Should I Use an Online Bank?
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Almost everything can be done online these days, and banking is no exception.
Many consumers have decided to take their banking digital, and some opt to use banks that exist exclusively online—without a brick-and-mortar location.
“The Internet has become one of the most popular ways for consumers to access their banking services,” says Allison Ross, a senior banking analyst at Bankrate.
According to a 2013 report from the Pew Research Internet Project, 51 percent of U.S. adults—or 61 percent of Internet users—bank on the Internet. Meanwhile, 32 percent of U.S. adults—or 35 percent of cellphone owners—use their phones to log in to online banking.
A sizeable chunk of Americans haven’t even visited a bank branch in recent memory. Three out of 10 U.S. consumers, for example, haven’t visited a bank or credit union branch in at least six months, according to a recent Bankrate report.
While many traditional banks have begun to offer online banking services, there are also online-only banks—also referred to as Internet banks or direct banks—that have digitized the entire banking experience.
With these online-only banks, consumers can monitor their account transactions, transfer money between accounts, pay bills, and manage their spending—all with the click of a button.
Because online-only banks have low overhead costs, consumers tend to see perks in the form of fewer fees as well as higher interest rates on savings and checking accounts.
And consumers are eager to cash in on those perks. According to a 2013 report from TNS Global, deposits at the four largest direct banks have more than doubled over the past five years, a growth rate more than three times the industry average.
To decide if online-only banking is right for you, evaluate your banking needs and whether they align with an online bank’s services. To help you get started, consider the following online bank pro and con list:
Pros of an online-only bank
1. Higher interest rates
In general, online-only banks tend to offer higher interest rates on savings accounts and time deposits compared to their brick-and-mortar counterparts, Ross says.
A MoneyRates.com survey for the fourth quarter of 2013, for example, found that online accounts maintained a “significant advantage” over the rates of traditional branch-based accounts. The average online savings account rate was 0.539 percent, according to the survey, compared with 0.138 percent for traditional savings accounts.
An online-only bank could also offer a higher annual percentage yield (APY) on a checking account than a traditional bank, Ross says, but that will vary based on the bank.
Bankrate.com offers an online tool where consumers can compare interest rates in their area to help them determine if an online-only bank may offer the most competitive rates.
2. Fewer fees
If you have an account with a traditional bank, you may be charged a monthly service fee or a fee for not meeting the minimum balance requirement, among other banking fees.
Typically, Internet banks lack these types of fees, or charge lower fees, which could make them a good option if you only make small deposits into your account and maintain a low balance.
3. Around-the-clock customer service
If you work late into the evening, you may have trouble making it to your local bank before it shuts down for the day. In contrast, many online-only banks offer customer service 24/7, so you don’t have to adjust your schedule in order to speak with a customer service representative.
Cons of an online-only bank
1. Deposit difficulty
With an online-only bank, you lose the ability to walk into your neighborhood branch to deposit a check.
Instead, you may have to mail your check in order for it to be deposited, which could mean a longer wait for the funds to be made available in your account. However, some online-only banks now offer an electronic deposit option, which allows you to take a picture of the front and back of your check and upload it to your account.
If you do use a mobile deposit option, find out whether the online bank has any caps on how much you can deposit electronically, especially if you regularly deposit large checks.
2. Lack of face-to-face assistance
With all of the convenience and ease that online banking may bring, one drawback is the lack of opportunity for in-person communication or problem solving.
“You have to consider whether face-to-face interaction is important to you,” Ross suggests. Also consider your needs for a product such as a safe deposit box.
Some consumers enjoy getting to know the staff at their local branches or like learning about new products and services when they go in for a transaction. Face-to-face interaction with banking staff could be especially beneficial if you need help troubleshooting.
Evaluate your banking and technology situation
When it comes down to it, Ross recommends considering how comfortable you are with technology when deciding if an online bank makes sense for you. If you’re not tech-savvy, you may not be comfortable with the idea of Internet-only banking.
Ross says some consumers also worry about the security of online-only banks, but she notes that security is not an issue as long as you are banking with a reputable, FDIC-insured bank.
“Of course, you would want to use the same precautions as if you were online banking with a different type of bank,” she says. That means creating strong, unique passwords for bank accounts and not logging on to your account over public WiFi, which is not secure and is therefore easier for fraudsters and identity thieves to hack.
Regardless of whether you take your banking online or stick to a bank with brick-and-mortar locations, remember that your financial situation will probably change over time. Make sure you are equipped to manage your finances as they grow.
Joslin Woods is a researcher, writer, and Web producer at Think Glink Media, with a background in print and digital media. Previously, Joslin worked as a news reporter for the international news agency Agence France-Presse and as a freelance reporter for the Sun-Times News Group. She is a graduate of Vanderbilt University and Northwestern University, where she received a master’s degree in journalism.
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