Online banking: E-valuating the virtual alternative
By Holden Lewis • Bankrate.com

If you're interested in handling some of your finances online, you might not have to switch banks. Most of the country's big banks, and many of the smaller ones, have Web sites that offer at least some functionality. Brick-and-mortar banks with Web sites are sometimes called clicks-and-mortar banks. You can talk to a teller at a branch, use the bank's ATMs, call a customer-service line, and visit the bank's Web site.

Then there are the virtual banks -- institutions that have no branches. You can't visit a teller and usually you have to use another bank's ATMs. Most of your dealings with the bank are online or by phone.

You could even combine virtual banking with online trading. E-Trade, the online brokerage, owns E-Trade Bank, a virtual bank formerly known as Telebank. Prominent virtual banks such as First Internet Bank of Indiana and Netbank allow you to link your bank account to an affiliated brokerage account.

Some of the country's biggest clicks-and-mortar banks, including Citibank, Bank of America, Bank One and First Union, will let you bank online and trade online through their investing subsidiaries.

Bankrate.com analyst Greg McBride says: "The accounts offered by Internet banks remain in a class by themselves relative to the offerings of traditional brick-and-mortar banks. The list of attributes to the accounts offered by Internet banks is extensive -- competitive yields, lower service fees and bounced-check fees than brick-and-mortar accounts, more modest thresholds needed to avoid fees and a predominant number of accounts that are free or lack monthly service charges."

If that sounds good to you, Bankrate's research department helps you find the best deals from among the Internet banks with its comparison of Internet banking deals.

Customers of virtual banks have to bear one major financial disadvantage: ATM surcharges.

Most brick-and-mortar banks don't charge their account holders for using the bank's own ATMs. In other words, if you have an account at FirstMegaBank, you can use its ATMs free.

But if you have an account with another bank, FirstMegaBank will charge you to use its ATMs. Most banks levy these ATM surcharges. Since most virtual banks don't own ATMs, their customers have to pay surcharges.

Some virtual banks will reimburse you for a few surcharges, but other virtual banks make you pay all surcharges. If you're a frequent ATM user, it might be cheaper to keep an account at a brick-and-mortar bank.

Brick-and-mortar and clicks-and-mortar banks offer more convenience. It's nice to be able to drop in on a teller during your lunch break, or to complain to a branch manger when the bank makes a mistake. You can't do those things with an online bank. And with many online banks, you can't make a deposit at an ATM.

It's harder to make deposits at online banks. With most, you have to mail deposits or transfer money electronically from another account. Even if you set up direct deposit for your paychecks, you still get the occasional check, whether it's a gift, a payment at a garage sale, or a product rebate.

A few online banks have attacked this problem aggressively. Juniper Bank, for example, lets you drop off noncash deposits at Mail Boxes Etc. locations, and so does National Interbank.

Other banks make arrangements with regional ATM networks to allow account holders to make deposits at the machines. Juniper, NetBank and First Internet Bank of Indiana are among the online banks that take deposits at ATMs, but the banks cover some areas better than others.

Accounts that are insured by the Federal Deposit Insurance Corp. are covered regardless of whether the bank is virtual, clicks-and-mortar, or brick-and-mortar. Your money, up to $100,000 for non-retirement accounts and up to $250,000 for retirement accounts, is safe at an FDIC-insured institution.

As always, you should zealously guard the user name and password of any online accounts. That's the most important security step. Banks have a pretty good track record when it comes to security.

All banks, whether they are virtual or not, have to abide by federal privacy laws and regulations. The rules are not particularly strong. Most financial institutions will share information about you with corporate affiliates and outside marketers unless you deny permission. A few have "opt-in" policies, meaning they won't share your information unless you give permission.