks, such as ING Direct, require customers to have a checking account at a regular institution. That makes transferring money from one account to another easier, and much quicker than making deposits by mail.

Traditional banks, of course, also offer the convenience of online banking, but the rates they pay are similar to those in their branches, experts said.

If you're considering an online bank, do a little homework.

Online banks have been around for a decade. Some are purely Internet-only. Others are part of a traditional bank that is concentrated in, say, one state, but tries to attract deposits from the other 49 via the Internet, said Greg McBride, a senior analyst with

And some are part of a major financial services company. The online MetLife Bank is an arm of the insurance giant MetLife.

Five-year old ING Direct - the largest online bank and the fourth-largest thrift in the United States, according to SNL Financial - is part of ING, the financial services giant based in Amsterdam. ING Direct also operates four Internet cafes in New York, Los Angeles, Philadelphia and Wilmington, Del., where customers can drop by to use a computer to check up on their account. The baristas are trained to whip up cappuccinos and answer customers' banking questions.

Words of warning: As during any time you're conducting business on the Internet, make sure you know the company you're dealing with. Indeed, 41 percent of online consumers say they don't bank online because of security concerns, according to a survey last year by JupiterResearch. Some banking experts say online banks are no less safe than traditional banks, but they suggest consumers use caution when searching for a bank over the Internet.

Regulators monitor the Internet for online banking, but some fake Web sites can spring up for a day or two, just enough time to capture consumers' financial information, said Kevin Mukri, a spokesman with the Office of the Comptroller of the Currency.

One way to check up on a bank is to see if it is FDIC-insured by going online at or by calling 1-877-275-3342. If you searching for the best rates at, every bank posted there is FDIC-insured, McBride said.

(The Federal Deposit Insurance Corp. guarantees deposits up to a certain limit if a bank fails. One Internet-only bank, NextBank, did just that in 2002. The bank wasn't offering savings or checking accounts but got into financial trouble extending credit cards to high-risk customers.)

Also, be wary of banks offering rates too good to be true, experts said. If others are advertising rates of around 3 percent on a savings account, a Web site promising 20 percent should raise red flags.

Be on the lookout for phishing schemes where identity thieves try to capture personal financial information by sending e-mails to consumers that appear to be from a legitimate bank.

To suggest a topic, contact Eileen Ambrose at 410-332-6984 or by e-mail at

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