You saw an ad boasting generous rates of returns on checking or savings accounts from an online bank. But perhaps you had reservations or weren’t even close to being sold on the idea of going digital because it seems too complex or virtually impossible.

Well, the options for online banking are vast and more and more consumers are thinking outside the box and taking a chance on online banks? Reasoning: they’re longing for an opportunity to escape hefty fees and keep more of their hard earned money in their pocket while earning a greater return. 

How Online Banking Works

Most brick-and-mortar banks offer digital services, which can technically be classified as online banking. However, it’s usually referred to the practice of conducting all your transactions and other banking-related business through an actual bank that operates exclusively on the web. 

This means that there won’t be a physical location that you can walk into to make a deposit or withdrawal, apply for a debt product, make a loan payment, speak with a banker, or even grab a lollipop from your favorite teller. Instead, all digital banking will be conducted through an ATM machine, snail mail, or electronic transfer. 

And if you want to speak with someone at the bank, you’ll have to pick up the phone, send an email, or use the chatbot found on their website. 

But what about safety? The good news is online banks are just as safe to do business with as traditional banks, and they invest millions of dollars in security to see to it. 

Pros of Online Banking 

The thought of banking online may seem strange and somewhat complex but these entities have top-notch technological systems that can make your life much easier. In turn, scores of consumers have turned to digital banks to meet all their needs. Here are some major benefits of banking online:

Higher Rates of Return

When you drive up to a brick-and-mortar bank, you’ll notice the beautiful landscaping, fancy tunnels for the drive-through, bright lights, ATM machines awnings, oversized glass windows, and the list goes on. And once you step foot inside the building, you’ll see offices, staff members, colorful pamphlets advertising their offerings, and so much more. 

Here’s the thing: it’s all overhead and comes at a hefty cost to banks, which means they can’t afford to pay you a high rate of return on your funds. 

By contrast, online banks have lower operating costs, which means more money in your pocket. With a brick-and-mortar bank, you may earn one-percent back on an annual basis if you’re lucky and have a hefty balance that you can afford to maintain each month. But with an online bank, it’s not unheard of to earn at least two-percent or more on your money without making a hefty opening deposit or maintaining a certain minimum monthly balance.

Lower Fees 

It’s no secret: banks recoup a ton of their costs through fees. In fact, a MarketWatch report revealed that consumers paid over $34 billion in overdraft fees to banks in 2017, notes Forbes. And that’s just one type of fee that banks assess. So, imagine how much they rake in on account maintenance, dormancy, and paper statement fees.

That’s enough to make some consumers ditch traditional banks and search for online options that don’t nickel and dime consumers at every turn. It’s not to say online banks don’t charge fees, but a quick analysis will reveal that these figures are far lower because they have less overhead to worry about. 

Convenience

If you’re always on the go or move around a lot, the idea of having a bank that is not location specific and can go wherever you go may seem quite appealing. And with their user-friendly mobile apps, you should be able to handle all your banking business in minutes if not seconds and get back to things that matter most. 

Vast ATM network 

Worried that you’ll spend a fortune since online banks don’t have exclusive ATMs? Don’t be. Most are willing to reimburse you for any fees and surcharges incurred while withdrawing money, or you can use one of the fee-free ATMs in their network.

Popular networks include Allpoint, MoneyPass, and the Credit Union ATM CO-OP as they include thousands of ATMs throughout the US. You can locate the list of participating ATMs via the mobile app or directly on the online bank’s website. 

Educational Resources at Your Fingertips 

If you’re looking for ways to get your finances on track, online educational resources are everywhere and they’re easy to find. Traditional banks offer these resources in-house but online banks tend to step it up a notch by offering interactive resources and online learning portals designed exclusively for their account holders.

They invest thousands, if not millions, in these programs and provide trackers and encouragement as a source of accountability and to ensure you’re staying on track. Ultimately, online banks understand that if you knock your financial goals out of the park, that means more hard-earned money in your pocket and more opportunities for them to do business with you. 

Cons of Online Banking 

While there are several benefits to online banking, there are also drawbacks you should be mindful of: 

No Human Touch

Maybe you’re a consumer that prefers human interaction when conducting banking transactions. After all, there’s nothing like a quick but heart-warming chat with your favorite teller that you’ve known for 10 plus years or a yummy green sucker from the teller in the drive-through line to give you a quick sugar rush. Or perhaps you prefer sitting down and having a face-to-face conversation when considering taking out a personal loan for a big-ticket purchase or discussing an issue.

Regardless of which of these categories you fall in, online banking may not be a good fit as it’s missing the “human touch” element. Yes, you can always pick up the phone, use the chatbot, or send an email, but it’s not the same as that warm, personal touch. 

Limited Services 

Need a money order or cashier’s check by 5 pm? How about notary services for a contract? Unfortunately, it’s impossible to have guaranteed funds sent to you the same day when you bank online, and you can’t take advantage of free notary services, either, since there’s no physical location. 

Cash Deposits and Withdrawals Can Be Challenging 

Do you frequently make cash deposits? Not all ATMs have deposit capabilities, so you may find yourself having to use another bank and initiate an electronic transfer. 

With regards to withdrawals, finding a fee-free ATM shouldn’t be a problem (unless you’re in a rural area). But if you need certain denominations of cash or more than you’re permitted to take out on a daily basis, you could easily be inconvenienced. 

Tech Issues

Technological glitches and outages are bound to happen. In most instances, online banks can get them resolved and have the systems, website, and mobile app up and running within a few hours. But this could pose a major inconvenience if there’s a cutoff or you have a jam-packed day. 

You must also consider the internet outages in your home or local area. If you need to make a quick transaction and are on a limited timetable, you can’t just drive to a branch. The same applies to international travel where you may not have internet access; you’ll have to reach out to the bank and could incur steep fees for the international call.

Is Online Banking Right For You? 

It depends on your personal preferences. If your goal is to earn a higher rate of return for your money and you don’t mind using technology for all your banking needs, online banking may be a good fit. By contrast, if you prefer face-to-face interaction and would feel more comfortable with being able to visit a physical location anytime a need arises, it may be a good idea to stick with a traditional brick-and-mortar bank. 

Torn between the two? If so, select an online bank with generous earning potential to park your savings and stick with a low-fee traditional bank for your checking account and all your other banking needs. That’s a win-win for you and your money.

Best Online Banking Options

Ready to commence your search for an online bank that will best suit your financial needs? Below are some of the top options to choose from: 

Ally Bank

  • Premier Product: Online Savings Account
  • Minimum Balance Requirement: $0
  • APY: 2.10 percent 
  • Core Offerings: checking, savings, CDs, IRAs, auto loans, home loans, investment products

BankPurely

  • Premier Products: Certificates of Deposit, Online Savings Account
  • Minimum Balance Requirement: $1,000 (CD), $0 (online savings account)
  • APY: 2.25 percent (12-month CD), 1.90 percent (online savings account)
  • Core Offerings: checking savings, money market, CDs

Capital One 360

  • Premier Product: Online Money Market Account
  • Minimum Balance Requirement: $10,000 (lower balances are permitted but with a lower APY)
  • APY: 2.00 percent 
  • Core Offerings: checking, savings, credit cards, auto loans, business banking, commercial banking 

Charles Schwab Bank

  • Premier Product: Online Savings Account
  • Minimum Balance Requirement: $0
  • APY: 0.50 percent 
  • Core Offerings: checking, savings, home loans, pledged asset line

CIBC Bank USA

  • Premier Product: Online Savings Account
  • Minimum Balance Requirement: $1,000
  • APY: 2.39 percent
  • Core Offerings: checking, savings, health savings accounts, retirement, personal lending, small business banking  

Discover

  • Premier Product: Online Savings Account 
  • Minimum Balance Requirement: $0
  • APY: 2.10 percent
  • Core Offerings: checking, savings, money market, certificates of deposit, IRA certificates of deposit 

E-Trade Bank

  • Premier Product: Online Savings Account
  • Minimum Balance Requirement: $1 opening deposit 
  • APY: 2.10 percent
  • Core Offerings: checking, basic checking, max-rate checking

iGObanking

  • Premier Product: Online Savings Account
  • Minimum Balance Requirement:$0
  • APY: 2.25 percent
  • Core Offerings: checking, savings, money market, certificates of deposit 

Live Oak Bank

  • Premier Product: Online Savings Account
  • Minimum Balance Requirement: $1,000
  • APY: 2.30 percent
  • Core Offerings: savings, certificates of deposit, business banking  

Marcus by Goldman Sachs

  • Premier Product: Online Savings Account
  • Minimum Balance Requirement:$0
  • APY: 2.25 percent
  • Core Offerings: savings, personal loans, certificates of deposit

Radius Bank

  • Premier Product: Online Savings Account
  • Minimum Balance Requirement: $100
  • APY: 2.05 percent
  • Core Offerings: checking, savings, certificates of deposit, credit cards, personal loans, mortgages, yacht loans

Salem Five Direct

  • Premier Product: Online Savings Account
  • Minimum Balance Requirement: $100 deposit, no minimum balance
  • APY: 2.51 percent
  • Core Offerings: checking, savings, certificates of deposit

Sallie Mae

  • Premier Product: Online Savings Account
  • Minimum Balance Requirement: $0
  • APY: 2.10 percent
  • Core Offerings: savings, money market, certificates of deposit, credit cards, personal loans, student loans 

Simple

  • Premier Product: Online Checking Account
  • Minimum Balance Requirement: $0.01
  • APY: 2.02 percent 
  • Core Offerings: checking only

USAA

  • Premier Product: 1-year Certificate of Deposit
  • Minimum Balance Requirement: $1,000
  • APY: 2.06 percent 
  • Core Offerings: checking, savings, credit cards, auto loans, certificates of deposit, mortgages, personal loans, motorcycle, RV and boat loans, credit monitoring, identity theft protection

***Quick note: these offerings and figures are valid as of June 2019.

Author

Allison Martin is a syndicated financial writer, author, and Certified Financial Education Instructor (CFEI). She has written about personal finance for almost ten years and holds a master's degree in Accounting from the University of South Florida. Allison's work has been featured on The Wall Street Journal, ABC, MSN Money, Yahoo! Finance, Fox Business, Credit.com, MoneyTalksNews, Investopedia, The Simple Dollar, and a host of other reputable publications. She also travels around the nation facilitating financial literacy and business workshops to individuals from all walks of life. In her spare time, Allison enjoys traveling, cuddling up with a good book, and spending time with family. She lives in Florida with her husband and two young sons.

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