It's not just better rates on savings accounts. Online banks also have high APYs on certificates of deposit (CDs). And you're more likely to find interest-bearing checking accounts online than offline. These market-beating interest rates especially benefit heavy savers with lots of money deposited in their accounts.
Easy to open
Online banks let you open accounts in minutes from the comfort of your home. You don't have to wait until business hours, and you don't have to make an appointment with your local branch. If you decide you want to open a checking account online at 3 a.m. on Christmas morning, no one's going to stop you.
Online banks do require you to provide some personal info before opening new accounts. You'll need to give your name, address, Social Security number, and date of birth. Some online banks require you to deposit money right away. But others give you weeks-long grace periods to fund new accounts.
Since online banks operate entirely online, they put a ton of effort into making websites and banking apps friendly and easy to use.
Online banks typically offer nifty mobile apps. These let you eyeball your balance, transfer funds between accounts, remotely deposit checks, pay bills online, and perform peer-to-peer payments.
Some online banks offer automated savings tools. You may be able to set up automatic transfers to savings accounts. Some apps offer round-ups, which round up purchases to the nearest dollar and send the change to your savings account.
Security
Online banks are backed by the same Federal Deposit Insurance Corporation (FDIC) insurance as brick-and-mortar banks. This protects your money up to $250,000 per account per bank against bank failure. Bank failures are rare, but they happen.
Online banks encrypt websites to help keep your financial data safe. This encryption is identical to what traditional banks use to safeguard accounts.
Cons of online banks
Online banks have a lot going for them, but there are a few drawbacks you should be aware of before opening an account with one.
No branches
Online banks offer zero physical branches. Running into banking trouble? You'll need to contact a bank representative via phone, email, chat, or text message. Brick-and-mortar accounts let you meet bank representatives face to face; not so for online banks.
To take advantage of the perks online banks offer, you need to be able to navigate the internet. Do you have unreliable internet access? Do you struggle to navigate smartphones? Consider offline alternatives. Traditional banks can meet your needs without forcing you to open apps or connect to wifi.
Limited deposit and withdrawal options
Banks limit your access to cash deposits and withdrawals.
Depositing cash is challenging when a bank doesn't have any physical branches. Many online banks offer a limited number of deposit-taking ATMs, but if you don't have one of these nearby, you might be out of luck. That's why some people choose to maintain checking accounts at brick-and-mortar banks -- they can transfer cash to these easily.
Withdrawing cash is typically easier. Online banks often partner with large, nationwide ATM networks you can use for no fees. But if you don't have any ATMs close by, you may be forced to use expensive out-of-network ATMs.
Customer service
Online banks offer limited customer service. You can't meet representatives in person. And it may be harder to form lasting relationships with bankers online.
Online banks typically offer phone support or live chat. Some customers prefer this. After all, you don't always need a banker's help to move money from point A to point B. But sometimes you would benefit from personalized assistance. Brick-and-mortar banks offer this, online banks don't. This is especially detrimental to customers who prefer heavy guidance.
Less account variety
Online banks offer checking and savings accounts. Some offer CDs. Few offer money market accounts or more than one type of checking or savings account. Some actually offer lots of product options, but many offer less account variety than brick-and-mortar banks.
Is an online bank right for me?
An online bank may be right for you if you have reliable internet access. You'll also want to be digitally savvy because online banks don't offer physical bank branches -- it's all online.
Online banks offer a winning combination of few fees and easy access, ideal for folks new to banking. You can whip up an account in minutes and start saving. These features especially benefit college students, digital natives, and customers with low bank balances.
Some online banks also offer market-beating APYs. Folks who have upward of a thousand dollars in savings accounts profit from this feature the most. They could earn substantial returns on deposits at online banks.
But customers who frequently deposit cash may struggle to do so through an online bank. Plus, many online banks fail to offer physical checks. If you're used to writing checks, and you want to continue to do so, then brick-and-mortar banks may be more your speed.
READ MORE: Are online banks safe?
