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Online banking has come a long way since the first online-only bank (aptly named First Internet Bank) debuted in 1999. Today, offerings at many online-only banks go far beyond standard savings and checking accounts. Some online banks provide services including auto and home loans, certificates of deposit and investment accounts, but they typically don't offer more than a traditional bank does.
What Products and Services Can You Get From an Online Bank?
While not all online banks provide the same services, many offer the following options:
- Checking accounts used for day-to-day spending and paying bills. Like checking accounts at traditional banks, they generally offer debit cards and the option to order paper checks.
- Savings accounts, which can house emergency funds and money for long-term goals such as buying a home. Savings accounts at online-only banks offer some of the highest annual percentage yields (APYs) around.
- Money market accounts, which combine the interest-earning features of a savings account with the check-writing capability of a checking account.
- Certificates of deposit (CDs), special savings accounts that generally offer higher APYs than traditional savings accounts for a set time period. However, if you withdraw money from a CD before it matures, you'll usually pay a penalty.
- Credit cards, with options including rewards cards, student credit cards and secured credit cards.
- Loans, including personal loans, auto loans, mortgage loans and even student loans.
- Investment accounts with options ranging from self-directed trading to robo-advisors or even personal financial advisors.
- Business banking services such as business checking and savings accounts and small business loans.
- ATM access at online-only banks is typically provided through partnerships with ATM networks you can use to deposit or withdraw cash. Online banks may even cover part or all of the fees you pay for using non-network ATMs.
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Does Online Banking Provide More Options Than Traditional Banking?
Online banks and traditional banks offer many of the same products and services. However, traditional banks still have a slight edge, because only they can provide services requiring physical locations or in-person transactions. These include safe deposit boxes, cashier's checks, money orders and in-person assistance or advice from tellers and bankers. In addition, many traditional banks have enhanced their digital banking features in the past few years and feature sophisticated online and mobile banking capabilities equal to those of online-only banks.
| Traditional Bank vs. Online Bank | ||
|---|---|---|
| Traditional Bank | Online Bank | |
| Types of accounts offered | Checking, savings, CD, money market, business accounts | Checking, savings, CD, money market, business accounts |
| Credit products offered | Mortgages, personal loans, auto loans, credit cards | Mortgages, personal loans, auto loans, credit cards |
| Investment options | Yes | Sometimes |
| Safe deposit boxes | Yes | No |
| Money orders | Yes | No |
| Cashier's checks | Yes | No |
| Foreign currency exchange | Yes | No |
| Customer service options | Chat, phone and in person | Chat and phone |
| Ability to deposit cash | Yes | Sometimes |
| Ability to withdraw cash | Yes | Yes |
Pros and Cons of Banking With an Online Bank
Using an online bank as your primary bank has its benefits and drawbacks.
Pros of Banking With an Online Bank
- Few or no fees: Because they lack the high overhead of traditional banks that maintain physical locations, online-only banks can pass the savings on to their customers in the form of minimal or no fees.
- Higher APYs: Lower expenses for online banks allow them to offer higher rates on your savings—sometimes up to 10 times higher than traditional banks' rates.
- Security: If the online bank is protected by Federal Deposit Insurance Corp. (FDIC) insurance, money in your accounts is guaranteed against bank failure, up to $250,000 per depositor, ownership category and institution. You can check the bank's website or use the FDIC's BankFind tool to see if it is FDIC-insured.
Cons of Banking With an Online Bank
- Requires internet access: Online-only banks may not be ideal if you live in a rural community or other area where internet access is unreliable.
- Technical problems can restrict access: When the online bank's website or mobile app aren't working or site maintenance is being performed, you won't be able to access your money, move funds or pay bills.
- Fewer options for depositing cash: If you prefer depositing cash with a teller, you won't have that option with an online-only bank. Many online banks let you deposit cash at their partner ATMs, but some do not. In this case, depositing cash might require multiple steps, such as putting the cash in an account at a physical bank and transferring it to the online bank via online or wire transfer.
- Limited customer service: Online banks encourage self-service with FAQs and guides. Customer service via phone or live chat is often available 24/7, although some online banks have shorter customer service hours. If face-to-face interaction or developing a relationship with a banker is important to you, a traditional bank may be a better fit.
How to Choose a Bank
Whether you're considering an online bank, a traditional bank or trying to decide between the two, these steps will help you choose the right bank.
- Decide which banking services you need. This will help you narrow down your options. For example, if you need a safe deposit box, love chatting with tellers or frequently deposit large amounts of cash, you'll want a traditional bank.
- Evaluate fees. Check the fine print of a bank's website to clarify maintenance fees, overdraft fees and ATM fees. If there are minimum balance requirements to avoid fees, consider whether you can meet them.
- Compare interest rates. Use APYs to calculate how much your money might earn at different banks and in different types of accounts. The difference between a 0.45% APY and a 5% APY can be significant.
- Check restrictions. Banks sometimes restrict the number of withdrawals you can make from a savings account each month without paying a fee. They may also limit how much cash you can withdraw from or deposit to ATMs in one day.
- Compare features. Consider the features and convenience the bank's website and mobile banking app offer. Perks such as introductory bonuses for opening an account or rewards for using your debit card can be the icing on the cake when comparing banks.
The Bottom Line
Both online and traditional banks have a lot to offer. Closing an account at one bank to move your money to a new financial institution won't affect your credit score, because banks don't report account activity to credit reporting agencies. However, if the account has a negative balance—for example, from unpaid bank fees—the bank may send your account to collections, which can cause a substantial drop in your credit score.
Maintaining good financial habits, keeping tabs on your bank account and promptly handling any fees will help you avoid potential harm to your credit. Also consider signing up for free credit monitoring from Experian. You'll get alerts of important changes to your credit report and score so you can act quickly to prevent problems.