What Is an Online Savings Account?

Online banks, which offer online checking and savings accounts, have become increasingly popular among many consumers. As their name suggests, these are bank accounts that you access and operate entirely online, often making the banking process easier. The bank has no physical branches and you can’t access your account in person. Because of their reduced overhead, some can offer better interest rates than a traditional account, but they otherwise have the same rules and products as in-person banking. If you have money you need to save or invest, consider working with a financial advisor who can help you create an asset allocation plan.

An online savings account is a savings account that you access and manage entirely online. There are no physical banks that you can visit. Instead, you conduct all of your transactions via the bank’s website and apps. You cannot conduct business in person, but online banks typically offer access to cash through an ATM in the same way as any other institution. Some traditional banks offer online services or banking options, which is different than banking with an online bank.

Many consumers also use traditional bank accounts as de facto online accounts. If your bank has no branches near you, or if you never visit it, you usually have all the tools you need to manage your account entirely online. A large and growing number of consumers prefer to bank this way, doing all of their business through their bank’s online tools.

The popularity of this form of banking is what gave rise to online-only banks in the first place. As customers increasingly did all their business through websites and apps, some entrepreneurs realized that they could offer banking without the expensive retail footprint at all. They created online banks and online savings accounts in response.

Pros and Cons of Online Banking

Since online banks have fewer costs than brick-and-mortar institutions, they typically offer lower fees and better interest rates, and the difference can be substantial. At the time of writing the average savings account offered an interest rate of 0.13%, according to the FDIC’s monthly report. By contrast, many online savings accounts offer interest rates between 1.5% and 2.1%. If you have $100 on deposit, this is the difference between getting $2 of interest or 13 cents.

The tradeoff for using an online bank is access to services. You cannot seek in-person customer service, which for some customers can be a significant pain point. You may end up paying higher ATM fees if your bank does not have the same network as a retail institution, although this is a risk with all smaller banks, not just online institutions. Finally, you may not have access to the same range of products. For example, many online banks don’t offer lending and mortgage services, money orders or financial management.

Finally, handling cash can become more difficult. While most consumers can deposit checks relatively easily through their cameraphone, depositing cash will require a trip to the ATM and can be a challenging process. If you work in high-cash industries, like service or retail, this may be a very real issue.

How big of a problem all this is depends entirely on your banking needs. Some consumers seek a best-of-both-worlds solution by opening accounts with both a traditional bank and an online bank, moving their money in between the two. This is not necessarily a bad choice, but be careful that you don’t erode all of your gains through potentially high wire transfer fees between institutions as you move your money between checking and savings.

Are Online Banks Legitimate?

There is nothing inherently suspect about online banks or online savings accounts. However, it’s important to do your homework before trusting anyone with your money. Because an online bank has no physical presence, it’s easier for scammers to operate in this sector so it’s important to verify banks through the FDIC before opening an account.

You can check on this through the FDIC’s BankFind service. Do not put funds on deposit with any bank that is not registered on BankFind. Even if they are simply foreign institutions, banks do go out of business. If your bank goes under and it is insured by the FDIC, you probably won’t even notice it. If it is not, you can easily lose everything on the deposit.

The Bottom Line

Online savings accounts are bank accounts that you manage and access entirely online. While some traditional banks offer online services such as an online savings account, most of the time they are offered by online-only banks, which have no physical locations at all. These accounts can offer higher APY, making you more off of the money you’re saving. However, if you handle a lot of cash that needs to be deposited then this might not be the best option for you.

Tips for Saving

Don’t worry if you’re unclear on how much you should be saving or where you need to put your money. You can enlist the help of a financial advisor who can provide you with the necessary information and tools to be successful. 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.
Online savings accounts are, mostly, a feature of online banks. These institutions can offer you better interest rates, but at the cost of some features and products. Traditional banks also have their benefits and actually might offer more stability if you have larger amounts of cash to put away. Find out which one is right for you.