Step cautiously into an online bank
Interest rates and convenience are high, but so are security concerns. And customers have to be especially vigilant.
from the April 2, 2007 edition
Page 2 of 3
"A higher interest rate means a higher risk, and somehow we have disconnected this" from current thinking about virtual banks, Mr. Colarik says. "If there is a breach, if there is a violation, what is your recourse?" In most cases, he says, chances are "you lose your money."
To date, the largest Internet banks report solid safety records. HSBC and ING Direct, for instance, both say they've never had a customer lose any funds due to a security breach. And even when Emigrant Direct's website was down for days last summer, customers didn't lose their money, although some complained of difficulty accessing funds.
What's more, in an age of concerns about identity theft, some advisers believe clients are actually more secure using virtual banks. The absence of a paper trail, which follows traditional banking transactions, reduces the likelihood that a thief will find valuable account numbers or passcodes in garbage bins, according to Justin Pritchard, a financial planner in Denver. And even paper checks have their downsides.
"It's worse to hand someone your paper check than it is to hand someone your user name and password of your online account," says Jim Bruene, editor of Online Banking Report, an industry newsletter. "That paper check not only has all your [contact] information on it, it has your checking account number on it. Your bank account number is right there, printed on the check," which could enable a counterfeiter to manufacture checks and drain an account of funds.
Virtual checking accounts are similar to regular checking accounts that are also accessible online, except the virtual accounts have a few distinguishing features. With ING Direct's checking account, holders can transfer funds to pay bills online or instruct the bank to cut and mail a paper check to a named recipient. The system is intended "for people who don't need hand-holding" and whose online banking habits have created little need in their lives for paper checks or branch access, says Todd Sandler, ING Direct's head of deposit services.
Online banking: the early years
Virtual banking got its start in October 1995 with the launch of First Security Network Bank. Even now, only 3 to 4 percent of American households have virtual accounts, but the number of households that use them has surged with the rise in interest rates. From 2004 through 2006, while the Federal Reserve was steadily raising interest rates, the number of virtual-banking households jumped 61 percent, from 2.3 million to 3.7 million, according to Online Banking Report. Now Americans keep between $80 billion and $90 billion in virtual accounts, compared with about $3 trillion in retail accounts with balances under $100,000.
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