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The Basics of Online Bank Accounts

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The Basics of Online Bank Accounts

When most people think of banking, they conjure up images of going down to their local bank branch and perhaps speaking with a teller to complete their financial transactions.

However, with the advent of the internet, a new breed of bank has cropped up: the Online Bank. But what are online bank accounts, what separates them from the traditional sort, and should you place your money there?

Today, many brick-and-mortar banks offer “online banking.” Online banking allows you to manage your money easily and safely online, without needing to contact a bank representative or visit a bank branch for each transaction you want to make. While this type of online banking is now offered by most traditional banks, this is simply a feature of the physical bank, rather than being done through an online bank. On the other hand, doing all of your banking online, via a virtual bank, is quite different.

What are Online Bank Accounts?

Because of the proliferation of safe and reliable internet access in this country, online bank accounts are becoming increasingly common. Online-only bank accounts often operate very similarly to the traditional neighborhood bank, and may be offered by your neighborhood bank or via an online-only bank. And because of the popularity—and low overhead costs for the banks—online banks can pass these savings on to their customers.

Online bank accounts come in a variety of types, including savings accounts, Checking accounts, interest bearing checking accounts, rewards checking accounts, Money Market accounts, or even a combination of these accounts.

Additionally, Online Savings and/or checking accounts are offered through such big names as Ally Bank, American Express, and ING Direct, to name a few.

Advantages and Disadvantages of Online Bank Accounts

The lack of physical presence creates both advantages and disadvantages for anyone who uses an online Bank Account.

Advantages

First, in order to entice customers, many of these accounts offer interest bearing accounts. Unlike traditional neighborhood banks that offer zero interest on checking, and very low interest on savings accounts, most online bank accounts offer higher rates of return. The result is that online account holders will earn more money on their account balances than people who only use traditional banks.

Second, it’s easy to manage your money when it’s all done online. And some online savings accounts even include calculators to help you save for specific goals.

Third, some online bank accounts offer low or no monthly fees, no minimum balances to open or maintain your account, and free debit cards and Checks.

Fourth, online bank accounts should be protected by the FDIC just like traditional banks. If you’re not sure whether the account you’re considering is covered, ask them.

Fifth, withdrawing funds is easy. You can transfer money from an online account, use bill-pay, set up automatic deductions from your account, etc. Many online bank accounts will give you a Debit Card that can be used to pay for items, as well as get cash from an ATM. Look for online bank accounts that include debit cards with access to plenty of ATM machines (for example, Ally Bank account users can get cash from over 400,000 ATMs nationwide).

And sixth, depositing money is often easy and quick. As technology improves, more and more online accounts allow you to deposit money faster than ever. Typically, there are several ways to deposit money into an online account:

  • Mail a check
  • Transfer money from another bank account into your online account
  • Direct deposit
  • Wire transfer your deposit
  • Some banks allow check scanning via a mobile app

Disadvantages

First, because these virtual banks don’t have bank branches, most transactions (like depositing money in and transferring money out) will be done online. If your internet is unreliable, or the bank’s website is not working properly, you may have to wait to access your money.

Second, rates change all the time. You may open an account at a virtual bank that offers a 1.0% APY Checking Account, and 6 months later that interest rate drops to 0.10%. Online banks reserve the right to change the rates they offer, which means that the best offer today may not be the best tomorrow.

Third, monthly fees may be lower with an online-only account than with a traditional bank, but other fees can easily outpace what you’ll be charged at your local bank. For example, many online savings accounts are linked to money market investment products which have a limit of six free transactions per statement cycle, after which account holders will have to pay a penalty fee for additional transactions. And if your bank ATM card isn’t widely accepted, except to pay for each cash withdrawal from non-network ATMs.

Fourth, when customer service at your neighborhood bank is unreliable, it can be annoying. However, when customer service for your online-only bank account is unreliable, it could leave you without access to your money and with no other course of action. This is one of the main reasons many people are hesitant about online banking, because when your banking is done solely online you can’t simply walk into a bank branch to “straighten things out.” It’s important to consider how important this aspect of banking is to you before considering opening any online-only check or Savings Account.

Should You Open an Online Account?

When considering an online account, make sure to compare across many options, like:

  • The interest rate, and how it’s determined
  • Is there a minimum deposit to open an account?
  • Is there a minimum balance to maintain once account is open?
  • The fee schedule, and how to avoid fees
  • Quality of customer service
  • Reputation of the bank
  • Whether they’re FDIC insured

Ultimately, whether you should open an online account should be based on your needs. If you want a relatively hassle-free savings or checking account, and are comfortable with conducting all of your banking online, there are many advantages to online-only bank accounts that brick-and-mortar banks simply cannot beat.

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