Online banks offer much higher interest rates for keeping your money there. They're also safe and easy to use. But don't quit your physical bank just yet.
An online bank is not much different than a traditional bank except for the fact that it doesn’t always have a physical, brick-and-mortar location. You can still deposit and spend the money you keep in an online bank, and depending on the type of account, your money could also earn interest.
There are online-only banks (also called “internet banks”) and banks that mostly exist online but which may have a handful of branches in the real world. You can also choose between an online bank and an online credit union.
Online banks have several major advantages over their brick-and-mortar cousins. For one, they typically offer higher interest rates than non-online banks for the same type of savings account. Many online banks also offer interest on their checking accounts, which is rarely a benefit of traditional banks.
For other purposes, like writing a check to pay the rent, some types of online banks may not be sufficient. The most advantageous way to hold your money might be to have both an online bank and a traditional bank.
Online banks are convenient and often offer lower fees and higher rates of interest, but by their nature may have limited physical access, so they're not right for everyone. Here are the advantages and disadvantages of using an online bank.
There are several pros and cons of using an online bank instead of a traditional bank with physical branch locations. Whether you should choose an online bank or a brick-and-mortar bank may come down to your personal needs and financial goals.
To sign up for an online bank, all you need is your Social Security number, if you’re an American citizen, or a tax ID number if you’re a permanent resident. You may sometimes have to submit a photo of your driver’s license or other form of identification. You can also choose whether you need a checking account, or a savings account, including personal savings accounts, money market accounts, or certificates of deposit.
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Online banks work just like traditional banks. Depending on the type of account, you can use a debit or ATM card to spend or withdraw the money. You can also transfer money from another checking or savings account to your online bank account and deposit checks using an app. Some online banks also let you draw against the count from a paper check and will even send you free checkbooks – but not all online banks allow this, so be sure to look for this feature if check writing is important for you.
Because they don’t have to spend overhead on maintaining physical locations, internet banks are frequently able to offer the highest interest rates for checking and savings accounts. Online-bank interest rates, expressed as the annual percentage yield (APY), may exceed those of brick-and-mortar by more than 1%. That may seem small, but it adds up fast.
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Online banks typically don’t have any kind of presence in the nondigital world, including ATMs. However, they belong to a vast network of ATMs administered by a third-party company, meaning that you can use your debit card or ATM at between 20,000 and 60,000 ATMs worldwide.
If you need to use another financial institution’s ATM, your online bank may reimburse you for any fees you incur doing so.
Some online banks will allow you to receive a cashier’s check by mail. You can even use expedited delivery.
Technology hasn’t quite caught up with banking, so internet banks don’t always come out ahead when comparing the pros and cons. In some ways, the disadvantages of online banks are not reasons to avoid them, but they do suggest that having an account a traditional bank may complement your online bank accounts.
Although setting up an online bank is easy, you have to transfer the money in from somewhere. The easiest way to do so is an electronic transfer from your current traditional bank to the online bank.
Not only do online savings accounts have the same six-transaction limit as traditional-bank savings accounts; they also may limit how much you can withdraw from an ATM. A common withdrawal limit is $1,000 per day, so if an online bank is your only cash account then you could be in a rut during an emergency.
Because online-only banks don’t have their own unique ATMs, there’s no way to deposit cash. Some online banks that have minimal real-life presences may be more useful for you if you frequently carry bills.
Not being able to exchange your U.S. dollars for another country’s currency at a bank is a huge inconvenience for some. However, online banks may make up for this by offering free ATM usage abroad as well as reimbursement of exchange fees.
The Federal Deposit Insurance Corporation, a government agency, insures up to $250,000 of every checking and savings account in FDIC-insured banks. (The National Credit Union Association, or NCUA, does the same thing for credit unions.) Online banks are also backed by this guarantee, but double-check the website to make sure.
Because online-only banks exist entirely at a web address, you might believe that they’re more susceptible to being hacked. However, there’s no more risk of losing your money to a hacker at an online bank than at a traditional bank. Both traditional banks and online banks use largely the same security protocols.
While most online banks exist entirely online, some do have limited physical locations. Others are a part of larger financial institutions that many people only interact with virtually anyway, such as when swiping a credit card.
While the following list looks at several different online banks, it is by no means all-inclusive. Also, note that this list doesn’t include traditional banks that happen to have an online banking service, as virtually all banks allow you to do banking online.
|Bank||Type of bank||Notes|
|Alliant||Online-only credit union|
|American Express National Bank||Financial services firm|
|Barclays||Financial services firm|
|Capital One 360||Financial services firm||Branch locations available in some states|
|Discover||Financial services firm|
|First Internet Bank||Online-only bank|
|Marcus by Goldman Sachs||Financial services firm|
USAA also offers online banking services if you’re a military member, a veteran, or family to someone who is. You can also get life insurance and car insurance from them, too, for maximum protection of your financial plan.
Zack Sigel is a SEO managing editor at Policygenius. He covers personal finance, comprising mortgages, investing, deposit accounts, and more. His previous work included writing about film and music.
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