Online Banking

Some 41 million households now bank online, according to Forrester Research. And that number is expected to nearly double by 2011. Online banks have wooed customers more aggressively by hiking savings rates higher than traditional banks, dishing out sophisticated financial planning tools, beefing up security measures and charging lower -- or no -- fees. "You make more money and don't have to jump through hoops to hold on to the cash," Money magazine's Carolyn Bigda says. She adds that a slew of online banks, such as ING Direct, are now offering checking accounts that pay interest. According to a checking study conducted by Bankrate.com, Internet bank service fees are much lower than at their brick-and-mortar brethren, averaging $2.91 versus $11.72 for traditional banks. Meanwhile, average checking-account yields at Internet banks are 2.7 percent on average versus 0.32 percent at brick-and-mortar institutions.

As for security, online banks now have extra steps for their log-on processes, so that account holders need more than just a single password. This improves security, but requires an extra step at log-in.

Traditional banks now offer online banking

There are two main types of online banks: those with an association with a brick-and-mortar bank -- such as Citibank or Bank of America -- and those that are online only, such as EverBank or ING Direct. Right now, traditional banks with online extensions are getting the best reviews for their more comprehensive services and greater access, mainly because those with online accounts can use ATMs for free at any branch office. Also, big banks like Citibank, Bank of America, Wells Fargo and JPMorgan Chase have added sophisticated financial planning tools like spending reports and balance alerts sent to your e-mail address or mobile device. All four of these banks nabbed top scores in Keynote's Competitive Research banking study.

Many traditional banks offer free online banking services, such as bill payment or checking. But some big banks are going further, creating a separate online offshoot with its own roster of accounts and services that are continually fattened with more features. Citibank and its online counterpart, Citi.com, are the perfect examples. At the time of our last visit, a Citi.com e-savings account paid an interest rate of 3.0 percent APY, while a savings account at a local Citibank branch paid only 0.5 percent APY.

According to the research report about online banks by Keynote Competitive Research, Citibank and Bank of America have the edge when it comes to customer satisfaction and breadth of online banking services. Citibank has the most comprehensive menu of services. At Citibank, online checking is free and includes unlimited bill paying if you have direct deposit, make two online bill payments or maintain a $1,500 average balance (otherwise, checking costs $7.50 to $9.50 per month, depending on where you live). You can see images of checks that have cleared during the past 120 days, as well as access statements for the past seven years. Global wire transfers into your accounts are also free. You can use any Citibank ATM for free, and there are also Citibank ATMs in over 40 countries. Citibank will reimburse online customers for up to four non-Citibank ATM transaction charges per month, though it depends on which account you sign up for. So, it's important to read all of the fine print at Citi.com.

Citibank also offers customizable e-mail and wireless alerts that run the gamut from low balance to check payment to deposit alerts. There's a substantial network of 3,300 brick-and-mortar banks (though mainly on the East Coast) as backups if you want personal attention, though online banking reps are available 24/7. Citibank's e-Savings rate is substantially higher than that of their traditional brick-and-mortar savings accounts, and it carries no fees or minimum balances if combined with the bank's EZ Checking account. On your Citi.com home page, you can track your Citibank accounts -- plus you can add outside bank accounts as well, giving you your total banking picture on one page.

For the past two years, Bank of America gets the highest rating for overall customer satisfaction in the study conducted by annually by Keynote Research. Bank of America has an advantage in that online customers have free access to over 16,000 ATMs. This means you'll rarely pay a fee, notes Forbes magazine. Like Citi.com, Bank of America, the nation's largest bank, also offers free online checking, along with free online bill pay. There are over 30 wide-ranging alerts you can get. The account comes with sophisticated tools for tracking expenses by transaction category and for calculating net worth. You can view checks online for up to 18 months. Bank of America lets you see all your account summaries on one page. However, Bank of America doesn't offer a high-yield online savings account like Citi.com. You'll only get the highest interest rates if your balance is over $2,500, and even then, the rates are below what you'll get at Citi.com, HSBC Direct or ING Direct. One nice feature is that you can make free stock trades through Bank of America. If you have an account balance of over $25,000, you get 30 free trades per month.

HSBC also has both brick-and-mortar branches along with an online extension called HSBC Direct. Critics say that the bank's online high-yield savings account is excellent. HSBC's online savings account routinely pays a bit more than other banks such as Citibank or ING Direct. There's no minimum balance requirement, and account holders can get an ATM card, which can be used for free at HSBC branches to either deposit or withdraw funds. You can also transfer funds for free both in and out of your account to another HSBC account, or to an outside account. Kiplinger says HSBC easily has the best online savings account. HSBC also offers an online payment account that pays interest -- something we didn't see anyplace else -- that can be linked to your savings account.

Keynote Competitive Research also rates Wells Fargo's website highly, but it's definitely not for the cost-conscious, low-balance banking customer. Wells Fargo has some solid services, such as online checking and bill pay. Also, you can link up your brokerage, mortgage and credit card accounts by viewing them in one online statement. A free tool called My Spending Report automatically sorts purchases into categories and updates information every day. Still, you'll need to keep at least $1,000 in your account or have direct deposit to skip the $5 per month fee for checking. The Wells Fargo savings account has a $100 minimum, or you’ll have to shell out $3 a month, and it isn't high yield. You'll also need an eligible checking account or a combined balance of $5,000 to avoid a monthly fee of $6.95 for the bank's bill pay service.

Many other banks, including Commerce Bank, SunTrust, Sovereign Bank and JPMorgan Chase bank, have extensive online features, including the ability to view transactions, transfer funds between accounts, use mobile banking in some instances and pay bills, but Citibank and HSBC come out ahead because both offer a high-yield online savings account. Bank of America gets high scores from Keynote, but it doesn't offer a high-yield savings account right now.

Best Internet-only banks

Internet banks are getting more attention than ever from reviewers who say they now offer some important advantages over your local bank. Without expensive bank branches to support, online banks can offer higher yields with fewer fees. "You make more money and don't have to jump through hoops to hold on to the cash," observes Money magazine writer Carolyn Bigda. She adds that obstacles have disappeared, since ATM withdrawals are easier than ever and the surcharges are often reimbursed. Also, Internet banks increasingly offer checking accounts that pay interest. And, at ING Direct, there's no minimum balance requirement. Newsweek columnist Jane Bryant Quinn adds that the best online banks "emphasize low costs, simplicity and full disclosure of fees," putting them ahead of bank officers.

You might not initially think of banking when you hear the name E*Trade, but E*Trade does offer a solid array of online banking features and some of the highest yields in the industry. An advantage is that you can link your E*Trade brokerage account easily to your banking accounts for seamless transactions. You can also use an ATM card anywhere, because E*Trade gives you unlimited reimbursements for any fee surcharges. The only drawback to an E*Trade banking account, notes Money magazine, is that you must have at least $5,000 in your checking account or you’ll be charged a $15 fee every month. Online checking accounts are free with direct deposit, though. Kiplinger says that E*Trade posts your deposits faster than other Internet banks, and you can have same-day access to deposits. E*Trade also offers a high-yield online savings account that pays far more than a brick-and-mortar savings account. E*Trade offers a range of services -- a high-yield savings account, free online bill payment and access to thousands of ATMs at no cost.

Making deposits is a little more complicated than with a brick-and-mortar bank. You can make withdrawals at virtually any ATM, but not deposits. To fund your account, you can mail in a check, arrange for direct deposit or make a transfer from another bank, but you can't deposit a check at an ATM.

Kiplinger says EverBank has the best online checking account. The reason is that the money parked here is treated like savings, with a high rate of interest similar to what you'll see for many Internet savings accounts. The catch is that there's a $1,500 minimum deposit. Checking is free unless your balance dips below that amount (then it's $5 per month).

While many Internet banks don't let you make ATM deposits at all, EverBank does have a network of 13,000 affiliate ATMs that do accept deposits, and your account is credited the same day. You can also transfer funds from other banks, set up direct deposits or mail in deposits using prepaid envelopes. You can withdraw money at 800,000 VisaPlus ATMs, and EverBank will reimburse you for up to $6 in ATM fees per month. However, Money magazine notes that you have to mail in your ATM slips for reimbursement. There are some key benefits, such as free online bill paying, reasonable trading commissions at EverBank's sister site EverTrade brokerage and the opportunity to invest in CDs denominated in foreign currencies, adds Forbes.

If you're just looking for a solid e-savings account or money market, ING Direct is a good bet, says Kiplinger. It has some of the highest rates in the industry, and the site is simple and uncluttered. There are no monthly fees or minimums. You can easily transfer funds in and out of your account, though it takes two days to be credited. If you open up an online paperless checking account at ING Direct, you can withdraw money at over 32,000 Allpoint ATMs for free. There are no minimum balances, and your money also earns interest. Newsweek columnist Jane Bryant Quinn admiringly calls these interest-bearing accounts "easy money, a click away."

Online banking security

Online banking is safer than people think, according to Bankrate.com. More than 68 percent of ID theft and fraud occurs offline, versus just 11.6 percent for online fraud, according to a study by Javelin Research published at Bankrate.com. The reason: Paper statements leave a trail that thieves can retrieve and use. Thus, more reviewers are urging consumers to start banking online and even to consider going paperless. One such advocate is MSN Money columnist Liz Pulliam Weston, who recommends taking good care of your computer with antispam/anti-virus software. She also recommends monitoring your online accounts regularly and signing up for e-mail alerts for further protection.

Another boon for online banking is that federal financial regulators now require banks to have more stringent two-step authentication procedures (most formerly used one) in place for increased cyber security. The caveat is that people may have more passwords to remember, but their accounts are safer than ever, experts say.

Many online banks also offer an extra layer of zero-liability policies, says The Wall Street Journal. For example, Citibank has its SafeWeb Fraud Protection that refunds the full amount of a loss; claims are investigated within ten days. After Bank of America was the subject of a phishing scheme in 2005, it tightened security by adding an extra log-in password and putting a zero-liability policy in place.

All reputable online banks are also FDIC insured, just like brick-and-mortar banks. This is especially important given NetBank's failure last year due to subprime mortgage woes. You can check the status of your bank by going to www.fdic.gov and clicking on Bank Find. Bankrate.com also offers a Safe & Sound bank ratings service to provide information on a bank's strength and stability. See the link in Best Research for more information.

One word of caution has more to do with general Internet security than online banking in particular. You've probably heard about phishing schemes, and you've probably received suspicious looking e-mails in the past. In phishing schemes, hackers send ominous e-mails warning that your bank account (or eBay account or PayPal account) is about to be closed -- or that you must verify your identity immediately. The true purpose of these e-mails is to get you to click on a link in the e-mail that takes you to a phony website, where you're prompted to supply your passwords and account numbers.

But security experts say there are some easy ways to spot the vast majority of these fake e-mails. First of all, if you have an account at a bank, the bank will never address you as "Dear Account Holder" in an important e-mail; your bank will always address you by name. A generic greeting is a red flag. Banks will also never ask you in an e-mail for your account numbers or passwords. If you've received what you think is a legitimate e-mail, rather than clicking on a link in the e-mail, just go directly to your account by typing the bank's web address into your browser. If you're still unsure as to an e-mail's authenticity, you can always call your bank and ask.

By now, banks know that they are targets of phishing schemes, and most have extensive security sections on their websites describing how they communicate with you. Whenever you're logged into your bank's website, check your browser address bar for the little padlock symbol that indicates you're in a secure area.

Important Features: Online banking

Reviewers say the following about shopping for an online banking account:

• Watch for fees. Though many online banking accounts don't carry fees, there may be extra charges for low balances or ATM use, so it pays to read the fine print, cautions Kiplinger. ATM charges can be particularly onerous.

• Watch the teaser rates. As online banks fight to offer the highest savings rates, consumers must see how long these rates will actually continue before considering switching banks. EverBank, for example, offers a high rate for just three months. Then it can drop a percentage point or more.

• Rates can differ between an online bank and its corporate parent. So it pays to check out e-savings accounts at your bank, because the rates are usually higher. Bankrate.com publishes listings of the highest-paying accounts.

• Deposits can take longer at online banks. Because you may have to mail deposit checks, you have to account for mailing time, plus up to five days for a check to clear. Direct deposits and bank transfers are faster.

• Make sure your online bank is insured by the FDIC. After NetBank's failure last year, FDIC insurance is more important than ever. "Internet-only banks are as safe as their traditional brethren as long as they carry the FDIC seal," advises Kiplinger. Also, be sure to keep your deposits under the FDIC limits of $100,000 per account, or it can take years to get your money back, says Kiplinger.

• Watch out for phishing scams. In scams such as phishing, you're asked to click on a link to reveal more about your banking account. If you do, you're open to having your assets stolen by revealing account numbers or passwords.

Our Consensus Report shows how many times products are top-ranked by reviewers included in our
All The Reviews Reviewed chart.

# of picks	Bank
3	Citibank
3	E*Trade
3	EverBank
3	Bank of America
2	Wells Fargo
2	HSBC Direct
1 each	ING Direct, JPMorgan Chase, Commerce Online

In comparative reviews, Citibank scores a bit better overall than other online banks. However, E*Trade, EverBank and Bank of America aren't far behind, and each has its strengths. HSBC Direct gets a little less recognition, but good grades for its online savings accounts. Wells Fargo has solid products and services, but failure to meet certain requirements and/or minimums can lead to high fees.

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