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What is Online Banking and How Does It Work?

Choncé Maddox • November 19, 2024

In today’s fast-paced world, convenience is key. And what could be more convenient than managing your finances at your fingertips? From high-yield savings accounts to features like mobile check deposit and free ATM withdrawals, online banks have a lot to offer.

This type of 24/7 access makes things faster, easier, and more convenient than ever before. But before opening up an online bank account, it’s worth exploring the unique features and benefits of online banking, as well as how online banking actually works.

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How does online banking work?

So what is online banking? An online bank is not much different from a traditional bank except that it doesn’t have a physical, brick-and-mortar location. Online 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.¹

All your banking needs are managed exclusively via the web or mobile app. You have access to all your internet banking needs at any time of the day through your computer or phone. 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,” offer financial services in innovative new ways for a tech-savvy consumer audience.

While both traditional banks and online banks have their respective pros and cons, online banks are very useful. Let’s explore what online banks have to offer.

Online banking services and features

Online banking isn’t just about checking your balance. It’s a full range of services designed to make financial management easier. Every online bank is different but here are some of the common services and features available.

  • Mobile check deposit: Mobile check deposit lets you deposit checks directly into your account using your smartphone camera.
  • Budgeting tools: Many banks also provide budgeting tools and spending trackers to help you manage your expenses. These tools often categorize your transactions automatically, giving you insights into your spending habits.
  • Easy automatic payments: Online banking platforms typically offer the ability to set up automatic payments for recurring bills, reducing the risk of missed payments.
  • Digital payment systems: Some banks even integrate with digital payment systems like Apple Pay or Google Wallet, allowing for seamless transactions online and in-store.²

Online banking pros

Unlike traditional banks, online banks often prioritize user-friendly digital platforms, offering a range of features designed to save time and reduce costs. Let’s look at some of the key benefits that make online banking a beneficial choice for some people.

  • Convenience: With online banking, you can manage your finances from the comfort of your home or on the go. Whether you’re transferring funds, paying bills, or checking your balance, these tasks can be completed in a few clicks without needing to visit a branch.
  • Speed and efficiency: Online banks streamline routine tasks like depositing checks and making payments allowing you to complete transactions faster than at a traditional bank.
  • Low fees: Online banks tend to have fewer overhead costs than brick-and-mortar institutions, which means they often pass these savings on to customers. This typically translates into lower fees, such as reduced ATM fees, minimal maintenance charges, and fewer account service fees.³
  • Higher interest rates: Since online banks save money on physical locations, many offer higher interest rates on savings accounts and CDs to attract customers.³ This can be a huge advantage if you’re looking to grow your savings.
  • 24/7 access: Unlike traditional banks, which have limited hours, online banking is available around the clock. This means you can handle financial tasks whenever it’s convenient for you, especially if you’re juggling a busy schedule or nontraditional working hours.

Online banking cons

While online banking offers many advantages, it also has a few potential downsides that may be important to consider. Here are some key drawbacks of online banks to help you decide if this option aligns with your banking needs.

  • Limited physical access: Online banks generally lack branch locations, which can be inconvenient if you need face-to-face assistance for more complex issues.
  • Technical issues and downtime: Relying on a digital platform means that any technical issues or website maintenance could temporarily limit access to your accounts.
  • Security and privacy concerns: Online banking requires sharing and managing sensitive information over the internet, which can raise security concerns. Although online banks use advanced encryption to protect accounts, there’s still a risk of cyber threats like phishing attacks or data breaches.
  • Potential learning curve: For those who are less familiar with digital banking or who prefer traditional methods, there may be a learning curve when switching to an online bank. Adjusting to a new interface, navigating digital features, or troubleshooting issues on your own can be challenging without in-person assistance.

Should you open an online bank account?

Deciding whether to open an online bank account depends on your personal needs and preferences. If you value convenience and cost-effectiveness and are comfortable with digital technology, online banking could be a great fit.

Here are some key questions to ask yourself to help you decide.

  • What services are you looking for? Different banks offer different features and benefits, so identify what’s most important to you. Are you looking for a basic checking account, or do you need a savings account with a competitive interest rate? Or maybe you’re interested in credit card offers or loans.
  • How secure is your information? ​​Understanding the bank’s security measures can give you peace of mind. Investigate their track record in handling data breaches and how quickly they respond to potential threats. A bank with a solid reputation for security is more likely to protect your personal and financial information effectively.
  • What customer support do they offer? Assess the quality of customer service provided by the online bank. Do they offer multiple channels for assistance, such as phone, chat, or email support? Are they available 24/7, or do they have limited hours?
  • How can you deposit cash? Some online banks have partnerships with networks of ATMs that allow cash deposits.⁴ Check if there are ATMs near your location that support this feature.
  • Are the ATM locations convenient for you? While online banks often have partnerships with ATM networks, make sure that these ATMs are conveniently located for you, and beware of out-of-network ATM fees.
  • How important is in-person service to you? Consider your comfort level with conducting all banking activities digitally. If you prefer the reassurance of speaking with a banker in person, weigh the importance of in-person service against the convenience and benefits offered by online banks.

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 three simple steps.

Find out if online banking is the right experience for you

Whether you’re looking to simplify your financial routine or wish to explore the modern conveniences of managing your money online using the latest technology, online banking can bring a world of convenience to managing your finances.

As with any financial decision though, you’ll have to weigh the pros and cons of electronic banking based to see if the benefits outweigh the drawbacks and how to manage any aspects that you may not like. Knowing what you’re looking for in an online bank account can help you choose a bank that meets your needs so that you can stick with it long term.

FAQs

What is the difference between a bank and an online bank?

Traditional banks have physical branches where customers can conduct their banking activities in person, while online banks operate primarily through digital platforms. Online banks offer a range of services and features that cater to modern banking needs, such as enhanced security measures and convenient tools for managing finances.

What are two good reasons to not use online banking?

Some people may prefer traditional banking methods due to a lack of trust in online security or a preference for face-to-face interactions. Others may not have regular access to the internet or may struggle with adapting to new technology, making online banking less convenient for them. Ultimately, each person’s individual needs and preferences should be considered when deciding whether or not to use online banking.

Can you deposit cash if you have an online bank?

It depends on the specific online bank and its policies. Some online banks have partnerships with ATM networks that allow for cash deposits, while others may offer mobile check deposit services.⁴ In that case, you can connect a separate external bank account to transfer funds from.

Easy online banking
  • Checking Account with no monthly fees
  • 50,000+ fee-free ATMs~
  • Chime Visa® Debit Card
Get Started