As Big Banks Converge, Depositors Find Deals at Smaller Institutions

As the big banks get bigger, it may be time for savers to shop around.

Citigroup Inc.'s decision this week to gobble up most of ailing Wachovia Corp. is the latest in a string of blockbuster acquisitions that have transformed the banking landscape. A huge chunk of consumer deposits are now consolidated in three banking behemoths -- Citigroup, Bank of America Corp. and J.P. Morgan Chase & Co. -- not known for wooing consumers with high interest rates and low fees.

But as competition shrinks, there are plenty of options for rate-sensitive depositors and borrowers, from smaller community banks and online institutions to credit unions and brokerage firms. What's more, the Internet makes it easy to shop around for the best rates, as well as forgo the need to visit bank branches or ATMs.

"If you're willing to send your money to an out-of-state bank, what that delivers in interest earnings can be worth far more than having everything under one roof but settling for lower returns," says Greg McBride, a senior financial analyst at Bankrate.com. For example, the top yield for six-month CDs, if you shop around, is 4%, up from about 3.5% six months ago, he says. Meanwhile, the average yield for a six-month CD is just 2.09%.

Many of the higher rates are typically offered by smaller regional banks, such as Corus Bankshares Inc.'s Corus Bank in Chicago and Zions Bancorp's Zions Bank in Salt Lake City, or by online banks, such as AmTrust Bank's AmTrust Direct and Lydian Trust Co.'s VirtualBank. Meanwhile, Chase was offering rates of 2% and 2.25% for six- and 12-month CDs, respectively, in the Chicago market; a company spokesman notes that the bank often runs special promotions in its branches.

And no matter the size of a bank or credit union, as long as depositors have $100,000 or less in their account, they are protected by federal insurance if the institution goes under.

To be sure, the big banks will offer consumers access to more bank branches and ATMs and additional services not offered by smaller banks, such as wealth management. Big banks also have more money to spend on product development, such as reward programs and mobile banking, says David Kaytes, a managing director of Novantas LLC, a management-consulting firm. In some cases, big banks will dangle high rates to attract deposits. Citibank recently started offering yields of 4% on a six-month CD and 3.5% on its Ultimate Savings Account.

"In times of financial stress, a $2 trillion bank gives people peace of mind," says Tom Kelly, a Chase spokesman. Other advantages include: large branch and ATM networks as well as the resources to run a strong online banking site. The bank is currently running promotions in Chicago offering 3% and 4% on seven- and 48-month CDs, respectively. The CDs require a minimum of $10,000.

So many banking customers say they come out ahead by splitting their business. Karl Blaeser, a 46-year-old information technology director from Burbank, Calif., recently opened a checking account at E*Trade Financial Corp. Mr. Blaeser says he is getting a 4% interest rate annually on his E*Trade checking account that has a balance of $23,000. He still has a Bank of America checking account, which he uses for direct deposit, but primarily uses his new E*Trade account. "The interest amount was too good to pass up," Mr. Blaeser says.

Indeed, smaller banks say they're seeing more interest from consumers who are switching banks. PNC Bank, a unit of PNC Financial Services Group Inc., says it had a 35% increase in new checking accounts in July and August compared with the same two-month period a year earlier. At the end of this week, PNC Bank is planning to run print ads about its performance and business strategy in national newspapers. In July, the bank also launched a marketing campaign and has been averaging 200 new customers a day, says spokesman Patrick McMahon. Other regional banks, such as Portland, Ore.-based Umpqua Bank and Newport, Ore.-based Oregon Coast Bank, have stepped up advertising and seen an increase in new deposits.

Credit unions -- which have largely sidestepped the subprime crisis because of their more-conservative underwriting practices -- often offer generous rates and low fees. And deposits are insured for up to $100,000, per account, per institution, just like regular bank accounts. The catch: You'll have to meet membership requirements, usually based on where you live or work.

The Navy Federal Credit Union of Vienna, Va., this week raised the yield on its EasyStart CD -- a one-year CD aimed at small savers -- to 4.25% from 4%. Navy Federal also extended the 4% yield on its 15-month CD through the end of the month.

"We're seeing an uptick in the amount of new money coming in," especially from customers who are bringing their checking accounts over from Wachovia and other larger banks, says Kathy Zierers, vice president of savings products. Savers can find higher yields at online-only banks, which are able to offer juicier deals because they don't have the expenses of maintaining branches. On Tuesday, for example, ING Groep NV's ING Direct raised rates by 0.25 percentage point across a slew of its CDs to a range of 4.25% and 4.50%.

In many cases, the online banks are virtual offshoots of small brick-and-mortar banks that are using the Internet as a way to reach out-of-state customers. This year, M&T Bank Corp., for example, launched OnBank.com, which recently increased the yield on its online savings account to 3.75% from 3.50%.

The downside of banking online is that you can't pop into your nearby branch. If you have a paper check to deposit, you'll typically have to mail it in. You also may incur some ATM fees. But if you pay most of your bills online and use a debit or credit card for purchases, then such inconveniences should be relatively minor. What's more, many online banks will offer to reimburse ATM fees.

Rob Schumacher of Woodside, Calif., says he's willing to spread his money across multiple banks to find the higher yields. Currently, the bulk of his cash is in U.S. bonds in an account with Citigroup that is earning minimal interest. "If I can spread around this money and I know it's safe, I'll do that," says the 52-year-old real-estate developer.

Others are tired of what they consider big banks' high fees and poor service. Chase customer Jim Barlow, a 72-year-old retiree from Houston, recently opened a second checking account with Compass Bank, which is owned by Spanish bank Banco Bilbao Vizcaya Argentaria SA. He likes Compass because when he travels out of the country, the bank charges a lower ATM transaction fee -- 1% of the total amount withdrawn -- compared with some bigger banks.

"The big banks don't have the kind of attention to customer that smaller banks have," Mr. Barlow says. The big banks say, "We are big and we can charge what we want," he adds.

Write to Jane J. Kim at jane.kim@wsj.com and Joseph De Avila at joseph.deavila@wsj.com