Online banks are banks that operate solely over the internet. These banks don’t have a physical location that you can visit. Instead, you interact with the bank through a website or occasionally over-the-phone.
Though you may be skeptical of online banks because you can’t walk in and talk to someone, most have a solid reputation and are insured through the FDIC (the government agency that insures deposits at enrolled banks).
I use both a traditional bank and an online bank (I use ING Direct), allowing me to get the best of both worlds. I’ll explain more about how to do this in another article.
Here’s why you should open up an online bank account.
Earn more interest on your money.
Arguably, the biggest benefit of an online bank account is the ability to earn more interest. In general, online bank accounts have higher interest rates than their brick-and-mortar counterparts. While you’ll typically earn less than 1% per year on a traditional saving account, online banks have been known to offer interest rates as high as 5% (back when the economy was doing good). The higher interest rate means you’ll earn more interest on the money you keep in the bank.
For example, if you deposit $2,000 into a regular savings account at .30% APY (annual percentage yield), you would earn $6 on the balance after a year. But, if you leave the money in an online savings account with 1.55% APY, you’d earn $31.
That’s an increase of more than 400%! Of course, the more money you save, and the longer you save it, the more interest you earn on your balance. Once the economy turns around, we might see higher interest rates on online bank accounts.
You can easily transfer money between accounts.
Online accounts only receive and payout funds through electronic transfers, so they make it easier for you to send money from one account to the other.
Traditional savings and checking accounts often have a cumbersome money transfer process that can get expensive if you transfer money often. Even with an online bank account, you may be limited to a certain number of transfer per month, so make sure you read the fine print for the account.
Pay lower fees on your account.
Because online banks don’t have the overhead costs of traditional banks, they can afford to charge fewer fees. In fact, most online accounts are completely free. There’s no fee to open the account, no fee to transfer money between accounts, and no fee to access your account.
You may, however, have a fee associated with using ATM to withdraw cash from your account. That is, if you have an account with an ATM card.
The money is less accessible (if you want it to be).
It’s easier to resist the temptation to spend your money when the money isn’t physically in front of you. If you want to put money somewhere that you can’t get to it so easily, an online bank is an excellent choice. You can’t just drive up to the local branch and withdraw funds, so you’re forced to think twice about pulling money out of your account.
This is great if you have a savings goal to meet, like an building an emergency fund or saving for college.
This isn’t to say that the money is completely inaccessable. I use ING Direct, and get to use free ATMs all over the nation. But if you need the “self-control help”, you can make saving money that much easier.
Make your savings completely automatic.
I don’t want to turn this into a commercial for ING Direct, but they have a button on their website that allows you to make saving money automatic. You tell them how much to save, and they’ll automatically do the saving for you.
You don’t have to budget it into account anymore — you’ll never have to think about saving money again.
To learn more about how to do this, check out How to Save Money Automatically.
You can manage your account online.
We’re spending increasing amounts of time online. Wouldn’t it be easier to manage your account over the internet rather than waiting for paper account statements to come in the mail? With online bank accounts, you do everything you need with your account right on the internet from the comfort of your own home.
You’re not subject to traditional business hours.
One of the problems with traditional banks is that they’re open at the same time that you’re at work. So, you have to take time out of your busy work day to visit or even call the bank. Not the case with online banks. Since you have the ability to manage your account online, you can access it and make changes 24/7.
A Minor Drawbacks
There may be delays in processing your transactions. Even though online banks operate electronically, not everything is instantaneous. You might experience some delays with funds showing up into your account or debits being withdrawn from your account.
This could cause a difference in your “posted” balance and your “available” balance, so double check to be sure you’re not spending money that really isn’t there.
The Advantages Outweigh the Disadvantages
You may have grown comfortable with your money in your trusty local bank, but what has your bank done for you lately? Charged you for moving your money to another account? Paid you a paltry 10 cents in interest this period?
While traditional banks still offer some perks, like rewards for using your check card, online banks have benefits that outweigh those from brick-and-mortar banks.
Online banking has changed the face of how we stash our money. It’s easier to watch our expenses, save money, manage money and take control of our financial future. To learn more, read the rest of our articles in the series Online Banking: A Complete Guide to Online Bank Accounts.
To read up on the best online bank accounts for saving money, check out our online savings account article, which lists the best — including ING Direct, of course.