What is Online Banking and How Does It 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 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

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.

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.

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.

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.