Online banking is a rapidly growing trend in the financial world, hailed as more convenient and efficient. Many individuals from Generation Z (typically born in the late 1990s to early 2010s) and Millennials are utilizing online banking.
But is online banking really the best way to manage your finances? Like anything, it comes with its own set of pros and cons. Understanding what online banking entails can help you determine if it’s the right choice for you.
Online banking operates entirely online, with no physical branch locations. All banking activities must be conducted through a website or mobile application. According to J.D. Power data, approximately 27% of consumers rely solely on online banking.
If you’re used to handling your finances through a traditional bank’s website, the concept of online banking isn’t too different. Online banking connects your bank account to a secure website or mobile app, just like a physical bank.
Through online banking, you can create a username and password to access your account. The bank links your username and password to your personal information.
To open an online bank account, you’ll need to provide essential documents, similar to other types of banks. These documents include:
• Photo identification
• Proof of address
• Social Security number
• Date of birth
These documents help online banks verify your identity. In most cases, you’ll need a valid local debit card to make transactions.
Once you’ve opened an account and deposited funds, you can conduct banking operations just like in a traditional bank. Online banking websites and apps come with built-in security measures to prevent unauthorized access to your account.
Online banks offer all the services of traditional banks, including:
• Checking accounts
• Savings accounts
• ATM access
• CDs (Certificates of Deposit)
• Money market accounts
The main difference between online banks and traditional banks lies in the lower management fees of online banks. Since online banks lack physical branches, they don’t incur branch maintenance fees. Therefore, online banks offer higher interest rates on savings accounts, CDs, and money market accounts.
Another distinction is that online banks generally have lower fees compared to traditional banks, with many not charging overdraft fees.
Similar to traditional banks, all deposits in online banks are insured by the Federal Deposit Insurance Corporation (FDIC), up to a maximum of $250,000, ensuring the safety of your funds.
It’s commonly found that savings account yields in online banks tend to be higher compared to traditional banks. Indeed, online banks offer significantly higher rates.
According to the Federal Deposit Insurance Corporation (FDIC) monthly report in March 2024, the average annual interest rate for traditional bank savings accounts was 0.46%. Unfortunately, this rate doesn’t keep up with the pace of inflation.
However, online banks do offer much higher interest rates compared to traditional banks. As of March 2024, some online banks offered the following savings account interest rates:
• Synchrony – Annual rate of 4.75%
• Brio Direct – Annual rate of 5.35%
• American Express National Bank – Annual rate of 4.35%
• CloudBank24/7 – Annual rate of 5.26%
• RBMAX – Annual rate of 5.20%
Apart from RBMAX, these banks do not charge monthly fees or require minimum deposit amounts.
One issue with online banking is how to deposit money. While there are several methods, some can be cumbersome.
You can transfer funds from a traditional bank to your online bank, the simplest method requiring the use of a traditional bank. If you’re using checks, you can utilize the mobile app of your online bank to deposit them by taking photos. However, depositing cash poses a bit of a challenge.
If your online bank has an ATM network, you can deposit cash via ATMs. Another method is to purchase a cashier’s check made out to yourself and deposit it using the online bank app. However, this requires physically going to a bank branch, store, or postal office, counteracting the purpose of online banking.
Another approach is to buy a prepaid debit card with cash, link it to your online bank account, and have the money directly deposited. However, there’s a $5 opening fee for this card and monthly maintenance fees.
There are various ways to withdraw money from online banks, but it’s admittedly not as straightforward as traditional banks.
You can use your online bank’s debit card for cashback transactions at merchants. If your online bank is part of an ATM network, you can withdraw money there.
You can also transfer money from the online bank to a traditional bank and withdraw from there, although this goes against the initial intent.
If you urgently need cash, you can request wire transfers from your online bank, though this may come with fees ranging from $10 to $30.
There are many factors to consider when deciding whether to use online banking, with one significant reason being inflation.
If you deposit money in a traditional bank with an interest rate of 0.46% and inflation rates exceeding 3%, you’d effectively lose money.
For day-to-day banking transactions, online banking may not be the most convenient as its primary function is savings. However, if you have funds sitting idle in a traditional bank’s savings, CD, or money market accounts, then online banking might be the best choice.
Remember, if you’re required to take out Required Minimum Distributions (RMD) and need to store that money, high-yield online savings or other accounts could be a good option.
The operation of online banks is essentially similar to traditional banks, though it may lack all the conveniences you’re accustomed to. However, it does provide a more cost-effective way to grow your savings. If you’re primarily focused on saving and seeking growth, then online banking might be worth considering.