Why You Should Use an Online Bank
You don't need physical bank access anymore.
If you aren’t already using an online bank, you should fix that. Online banks are easy to open, convenient to manage from your phone and offer some of the best interest rates on savings accounts you can get.
It’s important to note the difference between online banking and an online bank. Virtually every bank these days offers online services, including a mobile app. An online bank, however, only exists online and therefore doesn’t have the same physical infrastructure costs as a brick-and-mortar bank, allowing them to focus more on delivering services to customers and offering higher interest rates on deposits.
A lot of brick-and-mortar banks are large legacy financial firms, like Bank of America, Wells Fargo and Chase, that don’t always offer the best banking experience and often engage in unethical practices.
Some online banks are divisions of traditional financial institutions, like Citibank and Goldman Sachs, or credit card companies like Discover and Capital One. Others include smaller banks like CIT or newer companies like Ally, SoFi and Varo.
When you choose to do all your banking online, you no longer have to worry about your bank having a local presence where you live, or changing banks or credit unions when you move. Online banks cover you no matter what region you live in.
Is an Online Bank Safe?
Some people might feel distrustful of an online-only bank. But as long as a bank is FDIC-insured, your money is safe. FDIC insurance protects deposits up to $250,000 per financial institution.
Not all accounts in the online banking space are technically banks. Chime, Betterment and Fidelity offer what are called cash management accounts. These institutions use partner banks to store your cash and usually offer FDIC insurance on your deposits. You just have to verify that the account you’re opening is insured and offers the same protections as an actual bank account.
Since a lot of online banks are newer and lack name recognition, they require more due diligence before opening an account. Browsing some online reviews before using them is usually sufficient.
The Benefits of Online Banks
1. Easy to Open
Online banks are easy to open from your browser or their mobile app. Just like any other bank, they require basic information like a phone number, email, address and Social Security number. You can usually get your account open in a matter of minutes.
2. Higher Interest Rates
With interest rates rising, now is a great time to look at some of the attractive savings products that only online banks offer. While savings accounts from Bank of America, Wells Fargo and Chase only pay a measly 0.01% interest, online savings accounts as of this writing hover above 2% and rising. CD accounts are also quite attractive if you look around close enough.
Many online checking accounts even pay interest. Just be aware that some online bank accounts have specific requirements to earn the highest tier interest rates, like maintaining a minimum account balance or making monthly deposits.
3. Mobile-First User Experience
While every bank these days offers online access, online banks are designed with an online, and mobile in particular, experience in mind. This means they tend to have better user interfaces and better mobile apps that are easy and intuitive to use.
4. Little to No Fees
Many brick-and-mortar banks charge fees just for the privilege of using their accounts. Online banks rarely charge these kinds of fees. Many also do away with overdraft fees.
The Downside of Online Banks
1. Not All Offer Checks
Not every online bank offers checks, but many of the big ones do. So if you still need the ability to write checks, make sure the online bank account you open offers checks. Cash management accounts and some of the smaller and newer online banks are less likely to offer checks.
2. Limited ATM Access
Online-only banks don’t have their own ATMs. This makes it harder to deposit cash. But many provide free access to a network of third-party ATMs across the country, so you can withdraw cash if you need to. Still, you may need to do a little homework to see which ATMs aren’t going to charge you fees.
3. Lack of Branch Access
If you enjoy having a physical branch nearby and a person to talk to who will fix your issues, you’ll be disappointed by online bank service.
Why Use an Online Bank?
There are lots of online banks out there. Some have a proven track record while others are much newer and untested. Two of the online banks I have used are Discover and CIT. Discover’s savings account currently pays 2.15% while CIT’s savings account pays an impressive 2.70%. Discover shines more when it comes to CDs. Their 5-year CD currently pays 3.30%, but I would likely hold off until interest rates have increased even more before locking in a CD.
Keep in mind that these interest rates are still not going to beat inflation, especially at the current high levels. But if you’re looking for a place to hold your emergency fund or if you’re saving for a short-term goal, using one of these online banks and getting as much interest as you can is a no-brainer.
Just because online banks are superior in numerous ways doesn’t mean you have to ditch brick-and-mortar banks entirely. I still use a brick-and-mortar bank myself, but increasingly it makes little sense in 2022 to attach yourself to them when there are so many more options out there. At a minimum, you should use an online bank for your savings so you get as much interest as you can and keep a brick-and-mortar bank account for regular checking needs.
Competition in general is great for consumers, but especially when it comes to where you keep your money. Don’t settle for a big bank that treats its customers poorly. Online banks give you plenty of options to choose from.