Direct to the bank

If you want to show up at a direct bank and make a deposit, you will run into a few problems. Additionally, if you want to discuss your interest rate with a direct bank representative in person, you will see that it is not easy.

You will not be physically turned away by direct bank representatives because direct banks do not have physical branches that traditional banks offer.

Direct banks, also known as virtual banks because of their online-only nature, entered into the banking world with the creation of ING Direct in 2000, but have only recently made headway in the marketplace as consumers have become more comfortable conducting their banking online.

These banks have enticed customers primarily with their competitive interest rates, which are consistently much higher than rates at traditional banks.

Ally Bank, the direct bank unit of GMAC Financial Services, currently offers a basic savings account with no minimum balance at an annual percentage yield of 1.75 percent. HSBC Direct and ING Direct are not too far behind with APYs on their basic savings accounts of 1.35 and 1.30 percent, respectively.

Currently, a Bank of America savings account offers an APY of 0.1 percent and customers must maintain $300 in their accounts or transfer $25 into their savings accounts from a checking account every month to avoid a monthly maintenance fee.

Even Bank of America’s ‘Growth Money Market Savings’ accounts with high minimum balances of up to $2.5 million don’t reach the APYs that Ally, ING Direct and HSBC Direct offer on their basic savings accounts.

‘People who are looking for high returns go to [direct] banks,’ said Carol Kaplan of the American Bankers Association, which represent banks of all sizes across the U.S., said. ‘These banks have an advantage that they don’t have the overhead costs of the traditional banks.’

TAKING OFF

HSBC Direct, a subsidiary of the world-renowned HSBC, launched in 2006 and now has almost a million accounts. The bank had over $15 billion in deposits during the first half of 2009, an increase of 18 percent over the same period a year ago. The key to HSBC Direct’s success is their high-interest rates, spokesman Neil Brazil said.

‘We consistently offers rates at four times the national savings rate average,’ Brazil said. ‘Year by year we have had a solid increase in deposits.’

Spokespeople from ING Direct and Ally Bank also reported similar jumps in customers and large increases in deposits over the past year.

‘We have seen record growth in checking accounts and a phenomenal growth in savings accounts,’ Todd Sandler, the head of product strategy at ING Direct, said.

ING Direct is currently the largest of the direct banks with approximately eight million customers in the U.S. ING Direct offers customer service seven days a week from 8 a.m. to 8 p.m. in every U.S. time zone.

ING Direct has bent the rules of the direct bank model slightly by opening cafes in major cities where associates market bank products. Sandler said ING Direct has succeeded because the benefits the bank offers customers.

‘There are no fees, no minimum balances and every thing is simple and easy to use,’ Sandler said.

Ally Bank hauled in $14.5 billion in deposits during the second quarter of this year, a 32 percent increase over the first quarter.

‘Consumers are tired of common industry practices, including fine print and hidden fees, which are things we are not doing,’ Ally spokesman Tony Sapienza said.

Sapienza said Ally has quickly gained ground in the direct bank market because of its customer service line that is staffed 24 hours, seven days a week. A graphic on the Ally website tells you how long you will wait if you call the customer service number, and there is also an online chat function.

‘If you go to other direct bank sites, most of them don’t want you to call to keep the costs down,’ Sapienza said. ‘We want relationships with our customers.’

Sapienza said the 24-hour customer service line also is a service that traditional banks do not match.

‘If you want access to customer service at 1 a.m. you can have that with us,’ he said. ‘With a traditional brick-and-mortar bank you have to wait until the next day.’

DIRECT WHAT?

Despite the growing number of people turning to direct banks, the trend has not caught on among Boston University students.

When 15 BU students in different years and different majors were asked if they had heard of direct banks, they all said no. All of them had heard of online banking and most of them said they used the online systems their traditional banks offered.

Jack Huang, an MBA candidate in the School of Management, said direct banks could be a good option for people who wanted to start saving money, but he wouldn’t want to open a direct account for himself.

‘[Direct] banks are best for people who want to save money and don’t know how to invest properly,’ Huang said. ‘I have online-only accounts for trading stocks, but not for regular banking because I like to invest my money.’

Shaun Chang, a College of Arts and Sciences junior, also said he still likes to have a physical branch to go into in case a problem arises, but sees the appeal of direct banks.

‘I like the idea of a physical place I could go to in order to settle a dispute rather than using telecommunications,’ Chang said. ‘If you plan on leaving your money in an account for several years and there is a significant difference in the interest rate, then an online-only bank might make sense.’

Sara Jane Askildsen, an SMG junior, said an online-only account without ATM access would be a major inconvenience.

‘There are many times when I need access to cash because there are places on campus that don’t accept credit cards,’ Askildsen said. ‘What would I do in those situations with an online-only account?’

Spokespeople from direct banks said the lack of BU student knowledge of online accounts is an anomaly among young adults. ING Direct does not directly market to college students, but Sandler said many students know about ING Direct products and sign up for accounts because of its prominent online-advertising presence.

‘Our accounts are very popular among college students because they can begin their savings with high interest rates, and begin saving at an age where a lot of students are burdened by debt-producing products like credit cards,’ Sandler said. ‘A good percentage of college students have been taught the importance of saving for the future.’

Sandler said ING Direct’s target market is the 25 to 54 year-old age group, but if students on BU’s campus were to be asked if they had heard of ING Direct, he predicted many would say yes.

‘Our advertising is on multiple platforms that college students see,’ he said.

Sandler said he recognizes that many college students do not think about savings and are more concerned about instant access to cash. He also said that ING Direct products aren’t a good fit for everyone.

‘If phone service is not enough communication for you, then you are not right for us,’ he said. ‘You have to be willing to self serve.’

Ally Bank has also found a receptive market among college students.

‘We have had success across all age groups,’ Tony Sapienza, a spokesman for Ally Bank, said.

Laura Levine, the executive director of the Jump$tart Coalition, a national organization made up of groups that teach students about financial management, said direct bank accounts could be useful for some students to get them to start saving.

‘If an online account makes it easier for you to save and makes it more conducive for you to do that, that is a good thing,’ Levine said.

ONLINE BANKING GROWS

The recent success of direct banks coincides with a survey released by the American Bankers Association on September 21 which said online banking, for the first time, is the preferred method of banking for adults in the U.S.

Twenty-five percent of the 1,000 adults surveyed said they prefer to bank online, while 21 percent said they prefer to go to bank branches and 17 percent preferred ATMs as their top banking method.

Among 18-34 year-olds, 38 percent said online banking was their choice banking method with only 16 percent preferring to go to a branch.

The survey did not ask about direct banks, but instead focused on traditional banks that offer online options.

Kaplan from the ABA said the survey indicates that people have gradually gained comfort managing their personal finances online.

‘I think there were some people who felt insecure about giving financial data over the Internet,’ Kaplan said. ‘At this point, there have been more safeguards put in place where people feel more comfortable, and can save a lot of time doing transactions online.’

Marshall Van Alstyne, an assistant professor of information economics in SMG, said consumers still need to be very vigilant about updating their anti-virus software and creating long passwords that are hard to guess for their online banking accounts.

‘The most likely threats are to home computers where the users have not kept their anti-virus spyware up to date,’ Van Alstyne said.

THE FUTURE

Kaplan said she does not think the rise in online banking and direct banks will signal the end of branches of traditional banks.

‘There are almost 8,500 banks in the US and banks have been around before the US was a country,’ Kaplan said. ‘You may find fewer transactions occurring at banks, but there will always be a need for a local branch because there are certain transactions that you just can’t do over the internet.’

Kaplan said the major advantage that traditional banks has is the ability to connect with customers on a more personal level than direct banks.

‘It is a difficult to develop a relationship with a virtual bank where there is no person and no name,’ Kaplan said. ‘It is especially difficult if it is one of those things where it feels like your phone call is being answered by someone in India. There just isn’t the same connection.’

Sapienza disagreed with Kaplan’s assessment, saying he expects direct banks to continue to pick up more customers.

‘We don’t have the fixed costs, and we offer better products and better rates,’ he said. ‘That is going to win the day.’

Reporters Grant Mukai and Anne Whiting contributed to this article.