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 Advance (formerly 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 has a few branches in several major cities.

Deposits at 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 Advance, also let you deposit a paper check at 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.

Among Internet banks, ING Direct gets top recommendations in more reviews than any other, even though its savings account yields are a bit lower than most competitors. This is because it has achieved a stellar reputation for customer service and a good website interface. Accounts can be accessed for free through the approximately 32,000 ATMs on the Allpoint network -- generally standalone ATMs located in convenience stores, gas stations, drugstores and restaurants. Opening an account is faster than at most Internet banks, and promotional and referral bonuses often add icing to the cake. Accounts also integrate with ShareBuilder.com.

Though ING Direct gets the most overall praise, Ally Bank is getting favorable attention too. Formerly GMAC Financial Services (provider of auto loans), Ally competes directly with ING for web-based savings accounts. Ally is recommended by Kiplinger.com and by several financial bloggers for its higher rates of return. At the time of publication, Ally's checking account currently has the same interest rate as the savings account, and the bank also offers a range of certificates of deposit, from long-term, high-yield CDs to no-penalty CDs. While its returns have dropped considerably from the teaser rates offered after the bank's re-branding, they still edge out ING Direct as of this update. Reviewers say that ING Direct is still the safest bet overall for online-only banks, but Ally comes in a close second.

Other recommended online savings banks include FNBO Direct and HSBC Advance (formerly HSBC Direct). FNBO's parent bank, First National Bank of Omaha, earns a 4-star rating at BankRate.com. HSBC Advance's parent earns a 3-star rating.

FNBO Direct earns recommendations in many reviews, though it has fallen from being a top pick since our last online banking report update, particularly because of its scarce no-fee ATMs and limits on transactions. A separate online bill payment account gives you more liquidity, but it pays a bit less interest. 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 more than 800,000 ATMs in the Plus network, but FNBO charges a fee for each withdrawal ($2.50) and the ATM owner will probably tack on another fee.

Best for checking accounts

For online checking, Kiplinger.com'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.

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 with one institution. Schwab also gets good customer feedback at BankFox.com, where users praise the ATM fee rebates and excellent, 24/7 phone support. Drawbacks include a lack of physical branches for deposits, though Schwab provides customers with postage-paid envelopes for mailing in checks.

For both checking and savings accounts at the same bank, reviews also mention Everbank, which, like Schwab, provides phone support 24/7. Everbank pays a higher rate of interest (as of this update, 2.25 percent) for the first three months, then reverts to a lower rate. 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 from other banks are reimbursed only if you keep $5,000 in your account, but Everbank says you can use ATMs in its network for free. For its money-market savings, avoiding a monthly charge (*Est. $9 per month) also requires a minimum balance of $5,000, 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 4 percent (as of July 2010). 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 meeting 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 benefits or paycheck

• Using your debit card a certain number of times during the month -- around 10 or 12, depending on the bank; this does not include ATM withdrawals

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.

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 more than two years, but then suspended its offer indefinitely because about a thousand applications were coming in a day, overwhelming the staff. As of this update, this particular account at Redneck is still "sold out." Redneck's high APY applies to a balance up to $10,000 -- with no monthly charges or minimum balance.

Despite its name, Redneck Bank's parent bank is a midwestern brick-and-mortar bank, Bank of the Wichitas. Reviews say it gets good ratings for stability: 5 stars ("superior") from BankRate.com.

The same family owns two other banks in Oklahoma that offer reward checking with the same rates and terms. 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 limited -- 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. Also, as DepositAccounts.com has pointed out, reward checking accounts have begun lowering their balance caps. In other words, there is a maximum amount that you can keep in your account (usually about $10,000) -- any more, and the APY reverts to a much lower rate.

The main drawback to reward checking, though, is the need to make purchases by debit card. 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. SmartyPig, an FDIC-insured savings program offered  in partnership with West Bank, has made a name for itself by offering a relatively high return on savings accounts. According to Forbes magazine, 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. 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 from both Forbes.com and The Wall Street Journal. A review at MyMoneyBlog.com explains it in more detail, adding screenshots 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 also offers reward checking with a high APY, but only to residents of Iowa. SmartyPig is nationwide.

Reviewers recommend SmartyPig for 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.