There’s a very good chance you’ve done some online banking before, such as checking your account balance or reviewing bank statements on your bank’s app. But online banking isn’t the same as having an account with an exclusively online bank.
What are online banks?
Online banks are exactly what they sound like — banks that operate online and have no physical presence. A few examples include Discover, SoFi and Varo. These online institutions have bank charters and deposit insurance and can offer deposit accounts like checking and savings and sometimes lending options like credit cards.
There are also fintech companies that offer online banking services and products. Fintechs with banking services aren’t actual banks themselves. Instead, they partner with one or more FDIC-insured banks that issue cards and provide deposit insurance. An example of a banking fintech is Chime. Chime’s banking partners are The Bancorp Bank, N.A. and Stride Bank.
Are there any advantages to online banks over traditional ones?
Online banks have quite a few advantages over traditional banks.
Online banks and fintechs usually offer free bank accounts, because they don’t have to pay to maintain physical branches. Thanks to reduced operating costs, they can pass those savings on to their customers in the form of cheaper accounts compared to traditional banks.
Brick-and-mortar banks like Chase and PNC often charge customers monthly maintenance fees on checking and savings accounts, typically between $5 and $25 per month.
On that same note, online banks tend to offer significantly higher rates on savings accounts. It’s common to find an online savings account with APYs that are 10x higher than average. The average rate on a savings account is just 0.46%, according to the FDIC. SoFi’s savings account offers 4.60% APY if you set up direct deposit — an APY exactly 10x higher than average.
What’s the catch with online banks?
The main “catch” with online banks is you won’t get in-person customer support because there are no physical branches and you may not be able to deposit cash.
For nearly all online banks and fintechs, the number one complaint is the lack of customer support options or getting ghosted by the bank’s support team. Without physical branches, you’re forced to rely on communication methods like phone support, email, chatbots, or online forms.
And unless the online bank accepts cash deposits at ATMs or Green Dot retail locations, you’ll have to send cash to your account through ACH, mobile check deposits, or wire transfers.
With brick-and-mortar banks, you can just walk into a branch and talk to a real person to resolve minor issues and hand the banker cash to deposit. Additionally, if you frequent a specific branch in your area, there’s a good chance you’ll see the same bankers, and they’ll be familiar with you, making issue resolution and account management easy.
Online banks vs. traditional banks: Which should I choose?
The decision really depends on your priorities and needs. Making an online bank your primary bank can make a lot of sense if you:
- Haven’t visited a physical branch in a long time.
- Don’t often make cash deposits.
- Can use bank apps effectively.
- Prefer phone or online customer support.
- Want a fee-free bank account.
- Want a high-yield savings account.
If those don’t sound like you, you may want to choose a bank with physical locations and a more traditional approach to banking.
