When Big Island resident Bob Ristelhueber checks his bank statement online, he's pleased his money is earning more than double the interest rate listed by a local bank.

The 50-year-old freelance writer said he opened a money market account with a New York-based Internet bank, Emigrant Direct, about four months ago after seeing an advertisement that offered a 4.5 percent annual interest rate.

HomeStreet Bank, which has the highest rate among eight major Hawai'i banks, pays 2 percent interest on its money market accounts.

"The local banks really aren't competitive when it comes to rates," Ristelhueber said.

Since 2004, the Federal Reserve has ratcheted up short-term interest rates more than 15 times, which in turn has helped push rates higher on CDs, savings accounts and money market accounts.

Local banks say their rates are competitive, especially when you look at their special promotional rates.

Bank of Hawaii, for instance, pays 0.45 percent on savings accounts but offers a special 3.1 percent interest rate for customers with account balances of $100,000, said Peter Biggs, Bank of Hawaii's senior executive vice president for consumer products.

The bank also offers an 11-month CD that carries a 4.25 percent interest rate for balances of more than $2,500.

"I think (Internet banks) will appeal to a small segment but for the vast majority of customers, the type of offering we have at the Bank of Hawaii — which includes the competitive interest rates, our branching services, our automated teller machines, as well as our Internet services — will be more attractive," Biggs said.

Dennis Tanimoto, president of the 97-member Hawaii Credit Union League, noted that customers who tend to base their banking decisions solely on higher-interest rates, or "hot-money," tend to be in the minority.

Most customers tend to pick their financial institution based on the entire package they offer, which includes rates, service and convenience, he said.

Customers also prefer the face-to-face relation that they have in their traditional banks, where they can turn to a favorite teller or bank branch manager when problems arise in their accounts or in their personal finances.

MAKING INROADS

Still, the Internet banks are making inroads.

ING Direct, a leading Internet bank based in Delaware, said its volume of deposits from Hawai'i consumers increased 87 percent last year, thanks in large part to a local newspaper and Internet advertising campaign.

The company — which has about 10,000 accounts in Hawai'i — also said it has seen a 148 percent rise in the volume of certificates of deposit accounts held by local residents.

"Markets like this are particularly open to competition from players like us," said Jim Kelly, ING's chief financial officer. "Being in Hawai'i makes a lot of sense for us."

Unlike traditional banks, an Internet bank doesn't have a network of bank branches, so they don't have the same fixed expenses. For that reason, they're able to offer higher interest rates.

Some Internet banks, such as industry leaders ING and HSBCdirect of New York, don't charge fees for their services and don't require a minimum balance on their high-yield savings and money market accounts.

To deposit money, you have to mail a check from your current bank or have that bank or credit union transfer money to your Internet bank account.

To withdraw money, some allow you to use an automated teller machine operated by another bank and will pay for the ATM withdrawal charge. Others require you to transfer money out of the Internet account to a local account, which is a process that can take as much as a day to complete.

Many don't offer checking services, although a few, such as Bank of Internet USA of San Diego and Florida-based EverBank, offer checking accounts that pay more than 3 percent a year in interest.

Internet banks allow you to monitor your accounts online but they generally don't provide services such as automatic bill payment.

TAKING RISKS

Like all banks, $100,000 of your money is insured by the Federal Deposit Insurance Corp.

"The idea of being able to earn 4.5 percent without taking any risk and having access to the money looks attractive," said Greg McBride, senior financial analyst with the Florida-based personal finance Web site bankrate.com.

McBride noted that investor interest in cash investments such as CDs and money market accounts have grown recently as interest rates have risen.

The trend has prompted longtime bricks-and-mortars banks such as Corus Bank of Chicago and GMAC Bank of Pennsylvania to establish Internet-only bank subsidiaries that offer some of the highest interest rates on money market and savings accounts for their online customers.

According to a regular survey by bankrate.com, Corus is offering 4.85 percent on a money market with a $100 minimum balance while GMAC is offering 4.75 percent for a money market account with a $500 minimum deposit.

"There are a lot of players in this space right now that interest rates are rising and it has ramped up the competition to a new level," McBride said.

Ristelhueber said he doesn't believe it's less convenient to have an account with an Internet bank.

If he's ever in need of a large sum of money for a purchase, Ristelhueber said he will have his Mainland bank wire money to his local credit union.

"The concept of the bank has changed. With the Internet, you can move money all around the world," he said.

Reach Rick Daysog at rdaysog@honoluluadvertiser.com.