Online banking is rapidly becoming something that we all do. This has helped online banks to gain a toehold in the financial industry. Online banks differ from general online banking in that they are internet-only banks that are not necessarily associated with the brick-and-mortar bank where you do most of your banking.
Online banks have pros and cons. They may be useful tools in your financial toolbox, but they are likely not the only banks you use.
What are online banks?
Online banks are banks that are operated entirely through a website. Although they may be affiliated with a parent bank that has branch offices, the actual division of the online bank is web-only.
Online banks may or may not offer telephone banking, ATM use, and other services that are available through traditional banks. Online banks are commonly used for high-interest savings accounts but are beginning to offer checking accounts, loans and other bank products.
Benefits of online banks
There are definitely some benefits of using online banks. Those include:
Higher interest rates on accounts
Online banks have lower overhead costs than traditional banks do. Most of them pass these savings on to their customers in the form of high interest rates. This means you may be able to make more from your money with an online bank.
Lower interest rates on loans
Another way these banks may pass on savings to you is by offering lower loan interest rates.
Lower minimum account balances
You may find it easier to avoid banking fees with an online bank because the online bank often requires less money to be kept in the account. Of course, this varies depending on the type of account that you open and the bank that you are working with.
Easy 24-hour access to your account information
This is the nature of the web. Of course, it’s increasingly common with internet banking through brick-and-mortar banks as well, but it’s also a staple of online banking.
Drawbacks of online banks
There are some disadvantages to think about before using an online bank:
Limitations on accessing your funds
You can’t just walk into an online bank and withdraw your money. Transfer of funds to another more accessible account can take several days.
Limitations on depositing your funds
Likewise, you may find that it takes a few days to deposit funds into your online bank account. This isn’t always true since some online banks offer quick electronic transfers from other banks. However, if you have to mail in your deposit or transfer through a slower online process, then it may also take a few days to see your money deposited.
ATM costs
Some online banks allow ATM access with other banks at no charge. However, many charge a fee, so there is often no cheap or free ATM option for these accounts.
Issues around stability
As with other ecommerce stores, an online bank may have difficulties remaining open as a stable business over a long period of time. For this reason, it is especially important that you make sure that your bank accounts are fully insured by the FDIC.
Concerns about computer security
Anytime that you bank online you open yourself up to risks associated with computer security. This is true for online banking with your own bank as well as with online-only banks. Banks put a lot of security in place to protect you, but this is always a risk.
How to use online banks to your benefit
If you’re thinking about using an online bank, then the following tips can help:
Don’t make it your primary bank. Stick with a traditional bank for your ATM and main checking accounts. Use the online bank for high-interest savings and low-interest loans.
Read reviews carefully before choosing the bank. You want to really shop around to make sure that you’re selecting an online bank that’s right for you.
Start small. Pick a single short-term product to test out with the bank to make sure that you like working with them. For example, you may get a 6-month CD to start saving with this bank.
Choose a bank that does offer checking as well. If you’re going to keep using the bank, then you should set up a small checking account and maintain the minimum required balance. This allows for faster transfer of funds if needed.
Read the fine print. It’s always important for you to know every little detail of your bank account. This is definitely true for an online bank account.
Be smart about where you access your account. Don’t access the count using public Wi-Fi connections or otherwise compromise your computer security when banking online.
Contact the bank by phone if there is an issue that needs to be discussed. You can actually speak to a person even though there isn’t a physical bank for you to walk into. Take advantage of this when you need to solve a problem.
Food for thought
Computers have given us the option of having online-only banks. Do you think that the proliferation of smartphones and increasing interest in mobile banking will one day lead to mobile-only banks?
Kathryn Vercillo is a full time freelance writer / blogger with nearly ten years of writing experience. She has authored two books and contributed to many other print publications.
Previously Kathryn worked as the editor-in-chief of a small literary arts magazine and as the manager of a writing company that linked businesses with freelancers. Areas she has researched extensively include personal finance, real estate, travel, life-work balance and health and fitness.
There are 2 comments to "What Are the Pros and Cons of Online Banking?".
Jim Yih says14 September 2010 at 10:19
Great post! I think online banking is just a different way of banking and I beleive it is in everyone’s best interest to try it out. I’ve been banking with Manulife Bank since 2002 and it is the only account I have. The problem with conventional bank account is they pay you no interest and charge you fees. This is profitable for the bank, not you. The bank account is necessary. Why not turn it into a profit center instead of a cost center. I think people use conventional bank account because it is comfortable or they do not know any other way. There is a high price to pay for comfort, convenience and lack of awareness. Do what’s right for you and explore other forms of banking like high interest banking, not necessarily what’s right for the banks.
Jim
Great post! I work at PerkStreet Financial, an online bank, and I’d like to speak to some of your cons, as both a PerkStreet employee and someone who’s been banking primarily with online-only banks for about four years:
• Limitations on accessing your funds: I think it’s actually easier to access funds from my online bank accounts. In order to make a transfer or get cash using the branch, it has to be both nearby and open. Even when I banked with brick and mortar banks I used their online services and ATM network to access my funds at any time. Branch hours and locations are extremely limiting, not to mention costly to banking companies!
• Limitations on depositing your funds: Again, I almost never go into a branch to make a deposit – even if I can make the time to go into a branch and wait in line in the middle of my work day, it can still take just as long for a deposit to post to my account as it does for me to mail it in or transfer it from another account online. Are there brick and mortar banks that offer immediate full deposit? I did a quick informal poll of friends and family and no one I know has that feature.
• ATM costs: Actually, many online banks, PerkStreet included, utilize the STARsf ATM system(http://www.perkstreet.com/atms.aspx), which is fee free. Plus, with over 37,000 ATMs located nationwide it’s actually the largest surcharge free ATM network in the country.
• Issues around stability: No argument here, although I don’t think it’s limited to online banks. Always make sure your accounts are fully FDIC insured.
• Concerns about computer security: Again, I don’t disagree but don’t think this is a drawback to online banks. You make a good point that this is something to consider with any sort of online account access.
No matter where and how you choose to bank, always do your research! Read the fine print, read reviews carefully, be smart about where you access your account… this is fantastic advice and should be heeded in any banking case, even business banking!
Jennifer Scott
Digital Communications Manager
PerkStreet Financial
There are 2 comments to "What Are the Pros and Cons of Online Banking?".
Great post! I think online banking is just a different way of banking and I beleive it is in everyone’s best interest to try it out. I’ve been banking with Manulife Bank since 2002 and it is the only account I have. The problem with conventional bank account is they pay you no interest and charge you fees. This is profitable for the bank, not you. The bank account is necessary. Why not turn it into a profit center instead of a cost center. I think people use conventional bank account because it is comfortable or they do not know any other way. There is a high price to pay for comfort, convenience and lack of awareness. Do what’s right for you and explore other forms of banking like high interest banking, not necessarily what’s right for the banks.
Jim
Great post! I work at PerkStreet Financial, an online bank, and I’d like to speak to some of your cons, as both a PerkStreet employee and someone who’s been banking primarily with online-only banks for about four years:
• Limitations on accessing your funds: I think it’s actually easier to access funds from my online bank accounts. In order to make a transfer or get cash using the branch, it has to be both nearby and open. Even when I banked with brick and mortar banks I used their online services and ATM network to access my funds at any time. Branch hours and locations are extremely limiting, not to mention costly to banking companies!
• Limitations on depositing your funds: Again, I almost never go into a branch to make a deposit – even if I can make the time to go into a branch and wait in line in the middle of my work day, it can still take just as long for a deposit to post to my account as it does for me to mail it in or transfer it from another account online. Are there brick and mortar banks that offer immediate full deposit? I did a quick informal poll of friends and family and no one I know has that feature.
• ATM costs: Actually, many online banks, PerkStreet included, utilize the STARsf ATM system(http://www.perkstreet.com/atms.aspx), which is fee free. Plus, with over 37,000 ATMs located nationwide it’s actually the largest surcharge free ATM network in the country.
• Issues around stability: No argument here, although I don’t think it’s limited to online banks. Always make sure your accounts are fully FDIC insured.
• Concerns about computer security: Again, I don’t disagree but don’t think this is a drawback to online banks. You make a good point that this is something to consider with any sort of online account access.
No matter where and how you choose to bank, always do your research! Read the fine print, read reviews carefully, be smart about where you access your account… this is fantastic advice and should be heeded in any banking case, even business banking!
Jennifer Scott
Digital Communications Manager
PerkStreet Financial