Should you switch to an online-only bank?

The growing appeal of Web-based checking and savings accounts

Stories You Might Like

•  

[?]

21 Comments

11
inShare

new

Portfolio Relevance

LEARN MORE

Want to see how this story relates to your portfolio?
Just add items to create a portfolio now:

• X
  10-Year U.S. Treasury Note - Electronic (CBOT) Jun 2013 (TYM3)
• X
  10 Year Treasury Note (10_YEAR)
• X
  Capital One Financial Corp. (COF)

or Cancel Already have a portfolio? Log In

By Charles Passy

With financial institutions making a push into online-only checking and savings accounts, some industry insiders say this could be a defining year for Internet banking. But does it make sense for customers to adopt a purely web-based model?

Anton Violin / Shutterstock.com

Enlarge Image

Certainly, some already are doing that. Overall, online-only banks saw their deposits rise to $364 billion in 2012, up 32% from 2010 and more than 400% from 2004, according to Novantas, a research firm. More players large and small have been wooing those migrants: New Jersey-based financial firm CIT, for example, recently announced that it has landed 50,000 customers and $5 billion in deposits in less than 18 months since the launch of its internet-only CIT Bank. Capital One (NYSE:COF) , one of the country’s 10 largest banks, made a major online bet with its 2011 acquisition of ING Direct; in February, the company rebranded the online-only platform as Capital One 360. “It gave us a chance to lead the digital-banking revolution,” Jon Witter, Capital One president of retail and direct banking, says of the ING deal.
Meanwhile, the number of U.S. bank branches dropped by more than 750 last year, to 97,337, according to data provider SNL Financial; that marked the third consecutive year of decline after several years of growth.
The online-only share of the banking industry is still fairly small, representing 4.2% of deposits. But a few key factors still bode well for Internet banks. For starters, in a low interest-rate environment, online-only banks can offer savers higher yields. Web-based banks don’t have to pay staff to maintain physical branches, which frees up money to pay out in interest.
The average rate on savings accounts at web-based banks is more than five times that of bricks-and-mortar counterparts—0.60% to 0.11%—according to a recent survey by MoneyRates.com. Capital One’s new platform offers a rate of 0.75%, plus checking with no monthly maintenance fees. (Another MoneyRates.com survey showed that traditional banks were almost twice as likely as online ones to impose such fees.)
Those factors, along with a growing familiarity among consumers, indicate online-only banking “may finally have hit a tipping point,” says Sherief Meleis, a partner with Novantas.

Click to Play

Could Conservatives unite under 'too big to fail?'

Fed Dallas President Richard Fisher will address conservatives at their annual CPAC convention to promote the idea of breaking up big banks. Victoria McGrane has details. Photo: Getty Images.

Still, not all banking can be done virtually: Think requesting a cashier’s check or cashing in a jar of coins.
Moreover, while the current spread in rates between branch and Internet banks may be significant, that spread won’t remain as marked if rates in general start to climb. If the average branch savings rate rises to 2%, don’t expect online-only banks to offer 10%; during past times of higher rates, Internet banks have offered a premium of about 1.5 percentage points at most, according to Novantas.
Ultimately, financial advisers say, customers need to decide whether chasing a rate advantage or eliminating account fees will make up for any hassles associated with changing—especially in cases where the savings may add up to only a few hundred dollars a year.
“The dollars and cents often don’t make sense,” says Deana Arnett, a financial planner with Rosenthal Wealth Management Group in Northern Virginia.