Email FacebookTwitterMenu burgerClose thin

Pros and Cons of Online Banking


While friendly tellers and pneumatic tubes can make trips to the bank enchanting, banking at brick-and-mortar locations comes at a cost. For decades, online banks have interrupted the status quo of minuscule interest rates and weekly bank visits. Instead, they seek to strip overhead costs and give more benefits to customers through higher interest rates and reduced fees. Here are the benefits to consider with online banks and how to decide if you may want to switch.

A financial advisor can help you create a financial plan for your savings needs and goals.

Online Banks vs. Traditional Banks: What’s the Difference?

Online banks distinguish themselves from traditional banks through the lack of physical locations and offer services solely through websites and mobile apps. Online banks don’t employ tellers in buildings. Instead, purely online operations allow them to offer lower fees and higher interest rates than conventional banks. Remember, conventional banks typically offer online and mobile functionality as well, but they also serve customers through brick-and-mortar locations and ATMs.

History of Online Banking

The advent of the internet in the 1990s allowed businesses to contemplate delivering their services in new ways. Banking was no exception, and as internet speed and accessibility have improved, banks offered online services to their customers. Early online banking functions were rudimentary initially but quickly grew to allow customers to open accounts or submit financial documents.

However, until the mid-90s, banks were still physical, even as they expanded online services. Change came when Security First Network Bank, the first online bank, was formed in the autumn of 1995. As with online banks today, Security First Network Bank provided more favorable interest rates and reduced fees. The bank blazed a trail for more online-only institutions to follow, and they have grown in popularity over the last twenty-seven years.

Pros of Online Banking

SmartAsset: Pros and Cons of Online Banking

Online banking customers can enjoy these four common benefits:

Lower Fees

The absence of physical locations means lower operating costs. Online banks pass this on to customers as low or no fees. Banks are infamous for tacking fees onto accounts through maintenance costs, minimum balance penalties, overdraft fees, and more. Online banks generally avoid this tendency. However, whether you open an online or traditional bank account, it’s wise to inquire about fees and read the fee schedule first.

Higher Yields

Online banks also attract customers through better interest rates on checking and savings accounts. For example, a savings account’s average annual percentage yield (APY) is 0.17%.

Online banks might offer 10 times or more that rate, resulting in substantial gains. For example, a 0.17% return on a $5,000 deposit with monthly compounding is $9 annually. On the other hand, a 1.7% APY earns $86 annually.

Increased Mobile Deposit Capacity

While most banks have implemented a mobile check deposit feature, online banks generally let customers deposit checks with higher amounts. Electronically depositing checks of almost any size is a significant convenience for customers who don’t frequently visit their bank.

Wide Accessibility

Physical banks restrict accessibility through limited operating hours. On the other hand, online banks don’t have branches, but they typically have phone and online customer support available past conventional business hours. In addition, customers don’t need to stress about withdrawing money through an ATM because online banks have extensive ATM networks or fee reimbursements.

Cons of Online Banking

Of course, there are drawbacks to using online banks to consider:

Cash Deposit Issues

Because there are no locations for customers to visit, depositing cash can be challenging. Typically, depositing cash with an online bank will cost more time and money than it would with a traditional bank. Online bank customers have the following options, none of which are as convenient as running up to your local branch:

  • Use an ATM that takes cash deposits and is in your bank’s network.
  • Use a conventional bank account to deposit the cash, then transfer it to your online bank.
  • Purchase a money order and use your banking app to deposit it.
  • If your bank allows it, deposit cash with specific retailers and stores.

Fewer Services

Brick-and-mortar banks offer a full suite of financial services, such as mortgages, personal loans, financial advisors, and more. Online banks generally don’t provide much beyond checking and savings accounts, though exceptions such as Ally Bank have a range of services. Depending on your needs and your online bank, you might have to look elsewhere for a certificate of deposit or notary as your circumstances change.

Lack of Relationships

If you prefer conducting your business and financial relationships face to face, a bank with physical locations will likely fit your inclinations. In addition, building a relationship with your local bank employees can produce various benefits, such as having fees forgiven or requesting a new account or service.

Is Online Banking Right For You?

SmartAsset: Pros and Cons of Online Banking

Online banking is advantageous for a broad range of customers. For example, if you want to keep your traditional bank account, you can open a high-interest savings account with an online bank like SoFi. This scenario gives you the best of both worlds – the convenience of a brick-and-mortar location and the superior interest rate of an online savings account.

Or, if you dislike visiting banks and are ready to take your financial services entirely online, a multitude of supplemental financial services can augment barebones online accounts. For example, services like Acorns allow you to invest in index funds, and Simplifi by Quicken is an excellent budgeting app that connects to virtually any bank account.

Remember, shopping around for online bank accounts is vital instead of choosing the first one you come across. Interest rates, account features, fees, and additional services vary among online banks. In addition, make sure the bank you’re considering has FDIC insurance, a basic standard in the industry. All in all, it’s a good idea to do your homework before committing to a specific financial institution.

Bottom Line

Online banking is an excellent option for customers looking to digitize their financial services, reduce their fees, and receive better interest rates. However, with these perks come the lack of physical locations, limiting services and depriving customers of a personal touch. That said, taking stock of your financial needs and preferences can help you choose an online bank that fits your situation, even if it means opening a high-interest online savings account solely to create an emergency fund.

Tips for Reaching Your Savings Goals

  • A financial advisor can help you reach your savings goals with a financial plan. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • When choosing an online bank, interest rates are central. Your savings account can earn exponentially more money over time, increasing your financial wellbeing. Specifically, high-yield savings accounts provide the best returns. To help you decide, here’s an updated list of online high-yield savings accounts.
  • An online bank is only as good as its app. The last thing you want is to open an online bank account only to be frustrated by a clunky, outdated app. Instead, here are the 10 best mobile banking apps of 2022.

Photo credit: ©, ©, ©