What You Need to Know About Online Banks

Online banking has become quite popular due to the conveniences and features it offers, but some drawbacks keep many people from making the leap. Are the relative advantages and disadvantages of an online bank right for you?

Online banks like Ally and Capital One are gaining major popularity among consumers — with 10% of the total overall deposits in the United States in late 2019 according to Reuters.

So why are online banks doing so well, despite the lack of in-person locations and lack of traditional banking avenues?

In this article

    Online banks vs. traditional banks

    An online bank is one in which you perform all of your banking services online, through an ATM or via a customer service phone call. Online banks do not have physical branch locations — which lowers overhead costs. These savings in overhead costs are passed to the customer via higher interest rates on deposits like savings and certificates of deposit.

    On the other hand, traditional banks have plenty of branches where customers can visit and get in-person help. This usually means higher overhead costs, and those costs end up falling on the customer in the form of higher loan rates and lower deposit interest rates.

    For many customers, there’s a significant drawback in online banks having no physical brances, as local branches are the main place where they conduct their banking business. How do online banks make up for that?

    In short, they offer a bunch of features that exceed what traditional banks offer.

    Pros and cons of online banks vs. traditional banks

    Pros of online banksHigher deposit rates
    Low fees
    Cons of online banksNo in-person service
    No cash deposits
    Pros of traditional banksIn-person service available
    Cash deposits and notary services
    Cons of traditional banksLower deposit rates
    More fees

    6 things that make a great online bank

    Low fees

    One of the biggest advantages of most online banks is that there are few to no fees. Almost every online bank offers a fee-free checking account without a minimum balance. They usually keep ATM fees very low and many online banks actually reimburse fees charged when you use ATMs owned by other banks. Some offer low or no overdraft fees as well.

    If you find that you’re constantly getting dinged with fees from your local bank, most online banks will seem quite appealing.

    [ Read: The 10 Biggest Credit Unions in America ]

    Excellent online banking services

    Online-only banks typically have stellar online banking experiences — obviously, since that’s your main way of doing business with the bank. Almost all online banks offer simple online bill pay tools, easy access to your statements and tons of online tools already in place for most tasks that you might do at a branch location.

    For most banking customers who generally accrue few or no fees through a traditional bank, the online banking service is the real advantage of online banking. Some online banks, such as Ally Bank, offer incredibly well-designed online banking experiences on the web and in the form of smartphone apps.

    A wide ATM network

    Most online banks are part of a large network of fee-free ATMs where you can withdraw and deposit money easily. You can usually find a convenient tool on the bank’s website to help you locate these ATMs. This is an important feature because of the lack of local branches to do business.

    In addition, many online banks offer reimbursement for ATM fees charged to you by other banks when you use those out-of-network ATMs, usually up to a small dollar amount per month. 

    FDIC insurance

    This is a pretty standard feature at all banks in the United States, both online and off, but it’s something you should look for anyway. Look for the FDIC logo on the website and check here to make sure the bank is registered with the FDIC.

    Why is FDIC insurance so important? It guarantees the balance of your accounts against the failure of the bank, up to $250,000. Without FDIC insurance, if the bank were to fail, you’d strongly risk losing all the money in your accounts.

    Good customer service

    Most online banks make up for not having physical branches by instead having strong customer service by phone and e-chat. Almost all banking services you might think of are already available via easy online forms, and when that’s not enough, it’s usually easy to contact customer service representatives.

    Most negative reviews of banks revolve around customer service, and larger banks always have more reviews, so you likely won’t find a bank that doesn’t have some complaints. However, with online banks, the volume of the complaints is usually low compared to similarly sized banks that don’t focus as much on the customer experience.

    Competitive interest rates

    Finally, online banks typically have very competitive interest rates. They’re able to provide this and the low fees because there’s no cost to maintaining brick-and-mortar locations. 

    [ More: What’s Happening to Interest Rates and Why Does It Matter? ]

    In periods with lower interest rates, there’s not a lot of difference between banks in terms of interest rates, but you can often find online bank accounts that will earn 1% or more per year above what you earn at a traditional brick and mortar bank. In periods with higher interest rates, online banks tend to differentiate themselves even more, offering savings account interest rates several percentage points higher than most brick and mortar banks.

    How do online banks replace the services available at a brick-and-mortar bank?

    Many people rely on brick-and-mortar banks for services that are very difficult or impossible to replicate online. For example, people may rely on their local brick-and-mortar bank for notary services, for safe deposit boxes or for change sorting. Those services are essentially impossible to replicate online.

    One strategy is to retain an account at a local bank that allows you to use these services. Maintain a local emergency fund savings account at a bank with a few hundred dollars in it and let it sit there just to earn interest. Then, if there are any services that you regularly use, like free change sorting or notary services or a safe deposit box, you can continue to use just those services while conducting your main banking services online.

    Some banks offer those services à la carte to anyone who wants them, typically for a fee. If you have a bank in town that will provide notary services for a fee and there’s a change-sorting service available for a fee, you may want to consider just using those on the occasions when you need them.

    Is it hard to switch banks?

    Not particularly, especially with online services. You simply need to move your direct deposits to your new bank as well as all of your regular and automated payments. This can be done almost entirely online, though you may need to contact your employer to change your direct deposit.

    We advise leaving your old accounts open for a while with a small amount of money in them, just to make sure that there aren’t any forgotten automatic withdrawals.

    [ Related: Thinking of Making a Banking Change? Here’s How to Compare Bank Accounts ]

    What are the best online banks?

    Among the best online banks, two that have consistently reviewed well over the years are Ally Bank and Capital One 360. Ally consistently tops our online comparisons. However, Discover, Member FDIC is a strong contender for its cashback checking account and high-rewards credit cards.

    We welcome your feedback on this article. Contact us at inquiries@inforeadersusa.com with comments or questions.

    Daniel Smith

    Founder & Columnist

    Daniel Smith founded Info Readers USA in 2006 and still writes a daily column on personal finance. He’s the author of three books published by Simon & Schuster and Financial Times Press, has contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and his financial advice has been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.

    Reviewed by

    • Brittney Lundager
      Brittney Lundager
      Loans Editor

      Brittney Lundager is an editor at Info Readers USA who specializes in personal loans, student loans, auto loans, and debt consolidation loans. She is a former writer and contributing editor to Interest.com, PersonalLoans.org, and elsewhere.