BANKING

Internet-Only Banks

Banking

Instead of using the online service provided by a bricks-and-mortar bank, you may choose to go with an Internet-only bank.

The two main reasons that you might choose to use such a service are 1) convenience (including free online bill paying) and the fact that you wouldn't have to change banks if you relocated, and 2) free services such as 100% free checking. For the latter, the bank may require that you have one direct deposit a month.

Since a bank's costs are substantially lower if it only needs to support a single online computer network (as opposed to bank branches, tellers, ATMs, etc.), it can pass those cost savings on to you. This may translate into lower fees -- or possibly even no fees -- for online banking services. At least one online bank, for instance, offers no-fee checking, unlimited check use, a VISA check/ATM card, and 24-hour Internet access to your account. All for no charge. Not bad, eh?

The interest rate paid by such an account can vary widely. Some will pay no interest at all; others may come with interest rates that are higher than so-called "high-interest" checking accounts at traditional banks. If the rate is nonexistent or very low, you may simply want to use this account as a stop-off before sending your money to your savings or brokerage account -- or for paying bills. You can, of course, set up recurring bill payments or money transfers to your other accounts so that your money isn't just sitting there languishing.

Online banks, being cyber-ready and technologically proficient, may give you more detailed information than a traditional bank. For instance, you can make a withdrawal from an ATM and, within an hour, you'll be able to see that withdrawal reflected when you visit the bank's website. Or, if you prefer, you can see your account balance as of the close of the last business day (as you would with a normal bank). When you see your online register and you're wondering about a particular transaction, you may be able to click on it to see an actual image of the check or details of your ATM or debit card transaction. If you have more than one account, you can transfer funds between accounts with the click of a mouse. In addition, you can likely import the data right into your favorite personal finance software program.

So, what are the drawbacks? Well, there is the little matter of the ATM fee. Since the Internet bank doesn't have any physical branches located near your home, you're going to be charged whatever fees the host bank wants to stick you with. (At this writing, very few banks don't charge ATM fees for third-party cards, though that may change.) As we explained earlier, you need to do your homework if you want to minimize ATM fees.

In addition to hunting down those low-priced or free ATMs in your area, there are a couple of other ways to reduce the bite of the fees. Many grocery stores will give you cash back if you use a debit card (a debit card, of course, is a card that draws money from your checking account -- your ATM card is a debit card.) Check with your local supermarket -- you may be able to get $50 cash back if you use your debit card to pay for your food. Supermarkets do this as a customer service, and also because they get paid right away with a debit card, as opposed to having to wait for the payment to arrive if you use a credit card. There are, as well, a number of Internet banks that will give you some sort of rebate per month for ATM fees. For instance, Compubank -- http://www.compubank.com/ -- gives four ATM rebates per month on its accounts.

Another inconvenience to this kind of banking is that, other than direct-deposits, you'll have to mail in your deposits. If you're frequently making cash deposits, this could become a significant pain in the neck. While it may not be a major obstacle, it should be factored into your time-versus-money decision.

There is potentially a larger drawback as well. Suppose your mortgage payment is due on the first of the month. When you paid the old-fashioned way, you put a check in the mail on, say, the 25th, figuring that it would get there a couple of days before it was due. The bank then deposited it, and your account was debited right around the first of the month. When you pay online, though, you may have to put in a check request as much as 10 full business days before your payment is due. And the bank may withdraw the money from your account the day that request is received. You're then losing about 10 days worth of interest on your mortgage payment every month. If this is the case with all of your monthly payments, you may be losing interest on thousands of dollars each month. Even though the interest you make on that money may not be much, it can easily offset any savings you gain from supposedly "free" Internet checking.

So if you're going to do Internet banking, be sure to ask about precisely when the money is withdrawn from your account.

Shopping for a Bank Online

One site that you may want to visit to compare banks' online performance is the Gomez Internet Banker Scorecard. This site, which is updated quarterly, allows users to rate online banks for overall score, ease of use, onsite resources, and overall cost.

The world of the Internet is a fast-moving one, though. What if you need more current information than that? Well, how about following up on our online banking message board? You can post and/or read daily reports from customers around the country, providing you with a wealth of information about fees, services, and hassles across the landscape of Internet banking.

You'll also find various ads for banks right here on the Fool site. Go ahead -- don't be shy -- click them! Apart from the fact that you're supporting our sponsors, who are a large part of what allows us to bring you content absolutely free, you'll have a chance to take a look around their respective sites and get a feel for their online offerings.

Independent Bill-Paying Services

There's another service on the Internet that has recently emerged and deserves a mention. If you're a die-hard Netizen (that is, someone who uses the Net all the time -- but you knew that if you're a Netizen!) and you want to receive your bills via e-mail instead of regular mail, you can. Services such as Paytrust (http://www.paytrust.com/) and PayMyBills (http://www.paymybills.com/) do just that.

Instead of receiving a traditional paper bill at your house, you receive an e-mail telling you that a new bill is now available online. You then go online and review the bill (which has been scanned in by the service), select the payment date, and authorize the amount for payment. The cost for the service is currently $7.95 to $8.95 a month. This may be a bit more than you might pay for online banking, but it may be worth it if you need that flexibility. You'd no longer need to deal at all with opening envelopes -- no more messy paper cuts. And it may be especially interesting if you're planning to travel for a good length of time (but, of course, you'll be online!) and would otherwise have trouble responding to your mail.

Whether you decide to go with the Internet-only option or with Quicken and MS Money as your ticket into the world of online banking, the next question is: How do you get set up?

Next: Getting Set Up »« Previous