What is an Online Bank & Pros and Cons of Online Banks

An online bank is much of what it sounds like. It is a bank (in most terms that we classify the “normal” banks) that you access and utilize online. This along with the fact that they probably don’t have a local branch anywhere near you is why they’re deemed an “online” bank.

Online banking

This isn’t to say that these banks don’t have any buildings whatsoever, it just means that there isn’t a local branch that you can go visit whenever you’d like. The fact is that most of them do have buildings – somewhere – for their corporate headquarters, customer service reps, and IT departments.

While the majority of banks throughout the country offer online “access” to your checking and savings accounts, this doesn’t classify them as an online bank.

What Are the Benefits of Online Banks?

Online banks, such as Ally Bank, are continuing to grow in popularity, and these are the same reasons you should consider one as well:

  • Online and mobile platforms – ease of use
  • Higher interest rates on CDs as well as on checking and savings accounts – with interest rates at all-time lows, it’s always great to earn as much as you can!
  • Reduced fees – there is NO reason any person should pay for a checking account. Why pay when you can get them for free?

So, why can online banks offer better fees, rewards, and interest rates than their local or BIG counterparts?

Well, there really isn’t any other explanation other than the fact that they don’t have the massive over-head that having a local branch(es) entails.

By saving on loan/rent payments, taxes, utilities, upkeep that normal “brick-and-mortar” buildings require, along with saving on the salaries to staff those facilities, online banks are able to save tremendous costs that they can pass back to the consumer.

So Why Isn’t Everybody Using an Online Bank?

If online banks are so great, why isn’t everybody using them?

Well, for starters there is a lot to be said for being able to go and talk to somebody at your local branch.

While this concept is foreign to younger Americans, it is very much a vital factor for the older generations. I even have some thoughts about online banks being a scam or ‘running away with my money.’ For no other reason then I can’t actually see their building.

Regardless of how you think about it, there is definitely a comfort level with seeing the place that “your money is being held.” I put that in “” because your money isn’t really held there. Banks are only required to keep a very small percentage of their assets at their local branch. The rest gets loaned out or shipped to a reserve.

What are some of the other drawbacks to online banks?

  • Difficulty finding ATMs to use – while this isn’t as much of a hassle as many make it seem, it is still a deterrent. Most reputable online banks have developed a very good network of ATMs that you can use. Odds are there is one somewhere near you.If the online bank doesn’t offer a wide network of ATMs, then many of them will reimburse your account for ATM fees you’re charged when you withdraw at “foreign” ATMs.
  • It’s hard to deposit checks – I will say this has been my greatest struggle thus far in my experience with online banks. If your employer doesn’t offer direct deposit then depositing a check at an online bank will be a little different than you’re used to.I do have one online bank that has networked with UPS stores and I can instantly deposit a check at most UPS stores around the country (best solution I’ve seen – it instantly credits my account). However, I have another online bank that will allow me to overnight my check to them. They’ve also teamed up with UPS and I DO NOT get charged a dime for the shipping. Regardless, I’m still a little leery of a check getting lost in the mail.
  • Must be internet-savvy – while you don’t have to be an expert, you do have to have internet connection. If you’re not used setting up online transfers, working with computers, or used to paying bills online, then you’re probably not a part of the audience reading this article anyway.
  • Dollar limits on online transfers – if you’re wanting to transfer money from one bank account to another, there may be monthly limits placed. Of course these limits may be increased over time and may be determined on your account balance.

So is an Online Bank Right for You?

That’s obviously up to you.

Personally, I have 4 different bank accounts: (1) Primary checking, (2) Non-Monthly Expenses, (3) Emergency Fund Savings, and (4) a Business Checking Account.

My business checking and primary checking are at online banks (separate), while my non-monthly and emergency fund accounts are at a small, local bank.

The decision for me was easy: the gain I receive in rewards, higher interest, and lower fees far outweigh the difficulty of sending a deposit via overnight mail that’s paid for (once again, if you have direct deposit then this won’t even matter for you).

The important part is that you weigh each pro and con and determine what fits your priorities the best. I place a high value on getting money/rewards back – especially in my business account!

Why get nothing back when I can earn hundreds over the course of a year? Just because the bank has a branch I can go visit?

Picture by gemalto_photos.

About the Author

By , on Feb 23, 2012
Andy Tenton
Andy is a 30-something New Yorker who turned his financial life around. He took charge of his finances, got out of debt, and is now working his way toward financial success. He is the publisher of WorkSaveLive.com.

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{24 Comments}

  1. Miiockm says:

    It is nice to have an account with one of the bigger banks just in case.

    • Andy says:

      Miiockm,

      Thanks for taking time to comment! Why do you think it’s important to have an account with a bigger bank?

  2. I have been an online bank user for years and have never looked back at brick and mortar branches. The sooner you learn to get comfortable with doing business online the better!

  3. Ella says:

    Here in Norway you basically don’t have a choice. Absolutely all banks have gone online. Some of them might have kept a few local branches but it’s very rare and they are fewer and fewer. All employers offer direct deposits here and checks don’t exist anymore so you basically don’t need local branches anymore…

  4. Steve says:

    I like that ING allows free online transfers. I do most of my banking through a local branch and recently opened an ING account. I can easily transfer money from my local branches checking account into ING. This is a little extra effort, but you could always deposit your physical check with your local bank, then use ING to transfer it into their account so you can take advantage of their larger interest rates.

  5. The more interest the better is what I say!
    But tell me, why do you have four accounts, surely one or two would give you a better compounding effect?

    • Andy says:

      Good question! I personally like to keep things separated. Each account has a specific purpose.

      I’m not too concerned with the minor compounding that will take place in these checking/savings accounts. Sure, any “free” or extra money is good, but what we’re talking about here isn’t going to change anybody’s life. I might be able to buy an extra big mac each year (if I’m lucky).

  6. I love my online banks! I’ve worked with both ING and Ally for years and I agree their customer service is great (not that we’ve needed it much). With my evil brick-and-mortar bank I needed customer service all the time to correct their mistakes and it was quite poor.

    While we still have a small checking account with a brick-and-mortar bank, we haven’t used it once since Ally implemented their eCheck deposit. The only remaining unique benefit we’ve received from still having that account is that we once used their notary service for free.

    • Andy says:

      I need to check out ING and Ally. I’ve only heard great things about them.

      I have a PerkStreet Checking account (their customer service is great too) and accounts at 2 other banks. Is there such a thing as having too many accounts? I don’t want it to be too burdensome.

      • I like having our primary checking and all of our targeted savings accounts and EF at one bank (Ally) because of the instantaneous transfers. We do have accounts still open at a couple other banks but they are not used at all, basically just there because we haven’t yet closed them. It’s making tax season a little more complicated because of the additional 1099-INTs!

  7. Daisy says:

    I’m with ING, which I don’t know if you’d count as an online bank, but it’s pretty much all online. I love it! Non-online banking is going to be a thing of the past, soon!

  8. ING is going to begin remote deposits via their app in the spring, so that clears a hurdle.

    • Andy says:

      That is great to know! Thanks for the great info, Brent! I hope PerkStreet comes up with something similar in the near future.

  9. Peter says:

    I’ve got a Perkstreet account for my checking – earning those 2% cash back rewards – and then a Ally savings account – another online account. My Ally account allows for online scanned in deposits, so i can just scan deposit with them, and then transfer it over to my linked Perkstreet account. No need for mailed in deposits. 🙂

    I do still have a local bank for a small emergency fund, but that’s about it. Online banking is the way of the future!

    • Andy says:

      I think we’re very similar, Peter!

      I have a local bank for my emergency fund but everything else is done online. 🙂 It’s amazing how reliant we are on technology.

  10. Edward Antrobus says:

    Depositing checks is the biggest reason I stay with a brick-and-mortar bank. My employer doesn’t offer direct deposit, and one of my side-incomes pays out on a pre-paid debit card that I empty once a month and deposit the cash.

    • Andy says:

      Edward,

      I agree that is the challenge online banks face right now. Many of them are coming up with solutions around it…as Peter and Brent mentioned.

      I don’t mind mailing something via UPS overnight, but my belief is that all of them will figure out more effecient solutions. Simply a matter of time.

      • Edward Antrobus says:

        I did look into remote deposit, but I wasn’t able to find any that 1)was available for the product tier I would be in (no direct deposit, not from a military family, etc) and 2)had a setup usable from a desktop, as I don’t have a smartphone.

        ING has been saying they would introduce remote deposit for two years, so I’m hesitant to believe them this time.

        • Bryan says:

          What I find the most curious is that Chase (a brick and mortar) already has a feature for smartphones where users can take pictures of checks and deposit them remotely, but no strictly online banks (to my knowledge) have figured it out yet. How can Chase be that far ahead of the game?

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