Internet banks' losing their price advantage
By Laura Bruce • Bankrate.com

For many people who are comfortable with the technology, Internet banks are the way to go. Internet banks compete fiercely with their brick-and-mortar counterparts for customers. They often offer significantly higher interest on deposit products. But Internet banks are rapidly raising prices and consolidating with more-traditional banks, leaving customers wondering: Is there still virtue in virtual?

Twenty-six Internet institutions were surveyed for this edition of the Checking Account Pricing Study. E*Trade Bank, BankAtlantic, Centura Bank (which acquired Security First Network Bank), and Flagstar Bank appear in both sections of the study because of their significant size within one or more of the metro areas we surveyed.

Just as there's been a lot of consolidation among traditional banks, the bigger Internet banks are gobbling up the smaller ones.

Centura Bank has acquired Security First Network Bank, NetBank took over Compubank, Brookline Savings Bank bought Lighthouse Bank and Bank One Corporation closed its online subsidiary WingspanBank.

Bankrate.com financial analyst Greg McBride says there are two elements behind the consolidation movement: "Pure-play Internet startups haven't achieved widespread success in attracting a customer base, plus, online consumers have expressed a preference for having a way to interact with their institutions -- whether through branches or an ATM network.

"The consolidations," McBride says, "have transformed what was a landscape of pure-play Internet banks to one where offering accounts via the Internet is just one of their channels -- many of these banks now have branches and ATMs."

A total of 38 accounts were surveyed, 32 interest accounts and six noninterest accounts. Since the overwhelming majority of accounts offered by Internet banks bear interest, we'll focus on them for comparison purposes. With so few noninterest accounts offered, a comparison to prior studies is often irrelevant because averages can fluctuate wildly.

There is another trend in Internet banking. If you want to open an interest account, be prepared to keep a hefty balance to avoid monthly service fees.

Despite that, Internet banks still look pretty good when compared to traditional banks.

Here are the findings:

Minimum to open
The average minimum balance to open an interest-bearing checking account ballooned by 26 percent since our last report in spring 2001. You'll have to fork over an average of $809.41. That's up 45 percent from a year ago and is significantly higher than the $695.10 required at traditional banks.

Minimum to avoid fees
The average minimum balance you'll need to avoid paying fees rose 22 percent since the spring survey, from $831.25 to $1,010.90 on interest accounts. That's 84 percent higher than a year ago. Despite the hefty increases, it's still half of what traditional banks require.

Monthly service fees
The average monthly service fee on interest accounts is $6.61, up 26 percent from $5.25 since the spring study. Again, a sizable increase but still well below the $10.85 average charged by traditional banks.

Accounts without service fees
It's getting tougher to find an Internet bank that doesn't charge monthly service fees regardless of balance. Among the interest accounts surveyed at Internet banks, just 28 percent have no monthly service fees. That's down from 41 percent in our previous study.

Yield on interest checking
Yields have dropped sharply since our last study. To a large extent that's due to the Federal Reserve Board's interest rate cuts during 2001. The average yield paid by Internet banks dropped by more than 1 percent, from 3.78 percent to 2.77 percent. Nevertheless, that's almost triple the 0.97 percent offered at traditional banks.

Free accounts
Free interest-checking accounts are quickly becoming a thing of the past. Twenty-eight percent of the Internet banks surveyed offer free interest-checking, down from 41 percent six months ago. Free accounts have no service fee or per-item fee regardless of balance or activity. The percentage of free accounts at Internet banks is almost four times higher than the 7.5 percent of all accounts at traditional banks.

Bounced check charges
Just as you might suspect, the fee for bouncing a check at an Internet bank has steadily increased -- up 5 percent since the last survey. In fact, at $24.82 it is almost identical to the $24.85 charged by traditional banks.

Overdraft protection
Just as with traditional banks, nearly all Internet banks give you a way to protect your bank account from getting hit with bounced-check fees. Overdraft protection is available on all checking accounts at 89 percent of Internet banks; 88 percent of Internet banks offer overdraft protection on interest-bearing checking accounts. Those percentages are unchanged from our spring survey, but down slightly from 90 percent a year ago. Overdraft protection is available on 96 percent of accounts at traditional banks.

ATMs
All of the Internet institutions surveyed offer ATM cards, but 58 percent of them now own ATMs -- up from 54 percent in the previous survey.

Even though more Internet institutions own ATMs, 85 percent still don't charge their customers for using someone else's ATMs. This is in stark contrast to traditional banks where 86 percent of institutions charge an average of $1.36 when customers use someone else's ATM.

Bankrate's financial analyst McBride says the majority of Internet banks reimburse, to some extent, surcharges that are charged by other banks.

"That's important because it gives you more freedom. It also addresses one of those objections consumers had of how to interact with their Internet banks in terms of how to get money in and out of the bank. A bank that doesn't have an ATM network is able to overcome that by reimbursing surcharge fees."

Just as with traditional banks, the majority of Internet institutions that own ATMs levy a surcharge on transactions performed by noncustomers.

Clearly, online banks have come a long way, but are they the best bet?

"There are a lot of creature comforts you might associate with brick-and-mortar banks that you're not giving up if you go to an Internet bank; things such as debit card availability, ATM access and overdraft protection," says McBride. "From a checking standpoint, yes, the Internet accounts have the edge over traditional interest checking accounts. But I still maintain that the noninterest account that's truly free is the consumer's best option."

-- Posted: Sept. 28, 2001