What is Online Banking?
Most banks now offer online banking. But there's a growing number of banks operating mostly or entirely online. And since they do, they're on the banking cutting edge. After all, when you operate entirely online, you need to develop the ability to provide services that don't require face-to-face contact.
Since online banks usually don't have a network of physical locations, they have lower operating costs. That gives them the ability to both pay higher interest on deposit accounts and charge lower fees than traditional banks.
Most even offer no-fee checking, a feature that's nearly extinct among traditional banks.
The best online banks are offering the following services:
Checking accounts, even offering paper checks
Savings, money market, and certificates of deposit (CDs)
Loans and credit cards
Online and mobile banking platforms, including mobile deposits, monthly statements, transfers, bill payment, and even loan applications
Access to a wide network of no-fee ATMs
Some online banks are also offering investments, business loans, and even commercial banking services.
How Does Online Banking Work?
Online banking works the same way traditional banking does, except the entire process is handled online. That includes everything from opening your account to managing it.
If you're new to online banking, making the transition will be a bit of an adjustment. You'll no longer be walking into a bank branch to open your account, complete transactions, or resolve a problem.
But online banking has evolved to the point where just about anything you can do in a bank branch can now be done online.
Opening an Account
Rather than filling out a paper application in a bank branch, you'll complete an application online instead. There's a major advantage to this process as It can be done from the comfort of your home or office, and completed in a matter of minutes. Online banks will even accept electronic signatures to complete the process.
You'll need a reliable Internet connection, as well as a desktop or personal computer, and/or a mobile device. You also need to be able to link a third-party bank account to fund your new account.
And as is the case with opening any financial account, you'll need to be prepared to verify your personal identity. That can include providing your Social Security number, your driver's license number, or even a copy of your driver's license.
Any documentation that does need to be provided can be handled by scanning or taking a photo, and uploading it to the online bank website.
You'll need to create a password to access your account, and you should expect the bank to perform micro deposits to verify the connected third-party bank account.
Once all that's been completed, your account will be up and running.
Not so many years ago, receiving a check meant going to a bank branch and signing the check in the presence of a bank employee. You then needed to wait several days for the deposited check to clear your account.
All that's changed with online and mobile banking. You can either scan the front and back side of the check – or take a photo of it with your mobile device – then upload it to your online account. Depending on your bank, the funds may be available as early as the next business day.
You can also transfer money from another checking account into your online bank account. For example, if you have an account with a brick and mortar bank you can make your deposit in person there and then transfer the money to your online bank.
Also, online banks can not accept cash deposits so you'll need a traditional bank if you deal with a lot of cash.
Resolving Customer Service Issues
Customer service issues are handled the same way with online banks as they are with traditional banks. The only difference is that you'll handle them online or by phone, instead of face-to-face.
This can be done either by contacting the bank through the online or mobile app or by calling an 800 number. Online banking has also given rise to 24/7 customer service, so you can often resolve issues on your own schedule.
Benefits of Online Banking
Convenience and speed are two of the most obvious benefits of online banking. Since you'll no longer be limited to branch banking hours, you can conduct your business at any time of the day or night, and from wherever you are.
But perhaps the biggest advantage is the one-two punch online banking offers over traditional banking. That's the combination of higher interest rates and low or no fees.
Because online banks don't have a network of branch offices, and the many employees it takes to staff them, they have lower operating costs. They can pass this benefit on to their customers in the form of higher interest rates than traditional banks, and often charge no fees with the accounts.
Drawbacks of Online Banking
The drawbacks of online banking are mostly a matter of personal preference. For example, if you prefer face-to-face banking, you may not be entirely comfortable with online banking.
Even if you're comfortable with online banking, there may be times when you'll need to have a face-to-face meeting with a bank employee. That won't be possible with most online banks. Phone contact will be the only option.
Depositing cash is another limitation. Most online banks don't accept cash deposits, even at ATMs. But given that cash transactions are becoming increasingly infrequent, it's becoming less of an issue.
That said, online bank cash can easily be accessed from ATMs. Some online banks will rebate customers for a certain number (or even all) ATM fees each month.
More commonly, online banks are moving toward participating in large ATM networks, like Allpoint and MoneyPass. These networks offer fee-free access to tens of thousands of ATMs, often providing larger networks than those offered by traditional banks.
More limited services. Some processes are best handled in person, like straightening out a transaction error. Others, like getting a certified check or having a document notarized, can only be handled in person.
It may also be difficult to manage a business or commercial account in the complete absence of in-person contact. Also, if you need services such as insurance, brokerage, or trust services you will likely need a bank you can visit in person.
If you frequently have such transactions, online banking may not be the best option for you.
Most other drawbacks have to do with technology. You do need a good, secure Internet connection for online banking to work properly. If you live in an area not well served by the Internet, online banking will be problematic.
And as is always the case with technology-dependent activities, there will be times when the bank's servers will be down, or they're experiencing other technical difficulties.
Are Online Banks Safe?
First, all online bank accounts are protected by FDIC insurance for $250,000 per depositor, per bank, per account type.
Even though there are always risks involved in transacting business online, online banks go to great lengths to secure the process and your information.
For example, not only will you have a personal password to access your account, but most accounts also allow you to set up two-factor authentication. It will require the bank to send you a text or email with a one-time security code, that won't be available to the thief who might have obtained your password.
Internally, online banks typically maintain secure socket level encryption (SSL), firewalls, and automatic time-outs of inactive sessions. You can even set up security alerts to provide immediate notification of unusual transactions.
Best Online Banks
What's the best online bank? Since personal preferences matter, it's impossible to say which bank is the best. But the five listed below are easily among the best in the industry.
CIT is an all-online bank, offering checking in all deposit account types, as well as mortgages, business loans and commercial services. At the center of CIT are their eChecking and Savings Builder accounts.
eChecking is an interest-bearing account, paying 0.10% APY on account balances under $25,000, and 0.25% on $25,000 or higher. It comes with a debit card, mobile deposit, and payment using Bill Pay, Zelle, Samsung Pay and Apple Pay.
Savings Builder pays 0.40% APY with a $100 minimum opening deposit, and recurring monthly deposits of at least $100. Both accounts come with no monthly service charge.
Minimum initial deposit: $100 on all account types; $1,000 on CDs
Accounts offered: Checking, savings, money market, CDs, mortgages, business loans, commercial services
Annual percentage yield (APY): Checking (0.10% & 0.25%), money market (0.45%), savings (0.28% to 0.50%), CDs (0.30% to 0.50%)
ATM network: None, but up to $30 in ATM fee reimbursements each month
Axos Bank is also a full-service online bank, offering everything from personal checking accounts to business and commercial services.
They offer no fewer than five checking accounts, but the star of the lineup is Rewards Checking. The calculation is a bit complicated, but you can earn 1.25% APY by completing the following three requirements each month:
Receive monthly direct deposits totaling $1,000 or more,
use your Visa debit card for 10 transactions per month, and
use your Visa debit card for an additional five transactions per month.
There are no monthly maintenance fees, and no overdraft or non-sufficient funds fees.
Minimum initial deposit: Checking (none or $50), savings ($250), money market and CDs ($1,000)
Accounts offered: Checking, savings, money market, CDs, mortgages, auto and personal loans, small business accounts, commercial services
APY: Checking (none to 1.25%), savings (0.15% to 0.61%), money market (0.25%), CDs (0.20% all maturities)
ATM network: None, but unlimited ATM fee reimbursements
Ally Bank is another all-online bank, and one that offers full-service banking. That includes checking and all deposit account types, as well as mortgages and auto loans.
Ally Bank's interest rates are competitive among high-yield online banks. But their real niche may be investments. You can maintain an account with Ally Invest, to take advantage of self-directed investing with the same institution you bank with.
Minimum initial deposit: None on all account types; $100 on CDs
Accounts offered: Checking, savings, money market, CD, mortgages, auto loans, and investments
APY: Checking (0.10% & 0.25%), money market (0.50%), savings (0.50%), CDs (0.20% to 0.80%)
ATM network: 43,000+.
Discover is best known for having some of the best credit cards in the business. But they also offer online banking. That includes checking, savings, money market, CDs, and retirement accounts.
The checking account comes with a cashback debit card, giving you up to 1% cash back on up to $3,000 in debit card purchases each month. Not only are there no monthly maintenance fees, but they also have no fees for stop payments and insufficient funds.
Minimum initial deposit: None for checking and savings; $2,500 on CDs and money market
Accounts offered: Checking, savings, money market, CDs, and IRAs
APY: Checking (None), money market (0.30% and 0.35%), savings (0.40%), CDs (0.20% to 0.60%)
ATM network: 60,000+
Capital One 360
Much like Discover, Capital One offers some of the best credit cards in the industry. But it's also a full-service online bank, with more than 750 branches and 30 'café' locations. In addition to deposit accounts, they also provide auto loans, and business and commercial banking.
The centerpiece account is the Capital One 360 Checking account, with no account minimums and no fees. However, unlike some of the other banks on this list, the account doesn't pay interest.
Minimum initial deposit: None on savings, checking or CDs
Accounts offered: Checking, savings, CDs, auto loans, and business and commercial services
APY: Checking (none), savings (0.40%), CDs (0.10% to 0.40%)
ATM network: 70,000+
The entire banking industry is rapidly moving toward online banking. It's possible that traditional banking as it's been known up to this point will eventually disappear.
The benefits of online banking are too extensive to be ignored. High interest on savings, low or no monthly fees, the ability to access your account, pay bills, transfer funds, and deposit money at any time and in the place of your choosing is rapidly overcoming any advantages traditional banking offers.