The advent of online banking started a small revolution. It took a while to catch on given the wariness of the media. Now, having at least “virtual” non-brick & mortar account is standard protocol.

Even though the rates have changed dramatically (who remembers when accounts offered yields over 5%?), the debate over which parking place is better rages on.

Performing a search of “Review of Online Banks” or “Best Online Accounts”, will return thousands of hits. There’s plenty of information out there, and for the purpose of this article, I’ll refer you to this recently updated post at MoneyNing.

Overall, the article does a good job summarizing the current offers and looking at other considerations beyond the rate. Remember rates are not the only metric, and you should always do additional research to make sure the product best fits your own financial system.

Even though it clearly states the opposite towards the bottom of the page, I can appreciate his personal view. As long as someone takes a holistic view, and acknowledges that there are many factors to consider, that’s really all you can ask for.

On the other hand, there are points of disagreement – which makes it a perfect subject for my own post! Specifically,

Why does ING Direct not even warrant a ranking?

This has been an exciting post for me because it reaffirmed my own opinion of ING Direct. This online banking giant seems to get quickly written off because of their “lower” interest rate. What people fail to appreciate is the generous promotions they offer.

When you look at these promotions in conjunction with their publicized rate, you realize that the adjusted rate can rival, and sometimes even beat out, these other bank offers. There are more reasons why I prefer ING Direct, but for now, let’s focus only on their promotions and how it affects their rate.

At first I started comparing ING Direct with the other bank offers, but it’s actually simpler to demonstrate the change in rate looking only at ING Direct. For this calculation, we’ll consider the 3 scenarios outlined below.

Case #1: $250 Initial Opening Only

Case #2: $275 Initial Opening + Referred Bonus $25

Case #3: $525 Initial Opening + Referred Bonus $25 + Referral Bonus $250 (25 @ $10/sign-up)

Since this is a “back of the envelope” calculation, here are some details on the assumptions I made:

1. In order to receive the promotion bonus of $25, you are required to open an account with $250. You technically can open an account with $1, but for an apples-apples comparison we’ll assume all cases start with $250.
2. You do nothing else beyond what is listed above. You simply let it sit there and grow.
3. You sign up 25 friends essentially right after joining yourself. This is best case scenario.

Perform the forward calculation to figure the compound interest after 1 year. Here’s what I computed:

Case #1: $3.14

Case #2: $3.46

Case #3: $6.60

Already the benefit is clear.! You earn 2x more by taking full advantage of all that ING Direct offers its customers.

Since the purpose of this article is to highlight the change in rate, take the above results and perform a backwards pass through the to calculate the adjusted yield.

Case #1: 1.25% (stated)

Case #2: 1.38%

and drum roll please,

Case #3: 2.61%

If you were able to get referred to ING Direct by a friend and refer 25 other friends, then you could beat even Everbank’s teaser, 3-month rate by a full 0.5%. Assuming I did the calculation correctly, I also looked at Everbank’s combined rate over the year and came up with 1.69%.

The fact is that ING Direct is still in the game, and in my own opinion, setting themselves above the competition. In an upcoming post, we’ll look at a few other perks the bank offers that puts them a cut above the rest.

**UPDATE**  I’m not sure when this happened, but now ING allows you to refer up to FIFTY friends for a potential $500 promotional bonus.  If you were this popular and convincing, signed up 50 people, you’re rate would skyrocket to 3.83%!!!

Photo by Akuppa