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

There was a time, not too long ago, when Internet banks were the new kids on the block and worked harder to get your business. Lots of free accounts, fat yields on deposits and lower minimum balances to open interest checking accounts than at a traditional bank.

Those days are vanishing.

Free accounts are drying up, yields are shrinking -- even though they're still significantly better than at traditional banks -- and interest checking accounts are now pricier than at brick and mortar institutions.

"Ultimately the market dictates, and these guys have to make money," says James Record, banking analyst with SNL Securities.

"It wasn't profitable raising money by paying the highest rates. There's been a sea change. When NetBank first came out they weren't offering much that was new. A lot of traditional banks had invested a lot of money in the Internet and had sites that were just as nice. It's hard to see where NetBank could have had a competitive advantage.

"Banking is a relationship business, especially with loan origination, and that's why these companies have opened or bought brick and mortar facilities."

While both traditional and Internet banks have been increasing the costs of opening and maintaining checking accounts at an alarming rate, Internet banks are hiking costs a bit more steeply. We'll highlight a few examples. It is startling to see just how much financial institutions have been able to raise prices in a downtrodden economy.

The Internet bank section of the Spring 2003 Checking Account Study surveyed 54 accounts at 28 institutions. As is typical with Internet banks, 40 of the accounts are interest bearing and 14 are noninterest.

E*Trade, RBC Centura Bank, Acacia Bank and Flagstar Bank appear in both sections of the study due to their significant size within one or more of the metro areas surveyed.

Minimum to open
The average minimum to open and earn interest rose just 6 percent since last October. Far less than the 14 percent increase seen at traditional banks, but it comes on the heels of a 21 percent spike in the prior survey.

It now takes an average $1,011.25 to open an interest bearing checking account at an Internet bank. That's up 81 percent since October 2000, and exceeds the $832.09 average at traditional banks by 21 percent. Of course, the $832.09 required by traditional banks is 80 percent higher than the average minimum they required in October 2000.

The average minimum to open a noninterest checking account is $132.14, up nearly 27 percent since October. Compare that to the $88.42 average at traditional banks.

Minimum to avoid fees
There's good and bad news when it comes to the minimum balance to avoid fees on interest accounts. Good news first: the minimum has dropped 1 percent to $1,291.25 from $1307.69 since the last survey.

But the bad news is that's up 135 percent since October 2000. That's still less than half of the $2,964.10 required by traditional banks, which have raised their minimum by "only" 75 percent since October 2000.

The average minimum to avoid fees on noninterest accounts climbed to $200, up 4 percent since October, but less than half of the $409.79 average at traditional banks.

Yield
Internet banks still win the Battle of Yields. Turf banks have whipped out their swords and slashed yields to a pittance while their cyberspace foes have worked harder at giving customers something resembling a decent return, relatively speaking.

The average yield on Internet checking accounts is 1.09 percent, down from 1.51 percent last fall.

Not bad when compared to the 0.47 percent banks are offering, but a giant step down from the 3.85 percent they ballyhooed in October 2000. Traditional banks were paying an average of 1.17 percent back then.

Internet banks have cut their yield by 28 percent since October 2000; traditional banks cut theirs by an average 40 percent.

Monthly service fees
Another area where Internet banks have had an advantage over traditional banks is monthly service fees. The average fee on interest accounts actually dipped a bit to $8.11 from $8.24, but it's still 10 percent higher than the study we did a year ago, and it's up 54 percent from two years ago.

The average monthly service fee on noninterest accounts rose to $4.18 from $3.88 since October.

These fees still compare favorably to the averages at traditional banks.

No service fees
If you're looking for a bank that doesn't charge a checking account service fee, the Internet is the place to go. Thirteen percent of the interest accounts don't charge a service fee, up from 10 percent in October, but down considerably from the 41 percent of two years ago. Just 6 percent of interest accounts at traditional banks don't charge a monthly service fee.

Among noninterest accounts, 43 percent of accounts at Internet banks don't charge a monthly service fee, down from 50 percent in October. At traditional banks, 17 percent of noninterest accounts don't have a monthly service fee.

Free checking
Free checking is on the rise at traditional banks, but on the decline at Internet banks. Currently, 19 percent of all checking accounts are free at Internet banks. That sounds pretty good when compared to the 11 percent at traditional institutions. But two years ago, 46 percent of Internet checking accounts were free.

Free accounts, by Bankrate.com's definition, are those that have no monthly service charge or per item charges regardless of balance or activity, and include the option of canceled check or image statement return if available.

NSF
Internet banks are keeping up with traditional banks when it comes to bounced check charges. The average fee for non-sufficient funds at an Internet bank is $25.98, up 4 percent from October, and up 11 percent in the past three years. It's a record high; comparable to the average of $25.82 at traditional banks.

Nearly all Internet checking accounts, 93 percent, offer overdraft protection, up from 92 percent in the fall.

ATMs
This is where Internet banks really have clout over traditional banks. Internet banks rarely charge their customers a fee for using another bank's ATM, while traditional banks routinely impose such a charge. Furthermore, half of all Internet banks surveyed reimburse their customers for surcharges they incur using non-bank ATMs. That enables those Internet customers to go just about anywhere when making ATM withdrawals. That figure is down from 56 percent in October and 64 percent in March 2001.

While reimbursement varies by institution, the most typical scenario is a dollar limit and/or a certain number of transactions that will be reimbursed each month.

The most common continues to be up to four transactions of $1.50 per month, or up to $6.

Of the 28 institutions surveyed, 27 offer ATM cards and 57 percent own ATMs. That's within the range we've seen over the last two years.

Both Internet and traditional banks surcharge noncustomers for using the bank's ATMs. The average at Internet banks is $1.35, down from $1.38 in October. At traditional banks, the average is $1.49.

One way to get around surcharges is to use your card as a debit card at a supermarket and ask for cash back. These so-called point-of-sale transactions can save you a trip to your bank's ATM and keep you from having to use a non-bank's machine.

All Internet banks that offer ATM cards allow point-of-sale usage free of charge. Some 85 percent of traditional banks allow free usage at point-of-sale.

None of the Internet banks charges an annual fee for their ATM card, compared to 8 percent of traditional banks that do impose a charge.

-- Posted: March 27, 2003