Technology is shaking up the finance industry in a big way. Online-only bank accounts have started to surge in popularity and while bank branches aren’t a thing of the past yet, that could be the way they’re headed now that consumers can deposit checks, check balances and even open accounts via computer or smartphone.
Most of us prefer to do our banking online, in fact, a July 2020 survey of US consumers from Cornerstone Advisors found that 14.2 million Americans—6% of US adults with a checking account—now consider a digital bank to be their primary bank—a 67% jump from January 2020.
It comes as no surprise then, that today there are banks that exist entirely online. This type of 24/7 access makes things faster, easier, and more convenient than ever before. But before opening up an online-only account, it’s worth exploring the unique features and benefits of online banks, as well as how online banks actually work.
How online-only banks work
An online-only bank is not much different than a traditional bank except for the fact that it doesn’t have a physical, brick-and-mortar location. Online-only banks typically offer many of the same services as traditional banks including: electronic fund transfers (EFT), access to ATM machines, direct deposit, and the ability to make debit card purchases.
All your banking needs are managed exclusively via the web or mobile app, and with a simple internet connection or data from your phone, you have access to all your banking needs at any time of the day. There are several different categories and definitions that fall under this umbrella, including:
- Online-only banks or digital banks that offer conventional banking products and services, but in an online format.
- Fintech startups, also called challenger banks or “neobanks,” that offer financial services in innovative new ways for a tech-savvy consumer audience.
While both traditional banks and online-only banks have their respective pros and cons, online-only banks are quickly becoming the preferred method of the modern world, so let’s explore what online-only banks have to offer.
Online banking services and features
Online banks offer many of the same services provided by traditional banks—sometimes even a few more. Every online bank is different but these are the most common services and features available.
Online banking security
You work hard for your money, so naturally you want to be certain that your banking institution will keep your money safe. When considering an online-only bank, look for the security measures it has in place. Many online banks have things like multi-factor authentication, SSL encryption, the use of firewalls, and the requirement of using secure browsers, to keep your data under lock and key and safe from hackers.
To be sure your bank is legitimate, look for a bank that is FDIC-insured. The Federal Deposit Insurance Corporation (FDIC) helps insure your deposit accounts (checking, savings, money market accounts and CDs) against bank failure, protecting you for up to $250,000 per account, in FDIC member institutions.
In short, before opening an online-only bank account, ensure you read their security features so you know your money is protected and check to see if it’s FDIC-insured.
Access to ATM machines
Despite the move to make everything paperless and online, sometimes you might still need to physically access cash. Luckily, switching to an online-only bank does not mean you lose out on ATM services. Several online banks maintain relationships with ATMs or ATM networks and offer a method of easily locating ATMs via their banking app. Unlike traditional banks, which often charge customers a fee for using an out-of-network ATM, most online banks don’t charge any ATM fees at all, or they offer reimbursement for any fees incurred.
High-yield savings accounts
Because online banks don’t have the same overhead costs as banks with physical branches, some offer Annual Percentage Yields (APY) that are typically higher than ones you’ll find at traditional banks. So the money you put into an online savings account is going to build your savings at a faster rate than a traditional bank savings account. For example, as of October 2020, some of the best online savings accounts were offering APY rates of .80%, 1.00% and even as high as 2.80%—in comparison, according to the FDIC, the national average interest rate of a traditional savings account is just 0.05%.
Make sure you understand the rules and requirements for your account in order to qualify for the best APY rate. Some high-yield savings accounts will require a higher minimum deposit to open the account, and ongoing automatic monthly deposit to be made into the account or a minimum balance to be maintained in the account.
Little to no fees
Did you know Americans pay an average of $329 a year on bank fees? That’s a lot of wasted wages. Fortunately, banking with no hidden fees has gotten a lot easier with the rise of online-only banks. As mentioned above, the low overhead costs of online banks mean that they can reduce fees and increase interest rates on checking and savings accounts. But that’s not all, in addition to fee-free ATMs, with an online bank account you can also save on monthly service fees, overdraft fees, minimum deposits, and fees associated with paying by check or debit card—to name a few.
Financial management tools
Some online banks offer unique financial management tools—many in the form of apps—that provide fun new ways to help you save money or handle your monthly budget. There are several money-saving fintech apps that offer specific ways to help users save more money, such as: Qapital, Digit, and Qoins.
Things to consider before switching to an online-only bank
If you are considering a digital-only bank, ask yourself the following questions.
- What services are you looking for? Payment tools, checking and savings account, money management tools?
- How secure is your information? Who is the information shared with? What protections are in place to protect your account if you lose your debit card or mobile device, or if your account is compromised by phishing or hacker?
- What customer support do they offer? Can you talk to a person either by phone or chat 24/7? Do you have to submit a written request?
- How can you deposit cash? Not all providers provide a way to do so.
- Are the ATM locations convenient for you?
- How important is in-person service to you?
How to open an online bank account
Opening an online bank account is pretty simple and can be done instantly from the comfort of your home.
First you will want to apply for an online bank account and download their mobile app. Simply go to the site or app of the online bank account, fill out the application, and then provide your personal information and verification. Once you apply you’ll want to set up direct deposit to fund your account.
If you’re worried about how much money you need to open a bank account, consider an online bank account service like Chime that has no monthly fees, no overdraft fees, and no minimum balances. You can open an online bank account through Chime in 3 simple steps.