Online banking business is booming

It was a no-brainer for Jim Gilkeson when he found an Internet bank offering a money-market account paying five times the average interest rate offered by conventional banks. He moved $10,000 into the online account two years ago and has earned at least twice as much on his money to date than if he had gone with the best conventional rates available, he said.

“The yields they offer are so much better,” said Gilkeson, a finance professor at the University of Central Florida. “And the regular brick-and-mortar branches haven’t been very generous at all with their rates.”

Gilkeson is among millions of people who in recent years have surfed onto the Internet in search of a bank account.

Known as “direct” banks, the Web-only outlets have used high savings rates and aggressive marketing to capture more than $120 billion in deposits this decade, said Celent LLC, a Boston-based financialresearch firm.

They include giant players such as INGDirect and E*Trade Bank; growing ones such as Jacksonville, Fla.-based Everbank and Palm Beach, Fla.-based VirtualBank; and little-known ones such as giantbank. com of Fort Lauderdale, Fla. Because they don’t have the overhead expenses of a brick-and-mortar branch, direct banks can offer higher yields than do conventional banks.

Online banking, in general, is expected to expand 55 percent, to 72 million U.S. households, by 2011, according to a forecast by Forrester Research. Among Generation Y customers — those born starting in the late 1970s — it’s expected to grow a much faster 136 percent, the forecast projects.

The first step when exploring Internet banking is to clear the emotional or technical hurdles that may accompany conducting your personal financial business over the Internet, experts say.

Securing your computer is crucial before you start. Install the latest anti-virus, anti-spam, anti-spyware and firewall software and keep it updated.

Beware of e-mail “phishing” — scams that use realistic-looking but bogus Web links to try fooling you into giving up personal financial information.

Next, check out the Internet banks’ various offers. The simplest way to do that is go to www.bankrate.com, click on “Compare Rates,” and select from among the savings, investments and other products offered.

You can compare the rates available nationally or by state. Internet banks routinely lead the lists.

Bankrate says it verifies that all the banks it lists are insured by the Federal Deposit Insurance Corp. To obtain more regulatory information about a bank, go to www.fdic.gov, click on “Deposit Insurance” and then “Bank Find,” which will lead you to the company’s latest financials and other data.

Once you see what Internet banks are offering, you should be aware all savings offers are not created equal.

Although customers should expect convenience from an online account, they should be wary of an Internet bank that makes it too easy for someone to set one up, said Avivah Litan, a consumer-finance analyst for Gartner Group, a business-research firm in Stamford, Conn.

In this age of electronic identity theft, financial companies should make it as difficult as possible for an ID thief to obtain and misuse your personal information, she said. Internet banks should have multiple layers of security to verify that online customers requesting access to accounts are who they say they are, she said.

“It sounds counterintuitive,” Litan said, “but you want to have some inconvenience when it comes to setting up these accounts.”