There are dozens and dozens of online banks offering all manner of savings and checking accounts. Some banks you’ve heard of before and some you’ve never heard of. Makes you wonder what the best online bank is huh? Before you ever deal with any bank of any kind, online or in person, be sure to double check that they have FDIC insurance (lookup) and that they’re a legitimate bank. That being said, all of the banks on this list are legitimate, have FDIC insurance, and have been in the business of banking for a few years. These aren’t no-names but their names may not be familiar to you (if you read a lot of personal finance, all of these names will be recognizable) and they’re all banks that I’ve dealt with personally or talked extensively with someone who has dealt with them personally.

#1. ING Direct

For the longest time, ING Direct did not have the best of rates. While other banks were up in the 5’s, they were in the 4’s. When others were in the 4’s, they were in the 3’s. Now that the others are in the 3’s, it’s glad to see ING Direct is still in the 3’s. I’m a fan of ING Direct because of how easy they make everything. Their interface is intuitive, fast, and I can easily refer other people to take advantage of their $25 new account bonus. I can commit funds to a CD in minutes and then manage it all in one place. To be completely frank, interest rate is an important factor but not the most important factor when the rates differ by fifty basis points (half a percent on $1,000 is a mere $5, plus it’s taxed!), it’s about reliability and consistency and they’ve delivered on both.

ING Direct also has a promotion where you can get $25 if you open a new account and deposit $250, the only caveat is that an existing member has to refer you. You can visit this ING Direct $25 new account promotion referral page for a list of referral links. The referrer gets $10 for referring you.

#2. E*Trade

E*Trade, known more as a discount broker than as a bank, takes the number 2 spot in my list of top online savings banks because you can link your savings account to a brokerage account and instantly transfer funds between the two. If you’re an impulsive gambler and like to plow money into penny stocks, you don’t want an E*Trade online savings account or its 3.01% interest rate because you’ll probably turn it into a -100% interest rate account. That being said, the appeal of this account for me is the speed and convenience of being able to transfer between the two without having to wait several days for an ACH transfer. If you have more than $5k and fancy a checking account, they have a checking account earning 3.25%.

#3. HSBC Direct

How could I put HSBC Direct, the online bank rated 2006 Best Overall Online Bank by Kiplinger’s Personal Finance, at third? Sometimes that first mover advantage is difficult to overcome. Many banks appeared before HSBC but none had HSBC’s brand name power but once you have a high yield savings account, is there a real need to get another one? I actually do not have an HSBC account but many of my friends do and they say that it’s definitely one of the best in terms of features (and rates, they’ve been consistently one of the highest interest rates since their inception). The minimum amount you need to deposit to get the best rate is $1, which is the same as some other banks but E*Trade (checking) requires at least $5,000; so a minimum of $1 is not true across the board.

#4. Washington Mutual (WaMu)

If you are not comfortable with a completely online experience and there are no HSBCs near you, you might want to consider Washington Mutual and their Free Checking account as an option. You can link up your regular Wamu accounts, get free checks for life, cash-back on your debit card purchases, no monthly account fees, and the awesomely powerful 3.30% APY interest rate on a checking account. For me, I already have a checking account and the desire to have such a flexible and lucrative checking account isn’t enough for me to open up another one (plus there isn’t a branch near me, on the biggest advantages of a B&M type place).

#5. Emigrant Direct

Emigrant Direct probably has the least amount of branding power compared to the rest but they were the second online bank account I opened because they had competitive rates. Their CD buying process is also quite simple, not as simple as ING Direct, but their online account system looks and acts a little dated. One knock against them, which was the big bonus for ING Direct, was their reliability. When they revamped their system, it went down for a few days. That’s not what you want in a bank where the only access is online access.

Current Rates

• ING: 3.00% APY
• E*Trade: 3.25% checking, $5,000 min (3.01% savings, no min)
• HSBC Direct: 3.05%
• WaMu: 3.30%
• Emigrant Direct: 2.75% APY

There you have it, my five top online banks (though one was brokerage first and several of them have brick & mortar presences) according to my experience with them or my research of them. Please feel free to share your opinion and vote for which of these banks (or ones I left off the list) you think makes for the best online bank. (If you’re interested, Five Cent Nickel did a reader’s poll and has his list of best online banks)

I always read about how Bank of America sucks this, and Bank of America sucks that, but never had experience the suck that is Bank of America first hand. I opened an account with them a year ago with my then-fiancée because they had a branch within walking distance of my house and because they have ATMs essentially everywhere. I looked past the Bank of America horror stories because, honestly, every company has its bad moments. Well, today I met a bad enough moment to make me can Bank of America and go with M&T Bank. (I opened up a personal and business account with them because a good friend of mine works in their new business development side)

No, they didn’t screw me out of $23049823049 in fees or otherwise hosed me by being unreasonable - they did something far worse because it wasn’t some technical glitch or some procedural hangup. They’re going to lose me as a customer because they were rude. When there are as many choices as there are in the world, you can’t even mess up like that. Sorry!

Today, I went to a Bank of America branch to make some check deposits. When I walked up to the counter with my checks, the first thing the teller asks me is if I had counted the amount. I responded “No” because I wanted them to double check my math, as they always do. The responded with a bit of a roll of her eye and then asked me if I filled out a deposit slip. Again I said no, deposit slips are useless anyway. When she counts them up, she’ll print out a slip that goes with the checks and the deposit slip is just a wasted branch on a tree we’d otherwise like to keep around. This is what has happened the other half dozen times I’ve gone in to deposit a bunch of checks (and didn’t want to you the mechanized paper-cut maker of an ATM they have), the teller simply adds them up for you and you’re on your way.

So she pulled out a deposit slip and told me to fill out my name and address on the slip (useless!). Then she put a calculator in my face and told me to add up the checks. All of this was pretty terse and borderline rude but I was content to let it go. As I added up the checks and showed her the calculator, she proceeds to read out the numbers really loudly over and over again. Is there no sense of privacy? I can understand her reading them back softly, but she was speaking more than normal indoor voice.

Okay fine, whatever, at this point the interaction hadn’t gone great but it was hardly worth closing an account over. Then she looks at my balance and tried to sell me on a certificate of deposit. I politely declined. She persisted by saying I was losing money by putting my money in a regular checking account. She’s right, but I still politely declined. Then she proceeded to start talking to the customer waiting behind me! No good bye, no thank you have a nice day, nothing.

That, Bank of America, was the proverbial straw. Keep that lousy $6 you got for giving me an interest rate of 1.0%, which is essentially paying an annual fee anyway, and keep your other worthless products. We’re outta here.

It’s amazing they didn’t make it out of the first round of the Consumerist 2007 Worst Company in America contest (Verizon was a formidable opponent), but you guys should lock up the first round in 2008 against a cupcake like Toys R Us.

Update: Some people have said that I’m being a baby, that I over-reacted, (one guy said he’d punch me) and I respect all of your opinions (maybe I am a baby, but there are plenty of banking options that are more polite) and thank you for sharing them. I actually wanted to touch on the topic of over-reaction. What’s “worse” of a reaction, closing my account or calling out that teller to their manager? If anything, asking to speak to the bank manager and telling them the teller was rude seems to be like a greater over-reaction than closing an account. Thoughts on that?

The other day, as I was preparing my taxes, I saw a curious little $3 maintenance fee on my Bank of America Savings account. For the last five months, I’d been paying $3 a month in a maintenance fee that didn’t appear until November of last year (the account had been opened over a year ago). When I called, I was informed that the fee was because I had less than $300 in the account despite much more than that in the linked checking account. I had moved the funds over to the checking account because the difference in interest, much less than 1%, wasn’t worth me logging in to move funds as needed (vs. the risk of forgetting and taking a NSF fee). In my mind, I had figured that the account was one of those “minimum balance of $something, or combined account value above $something-else” and that I was safely in the $something-else category (usually it’s like $2,500 or $5,000 for something-else so I figured I was okay). Wrong, and they dinged me for $15 (of which I was able to recover $9 with a polite phone call, the other $6 were more than 90 days back and they couldn’t do it, which seems plausible).

The lesson for me here is two-fold and both are related to simplifying your finances. The first, is that as my life becomes more and more complicated, my ability to keep things “on the table” in my mind will diminish. When I was in college, concerned only with a handful of classes and almost nothing else, managing a dozen accounts was no big deal. Now, there are significantly more demands on my mindshare and thus my ability to keep track of everything lessens. One of the things that fell off the table was a monthly review of bank and credit card statements. By simplifying my finances, I can save money because I can more closely monitor my financial accounts. I can catch the $3 fee in the first month, not the fifth, and nip it in the bud.

The second lesson for me was that sometimes what appears to be a smart money move is really more hassle than its worth. More hassle means I’m less likely to do it, which can the smart money move into a stupid money move. The savings account, with its pathetic < 1.0% APY interest rate, exists only because I thought that we could maximize interest earnings. An external transfer would take several days but an internal one takes mere seconds. The savings account could be a holding tank and I would simply move funds as needed. A year later, the hassle of "mere seconds" became too great and I scrapped that strategy, thus costing me a cool $6 and 15 minutes of phone time. Simple is almost always better because I am inherently lazy.

In the future, I’ll be continuing to simplify our finances and operating under the belief that simple is almost always better (because I’m lazy), a valuable $6 lesson.

Pay day loan shops (and cash checking and other similar short term loan shops) are often singled out as places that prey on consumers in a tight spot. While I don’t dispute that, I want to point out other places that also prey on consumers in a tight spot that don’t often get the spotlight.

Pay Day Loans Are Bad

Don’t get me wrong, pay day loans are horrible products for consumers because of their high fees, high interest rates, and their propensity to become financial sinkholes. It’s the financial version of someone going in for a routine cavity filling and coming out with a lobotomy. You just need a little extra help to get you to the next pay day but end up paying for years. According to this warning by the FTC, they give an example in which “the cost of the initial loan is a $15 finance charge and 391 percent APR. If you roll-over the loan three times [42 calendar days], the finance charge would climb to $60 to borrow $100.” $15 to start and 391% APR is horrible but let’s compare to some of these other products.

Refund Anticipation Loans

Refund anticipation loans, tax rebate loans, assisted refund loans, etc. are horrible horrible, don’t ever get a refund anticipation loan. These products are often highlighted as preying on consumers but I felt they should be mentioned anyway. Given the fervor over pay day loans, you’d think a loan with a $30 activation fee, $20 check processing fee, and a 36% APR would get a little more heat than it does. $50 to start plus 36% APR on funds that are guaranteed (if the tax preparer does their job right) by the IRS… seems a little rougher than the pay day loans, which are loans on funds that are not guaranteed.

Bank Fees

According to Bankrate’s 2007 bank study, bank fees are on the rise. Big time. A bounced check will cost you $28.23, average ATM surcharge will run you $1.78, and the average monthly service fee on a checking account was $11.72 (don’t ever pay a fee for a checking account). You’d think that they were lending you money given those fee values! I can understand the headache of a bounced check but let’s get real here, bounced checks never come alone. In fact, considering banks withdraw the largest amounts first, you’re more likely to see multiple bounces than a single bounce.

Credit Card Fees

Again, credit card companies have come under heat too but it still bears highlighting that they’re practices are closer to pay day loans than they are to the Fed. If you make your payment late, most places will charge you somewhere between $20 and $30, with the bias towards $30. Interest rates? High, plus companies have been mailing out letters notifying people that their rates have gone up for no reason. I’ll leave it at that since the credit card industry does take a lot of heat for their practices.

So as you can see, pay day loans are horrible but there are a lot of other horrible and more mainstream products out there that simply don’t get the same exposure. Bouncing a check is like missing a payment which is like taking out a pay day loan, in terms of cost, but at least with a pay day loan you get something out of it (a horrible horrible loan!).

As many of you know, I recently got married to the love of my life (awwww!) and had a wonderful wedding and reception this past weekend. Everyone had a blast, we had a blast, and all in all I think the entire weekend went very very well considering the magnitude (both in size and importance!). Anyway, with a wedding comes gifts and some gave a gift in the form of a check.

Why is this worth mentioning? As you can probably tell from the title, the tricky part was in the fact that the checks were made out to my name and my wife’s name. That, in and of itself, is not big deal except they put it in my wife’s new (and, dare I say, better) name, which is not the name on our joint account. So, in the eyes of both the state and the bank, one of the person’s listed on the “Pay To The Order Of” line doesn’t actually exist. So, what were we to do? There are in fact two solutions.

Change Account Name

One solution is to change her name from her maiden name to her new (better) name and all we need for that is the marriage certificate. With the account name changed, she would simply sign the back of the checks in her new name and be done with it.

Double Endorse The Check

The other, far easier, solution would be for her to sign the check twice: first with her new name (name on the check), then with her old name (name on the account). While this struck me as a bit shady, it seemed to be the typical result. If the two names were in fact two different people, this is how we would’ve signed the checks to deposit them into the account. When she signed her new name, she was endorsing the check for deposit anywhere (you can write, “For Deposit Only” on the check to force it into an account your name only). It seemed tricky but the Bank of America tellers (two at two different branches) seemed to think that was business as usual and an accepted practice. Either way, no one will be disputing the deposits so it’s no big deal either way.

After those shenanigans, I needed to sign the check in order to deposit it. If a check has two names (with an “and” between them, rather than an “or”), both have to endorse the check before it can be cashed, deposited, etc.

Biometrics, loosely defined as the process of using a person’s physical characteristics for identification, is slowly gaining popularity and their use may soon extend to credit cards. Privacy is always a hot button concern in the US, just think back to when AOL released all that search data, and the collection and storage of your physical characters, one of the most personal of things, is something that probably would both a lot of people. So I’m curious, if biometric data were required, would it bother you? If it was optional, would you elect it?

I have mixed feelings on this. I’m not a gung-ho privacy advocate in some aspects and conservative in others. For example, I’m comfortable with people being able to see the websites I surf but I don’t want my information stored somewhere if it’s not absolutely necessary. I can see the value of using biometrics as a means of authentication and so would definitely elect to “activate” any biometric-related security features. It’s easy to fake a signature, it’s much harder to fake a fingerprint or retina scan.

As you probably suspected, one of the places where biometric authentication has become pretty popular is Japan (they get all the cool gadgets and gizmos before we do!). One of the reasons is because in Japan you can generally withdraw from the ATM the equivalent of thousands of dollars each day, so the higher security measures are required. Granted, this is the bank, which knows all your financial information anyway, but it’s an example of how biometrics have been rolled out and accepted.

So, what are your thoughts?

(Image by Joits)

The Fed just dropped the federal funds rates, a ton of banks recently dropped their high yield rates, and now you’re thinking about switching banks, right? Well … don’t be tempted. There are two huge reasons why rate chasing is a foolish endeavor:

• Rates are not guaranteed.
• You lose interest in the interim.

(Case in point, when I opened an E*Trade account three weeks ago, the rate was 5.05% - it’s only 4.40% now. That’s a drop of 0.65%!)

Rates Aren’t Guaranteed

Just because you signed up for a 5.05% APY savings account at E*Trade doesn’t mean that the rate will stay there for any period of time. These bank accounts aren’t CDs and the rate can drop just as easily as you can transfer your funds. While it’s tempting to swap your bank account for another one with a higher rate, the higher rate might disappear in a few days simply because that bank was slow to update their rates! Some banks anticipated the Fed rate drop and lowered their rates, other banks will wait until after the Fed move to shift their rates, you have no guarantee which one your prospective bank is. Banks can and will lower rates to as low as they are able to get away with so chasing is never as valuable as you think it is.

Interest Lost

When you transfer the funds between two accounts, you lose the interest that would’ve been earned during that time. The transfer usually will take about a week so that’s 1/52th of your interest gone. While that may not seem like a lot, you start moving your funds around every few months and that 1/52th becomes 1/26th, then 1/13th… you get the picture.

So, let’s say you still want to rate chase, is there anything you can do to ensure the rates stick? No, but you can do the next best thing, start analyzing their CD rates and consider putting some funds into those. What I do at ING is ladder my CDs in $500-$1000 increments such that I create a psuedo-liquid situation (click thru for an explanation of CD laddering). The laddering gives me some downside protection against a big rate drop and you should be looking for something like that. For example, right now I have several CDs in the 4.90% to 5.25% range - the ING rate is currently 4.1%.

So if you want to chase, look for banks that will let you take a no-minimum CD with a decent rate so you can give yourself some protection against a drop.

(Photo by Shoeless Joe/64)