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What is online banking? Definition, pros, and cons

What is online banking? Definition, pros, and cons

What is online banking? Definition, pros, and cons

Online banks operate without branches. They tend to pay higher rates and charge lower fees than traditional banks.

What is online banking?

Definition of Internet Banking: Internet Banking means managing your bank accounts using a computer or mobile device. This includes transferring funds, depositing checks, and paying bills electronically.

Traditional banks and credit unions with branches usually allow customers to access their accounts online. But banks and online service providers primarily offer mobile access. You will not meet a banker face to face, but you can access your account at any time using a mobile device or computer. Here is a closer look at online banks.

Pros of online banks

lower fees

Since online banks do not have to spend money on branch maintenance, they tend to charge low or no fees. Many online accounts don't charge a monthly service fee, for example, and some don't charge an overdraft fee either.

For comparison, accounts at high-volume banks often charge a monthly service fee of about $10, although they may waive it if you meet certain requirements, such as having a minimum daily balance of $1,500. Additionally, the average overdraft fee at large banks is $35, according to a 2019 study by NerdWallet.

Better interest rates

In online banks, deposit accounts tend to yield a higher percentage of annual return. For example, the best online savings accounts have APYs of around 0.45%. Compare that to the average national savings rate of 0.21%, and some major traditional banks, which have savings accounts that only earn 0.01% APY.

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A difference of a few percentage points may not seem like much, but the higher your score, the more critical it is. A balance of $10,000 deposited for a year at 0.01% will earn a dollar; At 0.45%, he makes just over $45.

Online cash management accounts are another option for earning interest. These financial products are offered by non-bank providers, such as brokerages. They usually combine the features of checking accounts, savings accounts, and investment accounts, and they can also bring good returns.

Standard Banking

Although online banks usually offer higher rates and lower fees, many still have basic banking features that you can expect to find in traditional banks, including:

  • Access to ATMs. A good online bank would be part of a network of ATMs, such as Allpoint or MoneyPass, with thousands of fee-free machines across the country. If you need to withdraw cash from an offline machine, some online banks will also reimburse any fees charged by the ATM owner.
  • protection. Online banks with standard security measures are just as safe as traditional banks. Look for features like encryption and fraud monitoring, and before you open a bank account, make sure that the funds are insured by Federal Deposit Insurance Corp. There are also measures you can take to ensure the security of your online banking, including avoiding Wi-Fi networks and keeping your antivirus software up to date.
  • Accessibility. You can access your bank accounts and banking services wherever there is internet - on your computer or mobile device - around the clock. You can also reach customer service by phone - in some cases, 24 hours a day, seven days a week.

Disadvantages of online banking

There are no branches
With an online bank, prepare for limited access to personal assistance. Instead of face-to-face meetings, many banks offer customer service over the phone. Some banks provide help via social media and online chat as well.

It can be difficult to deposit money
Online banks often have cumbersome cash deposit processes. You may have to find an ATM that accepts the deposit. Or you may need to put money into a traditional bank account and transfer it to your online account. You can also use the cash to purchase a money order, then deposit it electronically using the bank's online mobile application.

Some providers also partner with a third-party service, such as Green Dot, to allow retailers the convenience of accepting cash deposits. But these services usually charge a fee of about $5 for deposits.

Fewer options than one store
Some online banks have outstanding savings accounts but do not offer checking or certificates of deposit, so you may have to open one type of account in one organization and a different account type in another.

What about the new banks?

Fintech companies that provide banking services are often called new banks. With these providers, deposits are usually secured through partner banks, and accounts often have low monthly fees and flat rates with many online banks. However, new banks may lack traditional banking features, such as access to personal checks or checks and wire transfers. They can be a solid choice if you prefer online banking only, but consider these factors before making any decision.

Should you open an online bank account?

If you want higher rates, lower fees, and don't need frequent branch banking, it may be worth looking for an online bank. Keep in mind that you can choose to open an account online without giving up an existing account at your local institution. In fact, having accounts with both traditional banks and online banks can give you the best of both worlds - the best savings rates and access to personal help when you need it.

Or you can take a bigger action and transfer your accounts to an online-only organization. To know the steps, read this article on how to switch between banks. Either way, you can open a new account online within minutes, and access it at your fingertips at any time.