Online Checking Accounts Offer Higher Yields to Lure Customers

Facing an increasingly competitive market, online banks are launching checking accounts with attractive rates to lure new consumers and hold onto the ones they already have.

Thus far, 2007 has been a “very aggressive” year for online banks, according to Serge Matta, senior vice president of comScore, a Web audience measurement firm. The online banks are offering more competitive rates in an effort to reverse a recent slowdown in growth.

Both ING Direct and E*Trade recently launched online checking accounts with high-yields. ING Direct's checking account, called the Electric Orange, offers a 4% annual yield, while E*Trade's checking account has annual yield of 3.25%.

ING Direct's online checking account, like its savings account, has no minimums, no fees, and is completely paperless. Instead of a checkbook, customers will be able to make electronic payments online or have ING Direct send out a check through first class mail.

Electric Orange customers can also elect to have a MasterCard-branded debit card issued for ATM withdrawals or debit payments. ATM withdrawals can be done for free if customers use the Allpoint Network, which has 32,000 ATMs in 50 states.

Some Drawbacks

There are, of course, some disadvantages. The biggest is that ING Direct requires you to keep a checking account at your regular bank to facilitate cash and check deposits. Transferring money between those accounts can also take a couple of days to complete. Then there's the hassle factor of having to set up the new online account.

E*Trade's online checking doesn't require an account at a regular back, but it comes with other restrictions. Customers must keep a balance of $5,000 to receive the 3.25% yield; balances under $5,000 will earn only 0.5%.

Online checking accounts are nothing new. Banks like Citibank Direct, Washington Mutual and Capital One already offer checking accounts with their online savings accounts, although not with such high yields.

Online Banking Players

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More banks are entering the fray too. HSBC Direct expects to launch its own version of a high-yield online checking in the second quarter of 2007.

Banks have a good reason to raise yields on their accounts. A survey by JupiterResearch found that when looking to open a new bank account online, the No. 1 concern was the interest rate.

“Those yields” says Greg McBride, a senior financial analyst at Bankrate.com, is “the carrot that is dangled in front of the consumer.” And people are biting.

Crowded Market

The stepped up competition comes as a report by comScore Networks tracking the major online bank players found that newer online banks from Citibank, HSBC Direct, and Washington Mutual are eating into ING Direct's market share.

In 2006 ING Direct’s market share fell to 25% from 53% in 2005. Emigrant Direct’s market share fell to 12% from 22% and Capital One from 10% to 8%. Seeing a rise in market share last year were HSBC Direct from 14% to 21%, Citibank from 2% to 19%, and Washington Mutual from 0% to 17%. Matta says that the banks that showed an improvement did so because of more aggressive marketing campaigns, and offering higher yields in 2006.

The report also reveals how quickly a new bank like Washington Mutual, which was launched in late 2005, can grow. Today, the company says it is opening over 1,000 accounts online every day.

Whether launching new checking accounts, or raising rates, one thing is clear: the increased competition is “a very good thing for the consumer” says comScore's Matta. Consumers now “have more options, and more aggressive rates.”

Adds McBride, “You’re getting additional return without shouldering any investment risks;” it’s something “every household in America should be taking advantage of, in terms of where they park their emergency savings.”

Joseph Pisani is a news associate at CNBC.com. He can be reached at .