Best Internet-Only Banks

Internet savings banks vary in ratings for stability

The line between Internet-only banks and brick-and-mortar banks that offer online banking is getting more and more blurred. For example, HSBC Direct belongs to HSBC Bank, which has branches in several states -- mostly in California, Florida and New York. Charles Schwab is an Internet bank when it comes to checking and savings accounts, but has brick-and-mortar brokerage branches. So does one of its prime competitors, E*Trade. Even the well-known ING Direct now has "cafe" branches in several major cities.

Deposits to an Internet bank are usually made by electronic transfers from a checking account at a local bank, though you can also mail in a deposit. Some Internet banks, such as HSBC Direct, also let you deposit a paper check at one of their ATMs. Withdrawals are made by a similar bank-to-bank transfer or, for smaller amounts, at an ATM. The electronic transfers between the online savings account and your local checking account usually take two to four days.

Interestingly enough, the Internet bank that gets top recommendations in more reviews than any other is ING Direct, even though its savings account yields are lower than most competitors. This is because it's achieved a stellar reputation for customer service and a good website interface. Opening an account is faster than at most Internet banks, and promotional and referral bonuses often add icing to the cake. Accounts here also integrate with ShareBuilder.com, and ING Direct has a three-star rating at BankRate.com.

Other recommended online savings banks include FNBO Direct, HSBC Direct and Dollar Savings Direct. It's worth noting, however, that of these three, FNBO earns the best rating for stability. Its parent bank, First National Bank of Omaha (Nebraska), earns a four-star rating at BankRate.com. HSBC Direct earns only a two-star rating, and Dollar Direct earns an even lower rating of only one star.

FNBO Direct earns recommendations in four reasonably current reviews and is the top pick for online savings at Kiplinger's. A separate online bill payment account pays a bit less interest, but gives you more liquidity. There are no monthly fees and the minimum balance to open an account is only $1, but both features are typical of Internet savings-account banks.

Transfers and withdrawals from savings are limited to six per month. Another drawback is that FNBO's free ATMs are located in only six states. You can use any of the nearly 400,000 ATMs in the Plus network, but FNBO charges a fee for each withdrawal (*Est. $2.50) and the ATM owner will probably tack on another fee. Overall, reviews say FNBO Direct is a good place for emergency and long term savings given its solidly higher interest rates.

Best for checking accounts

For online checking, Kiplinger's favorite is Charles Schwab, whose Schwab Bank High Yield Investor Checking account provides unlimited ATM reimbursements for cash withdrawals (worldwide), plus free online bill paying. The interest rate on the checking account isn't great, but there are no minimum balances or monthly fees. Even the checks are free. You also get a free brokerage account, with no minimum balance or monthly fees.

In addition to these conveniences for checking, Charles Schwab offers online savings that are about average. Since it's much faster to transfer money from savings to checking within the same bank, it can be an advantage to have both types of accounts at the same bank.

The top pick at Kiplinger's for money-market accounts, Flagstar Bank, also offers a checking account with free checks, no minimum balance or monthly fees. The APY on checking is low, but higher for the money-market account. ATM fees aren't reimbursed, however.

For both checking and savings accounts at the same bank, reviews recommend two other Internet banks, E*Trade and Everbank, both of which provide phone support 24/7. E*Trade provides unlimited reimbursement of ATM fees, and looks good if you have plenty of cash to stash. The checking account fee (*Est. $15 per month) can be avoided only by setting up a monthly direct deposit, or keeping your balance above $5,000, or executing 30 stock trades a month.

Everbank pays less on its checking accounts, but provides a bonus for the first three months. There are no monthly fees for checking, but the minimum opening balance is $1,500, and online bill payment is free only if you keep that much in your account. ATM fees are reimbursed only up to $6 per month, but Everbank says you can use 500,000 ATMs free. For its money-market savings, avoiding a monthly charge (*Est. $5 per month) also requires a minimum balance of $1,500, but the first-year APY is higher.

High-yield reward checking accounts pay more

When it comes to interest rates, it's hard to beat the high-yield reward checking accounts offered by some community banks -- with APY ranging up to about 6 percent (as of May 2009). Remember that these are variable rates that are constantly changing and can go down at any time. Also, there are lots of strings attached. Checking is free (with real paper checks) either way, but to get the high yield requires making a certain number of debit card purchases a month -- not just ATM withdrawals.

However, to get the high APY for reward checking, you have to meet certain terms each month. The terms vary among banks, but usually they consist of:

• Opening an online account
• Receiving statements electronically rather than on paper
• Setting up at least one monthly direct deposit -- e.g. Social Security or paycheck
• Using your debit card a certain number of times during the month -- around 10 or 12, depending on the bank

Most reward checking accounts are available only within limited geographic areas -- not very far from the parent bank. CheckingFinder.com lists banks that offer reward checking, as do several blogs. BankVibe.com, for example, notes that First Robinson currently pays great interest rates, but only in a few counties in Illinois and Indiana. This bank earns four stars out of a possible five at BankRate.com and the highest possible five-star rating at Bauer Financial.

A few reward checking accounts are available nationwide, but these offerings can come and go. For example, Redneck Bank (based in Snyder, Okla.) offered reward checking for over two years, but then suspended its offer temporarily because about a thousand applications were coming in a day, overwhelming the staff. (A call to Redneck Bank confirms that they're increasing their staff in order to handle new accounts.) Redneck's high APY applies to a balance up to $10,000 -- with no monthly charges or minimum balance. (One person can have two accounts, for a total of $20,000).

Despite its name, Redneck Bank's parent bank is a staid Midwestern brick-and-mortar bank, Bank of the Wichitas. Reviews say it gets good ratings for stability: 3.5 stars ("good") from Bauer Financial, four stars ("sound") from BankRate.com.

The same family owns two other banks in Oklahoma that offer similar reward checking. AmericaNet Bank, whose parent bank is All America Bank, pays a high APY on reward checking. Evantage Bank, whose parent bank is Southwest State Bank, also pays a high APY on its reward checking account. These names haven't attracted as much media attention as Redneck Bank, but the banks earn the same good ratings for stability.

Reward checking has some distinct drawbacks. You don't get big-bank extras such as mobile banking by cell phone, and phone support is restricted to limited days and hours -- often just five days a week. Electronic transfers to another bank may be more limited than at most Internet banks -- $1,500 per day for Redneck Bank, for example.

The main drawback to reward checking, though, is the need to make purchases by debit card. Experts warn that unless users are very careful, hefty overdraft charges can be a problem. Experts also warn that debit cards may expose you to greater liabilities than a credit card if your card is stolen or lost. Be sure to find out the bank's policy on limiting your loss. You also have less clout in disputes with a merchant when paying by debit card, since your money is already in the seller's hands.

SmartyPig is designed to help users save for purchases

Even newer than reward checking is the integration of social networking with online banking. A Wall Street Journal article covering this phenomenon discusses SmartyPig, an FDIC-insured savings program offered in partnership with West Bank, which currently offers a high return on savings accounts. A February 2009 review at Forbes explains that this is possible because most users leave funds in their accounts for about three years -- the time it takes, on average, to save for their purchase goals.

SmartyPig is unique for more than its yield, however -- adding social networking and financial management tools to online savings. After setting up an account with a specific savings goal, you can invite family and friends to track your progress and even make contributions. The information you share is customizable, so you stay in control of your privacy.

The main purpose of SmartyPig is to be a simple online piggy bank. It's designed to make it easier to save money for specific goals, so users can break their credit card habits. By saving at SmartyPig for a future purchase, users earn interest instead of paying it. If you buy from retailers who've signed on with SmartyPig (such as Amazon.com and BestBuy.com) you can get some bonus cash as well.

SmartyPig has gotten good reviews so far from both Forbes and The Wall Street Journal. A review at MyMoneyBlog.com explains it in more detail, adding screen shots to show how it works. You set up a separate account for each savings goal and must fund it with an automatic deposit of at least $25 a month. The parent bank is West Bank (based in Des Moines, Iowa), which earns a three-star rating ("performing") at BankRate.com. (West Bank also offers reward checking with a high APY, but only to residents of Iowa. SmartyPig is nationwide.)

Reviewers recommend SmartyPig for its purpose -- saving for a future purchase -- but not for emergency savings. You can only withdraw funds from a SmartyPig account once, and only for the total amount. For emergency savings, reviews recommend a regular Internet savings account or money-market account, with electronic transfers set up to your checking account.