Advantages and Disadvantages of Online banks

What Is Online Banking?

Online banking is a process of understanding and managing your bank accounts via the internet using a computer or mobile device. Hence it is also known as internet banking or net banking or web banking or digital banking. Through the electronic payment system users are unable to access and perform a wide range of financial and non-financial transactions such as transferring funds, depositing checks and paying bills without the need to visit the financial institutions branch

Traditional banks and credit unions with branches typically let customers access their accounts via the internet, too. But online banks and providers offer primarily mobile access. You won’t meet a banker face to face, but with a mobile device or computer, you can reach your account anytime. Here's a closer look at online banks.

Today, practically all banks and credit unions offer online access with bill payment, cash transfers and other services. Every major bank has its own app, too. Some of the online features banks offer are incredibly slick and convenient, such as remote deposit capture, where you can take a picture of an endorsed check with your Smartphone and move it to your account.

An online bank offers the same types of products and services as a traditional bank – it just doesn't have physical bank branches to visit and bank tellers to interact with. With this lower overhead, online banks typically offer much higher interest rates on deposit accounts than traditional banks.

Can You Open a Bank Account Online?

It's a straightforward process to open a bank account online. Here's how you do it:

Go to the bank's website. There, you'll find a button or link that sends you to an account-opening page.
Make sure you have the necessary documentation handy. You'll need your Social Security number, a valid form of identification such as a U.S. driver's license or other government-issued ID, a U.S. address for a physical residence (not a P.O. box), and proof that you're a U.S. citizen or resident alien.
Create an application login. You will need to pick a username.
Pick the account type. If it's a joint account, you'll need the above documentation for the other account holder as well.
Fill out the application.

To deposit money from another bank account to open the new one, you will need debit card information or routing and account numbers. Your checking account routing and account numbers (in that order) are on the bottom of your check.

Do you have to open the bank account online, or can you do it over the phone?

Online banks will have a customer service line you can call to get help with opening an account. In many cases, you can open the account over the phone as well. If in doubt, ask as soon as you reach a customer service representative.

How much do you need for your first deposit?

Many online banks do not require a minimum account balance nor will they charge you any fees, even if you keep just one dollar in the account. Even if there is no minimum, the bank will often ask you to start with at least $25.

How do you get the funds to the bank?

If you have another bank account, you can transfer the money into your new account. If you don't, it's trickier; after all, you can't send cash over the internet. But some banks may work with you to remotely deposit a money order via their app. In that case, it's smart to work with a customer service representative or online banker as you go.

How can I access my funds once they're in the account?

If you're opening a checking account, you can usually write checks just as you would at any other bank. Online banks also have debit cards that you can use at ATMs or to get cash back at retailers. You could also transfer your funds to another bank account you can access.

Best Online Bank Savings Account Interest Rates

As of July 17, 2023, the national average rate for savings accounts was 0.42%, according to the FDIC. The best CD accounts also a place to earn competitive APYs.

Are Online Banks Safe?

Online banks are insured by the Federal Deposit Insurance Corp., just like brick-and-mortar banks. With online credit union accounts, the National Credit Union Administration serves a function similar to the FDIC.

Are online banks more vulnerable to hacking?

An online bank is vulnerable to hacking – just like any other business that operates online. It's important to verify your online bank has robust internet security measures, has its accounts FDIC or NCUA insured, and has never made headlines for careless data mishaps.

How do you protect yourself while banking online?

Avoid phishing scams. If your bank is asking you to reset your online password, be careful. Check the sender's email address and when in doubt, give the bank a call.
Use biometrics whenever possible. Some mobile banking apps offer biometric authentication, which allows you to confirm your identity using a unique physical trait, such as your voice, thumbprint or facial scan.
Keep an eye out for alerts. Banks have sophisticated fraud-monitoring services. Sign up to receive alerts about unusual activity on your account.
Protect yourself while banking in public. Always protect your password information when you use your mobile banking app in public places. Treat mobile banking on the go as you would any private phone call. Avoid conducting banking business when you are on public Wi-Fi, especially if the network isn't password protected.

Online Banking Features

"I think it is important to look for an account that offers no minimums, no fees and FDIC insurance," says Kristian Finfrock, founder and financial advisor at Madison, Wisconsin-based Retirement Income Strategies.

Consider these nine features when looking for the online bank that's right for you:

Ease of opening accounts. Provided you have the necessary documents handy, you should be able to open an online account in minutes.
Customer service availability. Zero branches should never equal zero customer service. Check for easy phone access and extensive hours for live chat and call-in help. Having an online banker you can pick is also a bonus.
High customer service ratings. You can find customer service ratings from the Better Business Bureau or Trustpilot, but note that smaller institutions might have fewer reviews.
Zero fees. The best online banks will scrap fees for monthly service charges and minimum account balances and reimburse ATM fees.
Ease of making deposits. Taking a front-and-back picture of a check with your smartphone and depositing it should take no more than two minutes. You'll also want nearby ATMs that can accept cash deposits.
Higher interest rates on checking and savings. In general, online banks will beat brick-and-mortar institutions. But among online and mobile banks themselves, there's healthy competition for your business. Shop the rates to get your best deal.
Lower interest on loans and credit-related products. Online banks often are quite competitive with traditional banks and credit unions, but be sure to shop around.
Variety of products. Online banks should give you options beyond checking and savings accounts. See whether the bank offers mortgages, home improvement loans, auto loans, credit cards and more.
Peace of mind. There's no point in joining forces with an online bank if you'll always worry about the safety of your money. Remember that all online banks and banking sites are vulnerable to hackers, but some do a better job keeping you abreast of their security measures than others.

What are best Online Banks?

The best online banks offer the combination of features that you are looking for. Consider what’s important to you: Do you want ATMs close to your home or office? Are you seeking a high-interest savings account? Do you want an institution that also offers home loans and credit cards? Compare a few banks before making a decision.

Advantages and Disadvantages of Online banks

Advantages of Online banks:

Better rates. With fewer expenses focused on branch operations, online banks have a distinct edge in offering a better annual percentage yield. According to the FDIC, the average savings account was earning a 0.3% APY in December 2022. Many online banks were offering savings accounts with rates higher than 3% APY at the same time.
Lower or no fees. It's common that online banks charge no monthly maintenance fees, require no minimum balance, charge no overdraft fees and will reimburse your ATM fees. While traditional banks do sometimes waive fees, there are generally more fees that are harder to avoid.

Disadvantages of Online banks:

Lack of face-to-face contact. That's a problem when you need a banker to answer more complex financial questions that can't be addressed via touch screen. Some online banks, however, work with individual bankers you can choose from. It's not that online banks necessarily have worse customer service – they offer mobile chat and call centers – but you might still covet that branch experience when the need strikes you.
Lack of track record. Considering that the oldest online-only bank in operation is just 20 years old, that's hardly a match for traditional institutions such as Capital One (1988), Bank of America (with roots dating to 1904) or The Bank of New York Mellon (1784, founded by Alexander Hamilton).

Do Online Banks Have ATM Availability?

Online banks do not have their own ATMs branded with the bank's name. That could leave you vulnerable to ATM fees, unless the online institution has an agreement with an ATM network or the bank reimburses fees.

Savvy online banks also allow you to use map locators to find fee-free ATMs. When you enter a ZIP code or street address, this map from Ally Bank can locate ATMs in your vicinity. Digital Federal Credit Union's ATM locator indicates which ATMs are fee-free, which belong to its branch network and which take deposits.