Top 4 Reasons for Using Online Banks

Why Bank Online?

Close up of senior woman buying online at home
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If you've never used an online bank, you may wonder what the experience is like. Why are they popular, and what makes them different from the brick-and-mortar bank that you currently use? There are plenty of similarities, but a few key differences make online banks especially attractive for web-savvy consumers.

1. Free Checking

Online banks are your best bet at getting free checking. Free checking used to be a given at almost any bank, but it’s getting harder to find.

In most cases, you have to qualify for free checking at brick-and-mortar institutions by having your paycheck deposited automatically or by keeping a large balance in your account.

That’s not the case at most online banks—they offer truly free checking accounts to anybody with at least one dollar to deposit. What’s more, you might be able to earn interest on cash in your checking account if you use an online bank. The interest rate is generally not as high as a savings account interest rate, but it’s a lot more than you earn at traditional banks.

Some brick-and-mortar banks and credit unions also offer free checking, and may even pay interest with reward checking accounts. Typically you have to find smaller institutions to enjoy these benefits. If you don’t feel like searching, the major online banks can take care of you.

2. Higher Interest Rates

Online banks are known for paying higher interest rates (or APY) on savings accounts and certificates of deposit (CDs).

The idea is that they don’t have to pay the overhead costs associated with building and maintaining a branch, so they can pay a little more. In the early days of online banking, higher rates were ​the main attraction — and you’re still likely to find better rates online — even though you had to wait on the mail to get checks deposited.

If you’re looking for the absolute highest interest rate available, an online bank is probably where you’ll find it. Just don’t be disappointed to find that another bank beats your rate in the near future. Some people keep accounts open at a number of online banks and transfer money between accounts as rates change. This strategy may pay off, but make sure to pay attention to any “transfer” days during which your money is not in any account earning interest.

3. Technology

Online banks generally lead when it comes to banking technology. They’re not always first, but they tend to offer new features before stodgier brick-and-mortar banks do. For example, mobile check deposit is a great way to fund online bank accounts without having to mail in deposits (which means you can start earning that high interest rate more quickly). Some small banks and credit unions offered this service before even the largest online banks. So you may not get the newest technology first, but you’ll get it soon enough.

Online banks also allow you to get features you might not otherwise have access to. If your bank still doesn’t offer free online bill pay or person-to-person payments, there’s a good chance that you can find an online bank that offers these programs.

You might also enjoy a larger ATM network, depending on where you live, making it easier to make withdrawals for free.

4. Skipping the Branch

Ultimately, online bank accounts are about taking care of things yourself, without needing to visit a branch. If you need help, most banks offer customer service online (via chat or email) and through toll-free phone lines. As competition has increased, so has the quality of customer service.

You might actually be happy to avoid bank branches. When you use an online bank, you don’t have to suffer through sales pitches that you often find at bank branches; you can simply complete your transaction and move on with your day. In addition, people in small communities may appreciate the anonymity they can enjoy with an online bank: nobody in town needs to know about your financial transactions.

Are Online Banks Perfect?

Online banks are a great addition to the banking world, but they are not perfect. If you prefer working with people in person, you may want to stick to a brick-and-mortar institution. You also need to be comfortable using computers, and you need a basic understanding of internet security (keeping your systems up to date, avoiding phishing scams, and so on). From time to time, you may experience technical glitches, but the other benefits will hopefully outweigh any inconveniences.