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The Ins and Outs of Online Banking

Thousands shift to Internet-only banks for higher returns

Afraid of online banking piggy bank

Gregory Reid

Lower overhead costs allow online-only banks to offer higher interest rates.

En español | You have probably noticed that most banks are paying next to nothing in interest on savings deposits and even CDs. And you may have seen commercials for so-called online-only banks, which pay higher rates than most local banks, yet offer the same FDIC-insured security. If you've been tempted by the yields but afraid to take the plunge, here's what you need to know.

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Banks that operate entirely online— no brick-and-mortar branches, no branch staff to pay—can save a bundle, and they sometimes pass their savings on to you in higher interest rates on your savings.

How much more? Internet-only banks are paying as much as 1.1 percent on savings accounts, at a time when local banks are paying about 0.01 percent. True, 1.1 percent is still low, but it goes a long way toward keeping up with inflation, compared with the alternative. And most Internet banks offering savings accounts are "huge and well-capitalized operations no different from your typical bank," says Jeff Reeves, executive editor of "They have pedigrees consumers feel comfortable with and boast billions in assets."

Nurturing your inner piggy

Gary Weiner, 66, of Franklin Park, New Jersey, opened a savings account at an Internet-only bank some six years ago and hasn't looked back. He says his decision was based on receiving a better rate with a low balance requirement, and the ability to link the account to existing ones at his local brick-and-mortar bank. "I can move money back and forth safely and easily from home," Weiner says. "I also like no fees, and the security and privacy of my account."

Weiner's online bank lets him divide the account into subaccounts. "I can earmark my savings for different purposes," he says. Plus, he appreciates the customer-service phone reps.

Setups such as Weiner's — putting a portion of your money into an Internet-only savings account — can make you a better saver, suggests Nicole Lorch, senior vice president of retail banking for Indianapolis-based First Internet Bank: "If you keep a savings account in a separate institution from the one where you do your day-to-day banking, you won't be tempted to borrow from your savings account as often."

Caveats to consider

Not every saver is a good candidate for an Internet bank.

If you are not comfortable with technology or have qualms about the safety of the Internet, you should probably avoid using an online-only bank. "Your local bank can be a better choice if you are more traditional and prefer working with people face to face, or you're not fully comfortable transacting business on the Internet," says Ben Sullivan, client service manager for Palisades Hudson Financial Group, a financial advisory firm in Scarsdale, New York. But some commonsense measures can help raise your cybersecurity comfort level. Never use public Wi-Fi for online transactions, for example. And if you use a wireless router at home, bypass it when doing online banking, by plugging the Ethernet cord directly into your computer.

Also, while many Internet banks offer phone support, some provide only online chat communication with customer-service reps.

If you require instant access to your money, be aware that it takes at least one business day to clear funds or complete a transfer. Convenience may be crimped if your Internet-only bank partners with a limited network of ATMs. And for most customers, the online bank does not replace your regular bank, which you'll still need for day-to-day banking. In addition, as with any savings account, the interest rate on an Internet-only account is subject to change.

But arrayed against these caveats is one more big advantage: Online banks offer rates on certificates of deposit that often top CD rates of regular banks. Among banks paying the highest CD rates recently were online giants such as Synchrony, with a two-year CD at 1.45 percent, compared with a national averageof 1.32 percent.