Online Interest Power

With High-Yield Savings Accounts, Internet Banks Develop Some Muscle

Who says Americans don't save?

Right now, consumers are flocking in enormous numbers to Internet-based bank accounts that pay interest rates upwards of 3.5 percent.

ING Direct, the market pioneer, has $60 billion in assets and is adding $1 billion in deposits each month. HSBC Bank USA's deposits in this type of account shot up to $3.8 billion from $1 billion in the first quarter. Citibank, which began offering high-yield savings accounts on March 29 with the hope of gathering $4 billion by year's end, now expects to hit that target months earlier than expected.

These big financial conglomerates also have dozens of smaller competitors. Some are local thrifts, such as Emigrant Bank in New York, which has $6.5 billion in Internet deposits and only $4.5 billion at its 36 land-based branches. Others were founded to do business in cyberspace, such as Bank of Internet, which is based in San Diego.

But they all have several key things in common: They use the Internet to offer accounts, insured by the Federal Deposit Insurance Corp., that pay far higher interest than is usually available at brick-and-mortar bank branches.

The rates rise and fall with the bank-to-bank lending rates set by the Federal Reserve Board and currently hover between 4 and 4.75 percent, depending on the institution. A few institutions offer higher rates but require minimum balances of $50,000 or more.

That stands in contrast to the average interest-bearing checking account, which currently pays 1.06 percent, while money-market accounts pay 3.16 percent on average, according to the Web site Bankrate.com.

Consumer advocates and financial planners can't say enough good things about the Internet-based accounts.

"When you compare them to the alternatives, money-market funds and mutual funds, these are 100 percent safe up to" the $100,000 limit for FDIC insurance, said Stephen Brobeck, executive director of the Consumer Federation of America.

His organization calculates that more than $1 trillion is currently stashed in bank accounts that pay 1 percent or less. "Going from 1 percent to 4 percent, what's not to like?" Brobeck asked.

These accounts "are perfect for cash reserves," said Gordon Bernhardt, a McLean financial planner who routinely advises clients to keep enough cash on hand to cover three to six months of living expenses.

Unlike certificates of deposit (CDs) or mutual funds, to which investors may have to pay a penalty to withdraw their money early, Internet bank accounts are extremely liquid. Some institutions, such as HSBC, allow investors instant access to their money using an ATM card. Others require depositors to wire the money to their regular checking account, which can take up to three days.