The Pros and Cons of Online Banking

A woman paying bills online.
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Online banking allows you to save time by managing accounts, paying bills, and more from your computer or cell phone. The range of tasks you can complete online is so extensive, it's possible to ditch traditional banks altogether and move to online-only banks. These institutions have no physical branches to visit and sometimes charge lower fees and offer better interest rates because they don't have expenses associated with multiple locations.

This kind of banking offers many conveniences, but there still may be hiccups as you manage your money.

  • General convenience of online banking

  • Easy to open new accounts

  • Potential for lower fees and better interest rates

  • Customer service lacks personal touch

  • Not an option for those lacking technical know-how

  • ATM options may be limited

Benefits of Online Banking

Nearly everything you can do with an account at a traditional bank is possible through online banking. Online banking is also available from brick-and-mortar banks, which provide access to your accounts in person or online. Typical functions include online bill paying, mobile check deposits, checking bank balances, paying bills, transferring money between accounts, setting up automatic payments, and sending money to another person.

What Is Online-Only Banking?

While traditional brick-and-mortar banks allow you to complete some banking transactions online, some banks offer an exclusively-online experience, with no physical branches to visit. It makes sense that these online-only banks often charge fewer fees and offer better interest rates because they don't have the cost of maintaining a collection of physical bank branches.

Most consumers are actually quite satisfied with their online banking experience. Many online-only banks pay higher interest rates on savings, and customers often have access to advances in banking technology (such as remote deposit) more quickly than they might with a traditional bank.

According to the American Bankers Association, 73% of Americans prefer to bank online, with 36% of those reaching for their mobile phones (instead of a computer). ATM transactions now make up only 6% of overall bank transactions.

Some issues still exist with banks that operate exclusively online, however, and the following can help you weigh the pros and cons of online banking.

Online Bank Accounts and Convenience

Quick Account Opening

Opening an online bank account typically takes just a few minutes. You can complete most or all of the steps online or with a short phone call.

Get Your Pay Easily

Although direct deposit is not exclusive to online banks, you’ll most likely have pay or automatic transfers deposited to your account. By doing so, you don’t need to wait for checks to arrive and get them to the bank (which can take several days, or more). Plus, some online banks allow you to get your earnings or other direct-deposited funds a few days early. Those banks might let you spend that money before it even arrives in your account.

Deposit Checks

If you don't use direct deposit, or if you get checks from other sources, most online banks allow you to deposit checks remotely with your mobile device. Those deposits will start earning interest faster, and you don't even need to pay for a stamp. But there's a catch: Banks limit how much you can deposit with your mobile device, so you can't deposit large checks this way.

Spending From Your Online Account

To keep your cash accessible, use accounts that offer online bill pay or debit cards. You can use your card at an ATM, online merchant, or in-person retailer. If you get cash frequently, it’s also helpful to choose an online bank that uses a vast ATM network or reimburses you for any ATM fees you pay.

Customer Service at Online Banks

With a brick-and-mortar bank, you’ll likely have some familiarity with the staff, and at a small credit union, the staff might even know you well. 

If you’re the type of person who enjoys the personal interaction, it’s easier to find that at a brick-and-mortar institution.

Problems are sometimes easier to solve in person. If an error occurs with your account, a face-to-face discussion may be the most effective way to make progress when things are confusing. You won’t have to wait on hold and deal with an “escalation” process when everybody can sit down together and figure things out.

The staff at a brick-and-mortar bank branch matters, because it’s easier to get quality service if you know them, they know you, and they know what you typically do with your accounts. You can choose who you deal with if you’re familiar with the employees (ideally, there’s somebody you like working with). 

However, online banks often require that you play the “1-800 lottery.” You might get somebody on the line who’s helpful and knowledgeable, but you might not. On the bright side, you can always hang up and try again later, hoping to reach a better-qualified (or more service-oriented) representative, but that’s frustrating and time-consuming. Fortunately, customer service is often good at online banks.

Pitfalls to Be Aware Of

Technical Glitches

Sometimes online banking websites go down. When this happens, there's no backup branch that you can go to, and the customer-service phone lines will likely be clogged. To protect yourself, always keep a backup account open with some emergency cash so you won't be penniless while they fix the problem.

Paying Others

You can pay bills through online bill pay, but sometimes you need other forms of payment. In terms of cleared funds, if you need to pay somebody with a cashier’s check, an online bank account may slow you down, requiring you to order a check and wait for it to arrive by mail. 

You can generally do a wire transfer out of an online bank account (if your payee will accept a wire transfer).

Depositing Cash

When there are no brick-and-mortar locations, cash can be problematic. Some banks allow you to deposit funds at an ATM or retail outlet, so research those options if you frequently get paid in cash.

The Bottom Line

Unless you simply cannot tolerate any of the situations above, you'd probably benefit from opening an online account. There are several reasons to consider online banks: 

  • They offer an easy way to bank for free.
  • They're your best bet for securing high-interest rates.
  • They offer convenience in a variety of ways.

You may never run into any of the problems mentioned above, and your overall experience will probably be satisfying, but you should always be prepared for occasional glitches.

Article Sources

  1. Consumer Financial Protection Bureau. "Online and Mobile Banking Tips for Beginners." Accessed Aug. 19, 2020.

  2. Ally Bank. "Ally Bank Asks: Why Has Branchless Banking Become So Popular?" Accessed Aug. 19, 2020.

  3. J.D. Power. "2020 U.S. Direct Banking Satisfaction Study." Accessed Aug. 19, 2020.

  4. American Bankers Association. "Survey: Bank Customers Preference for Digital Channels Continues to Grow." Accessed Aug. 19, 2020.

  5. Chime. "Banking With No Hidden Fees and Free Overdraft." Accessed Aug. 19, 2020.

  6. Capital One. "What Is Mobile Deposit?" Accessed Aug. 19, 2020.