The Pros and Cons of Online Banking

A Look at the Benefits and Problems You May Face

A woman paying bills online.
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If you’re new to internet banking, you might be excited to save time by banking from your computer or cell phone, while not fully considering where you might run into hiccups as you manage your money online. More and more people are ditching traditional banks and moving to online-only banks so they can bank exclusively on their mobile phones, tablets, and computers and reap other benefits. The number of online-only banks is growing, and they are working to make the customer experience easier than ever.

What's an Online-Only Bank?

While many traditional brick-and-mortar banks allow you to complete some banking transactions online, banks such as Ally Bank offer an exclusively-online experience, with no physical branches to visit. These online-only banks can 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 happy with their online banking experience, regardless of the bank type. 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 ABA Banking Journal, 42 percent of bank transactions now take place online, with 30 percent of those performed on a mobile phone (vs. a computer). ATM transactions now make up only 5 percent of overall bank transactions.

Some issues still exist with online-only banks, however, and the following can help you weigh the pros and cons of the online banking experience and whether it makes sense for you.

Benefits of Online Banking

According to a survey in 2017, 72 percent of new bank accounts were opened online. This number combines accounts for both online-only and traditional banks, but it clearly shows that consumers prefer to conduct their banking from their own device instead of in a bank branch. Many of those new accounts are opened via computer instead of a mobile platform, but this is mainly because banks are still bringing their mobile apps up to speed in terms of accommodating all possible transactions in a secure manner.

According to a survey by Avoka on digital sales of banking products, only about 24 percent of products such as loans could be accessed via mobile platforms.

Other common online transactions include checking bank balances, paying bills, transferring money between your own accounts, setting up automatic payments and transferring money to another person.

Online Bank Accounts and Speed

The internet makes some things faster, and some things slower. If you're considering opening an account at an online-only bank, it may feel like a “hurry up and wait” situation. You’ll complete an application online, and you might even have to send in a paper document with your signature. This can feel odd, compared to the relative speed of most other transactions online. At brick-and-mortar banks, you can do the whole process on the same day and begin using an account almost immediately.

Likewise, deposits to your online bank account can be slow in some cases. If you get a big check and want to start earning interest, you can expect to wait if you need to mail the check in. The higher APY you earn may still make it worth your while, but it’s just no fun to wait.

The upside to online-only banks is that you can get your paycheck or other direct-deposited funds a few days early. Some banks offer early direct deposit, which allows you to access your direct-deposited funds a full two days before they've even arrived at your bank. Instead of just saving time by not having to deposit a paper check, you also gain access to your paycheck funds before your employer even deposits them into your account.

If you don't use direct deposit, you can choose an online bank that allows you to deposit checks remotely (with a computer or 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.

What about getting cleared funds quickly? If you need to pay somebody with a cashier’s check, an online bank account won't help. However, you can generally do a wire transfer out of an online bank account (if your payee will accept a wire transfer).

Spending and Your Online Bank Account

Online-only bank accounts have traditionally made it harder to spend your money, because of the lack of a physical branch and a large ATM network, but things continue to improve. To keep your cash accessible, use accounts that offer online bill pay or debit cards that you can use at an ATM or retailer, and choose an online bank that uses one a large ATM network or gives you reimbursement for any ATM fees charged.

The positive side here is that when your money is slightly less accessible, it's a lot easier to save for special purchases, holiday gifts, vacations or that new-home down payment.

Customer Service With Online Bank Accounts

Things are improving, but you may occasionally have trouble with customer service. 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. On the other hand, you might want to just get things done and move on about your business, in which case online banks are probably more efficient.

Sometimes problems are easier to solve in person. If there is a mistake somewhere, 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.

Why does the staff matter? It’s easier to get good service if you know them, they know you, and they know what you typically do with your accounts. You can pick and choose who you deal with if you’re familiar with the employees (hopefully there’s somebody there who you like working with). 

However, online banks often require that you play the “1-800 Lottery”. You might get somebody helpful and knowledgeable, or you might not. On the bright side, you can always hang up and call back – hoping for a better-qualified representative, but that’s frustrating. In recent years, customer service has improved at most online banks.

Other Reasons to Avoid Online Bank Accounts

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 local bank or credit union account open with some emergency cash so you won't be penniless while they fix the problem.

Summary

Unless you simply cannot tolerate any of the situations above, you'd probably benefit from opening an account. There are several reasons to consider online banks: they offer an easy way to bank for free, they're your best bet for finding high-interest rates, and they usually make life more convenient in other ways. You may never run into any of the problems mentioned above, and your overall experience will probably be great, now that you have a better idea of what to expect.