Pros And Cons Of Online Banks

Online Banks Often Provide Higher Yields on Savings Accounts

When the markets turn volatile, people tend to seek out safer places to stash their cash. Naturally, some have turned towards the high-yield savings accounts of online banks. The appeal of these banks is clear -- many of them offer interest rates that are far higher than traditional brick and mortar banks. For example, one of the leading online banks may be offering an interest rate of 2.49% APY on their savings account. Compare that to your local community bank's savings account rate of 0.20% APY -- that's a difference of 2.29%. On an account balance of $10,000, that means a difference of several hundred dollars a year in interest earned. 

But, online banks aren't the right choice for everyone. If you're looking for a place to park your savings, take a look at the pros and cons of choosing an online bank over a traditional brick-and-mortar bank. 

Benefits of Online Banks

High yield interest rates: The main benefit of using an online bank is generally the interest rate. The interest rates on their savings accounts are almost always higher since their overhead is lower. There are no branches to maintain, no tellers to pay for, no branch managers or janitorial staff. Without those added expenses, banks can pass the savings on to customers in the form of higher interest rates.

Minimal fees: In addition to higher rates, online banks also yield another benefit in the form of fewer fees. Compared to a traditional savings account, which might have a $5 or $10 monthly maintenance fee, online banks may charge no monthly fee at all. No minimum balance requirement and low minimum deposits to open an account add to their appeal. 

Superior online website interface: Since 99% of your interactions with an online bank will be through a website, online banks typically have very sophisticated websites with plenty of features and a very fast response time. They also feature mobile apps that offer convenient and streamlined account management on the go. Many brick and mortar banks that offer online capabilities often do so as an afterthought, although some bigger-name banks are retooling their online and mobile banking systems to keep pace with online competitors. 

Opening an account is quick and easy: As a result of being entirely online, anything you need to do can be done online at any time. If you feel like opening a new CD on Sunday night, you can. You don't have to wait for a branch to be open, you don't have to drive to the branch, wait in line, and then fill out paperwork or meet with a banker. You can do your banking on your own terms.

Drawbacks of Online Banks

Websites can go down: While rare, it's not unheard of for the websites of to go down. In 2008, HSBC Direct suffered a technical failure that rendered its website inaccessible for quite some time. Banking business was conducted as usual (deposits were registered, withdrawals were processed, etc.) but customers couldn't log into their accounts. Several years ago, Emigrant Direct upgraded their website, and the deluge of visitors checking out the new site made it inaccessible for a few hours. In the end, it’s still a website, and websites can become inaccessible, which could force you to use the phone, or worse, be unable to make an important transaction.

You can't go to a branch: There is something comforting about being able to go somewhere and talk to someone face to face. With online banks, the relationship aspect of banking, which is most critical when dealing with loans, is gone. Some online banks offer loan services such as mortgages and car notes, but by and large, most people still trust brick and mortar banks for those types of services.

High ATM fees: While some online banks have extensive fee-free ATM networks, not all of them do. If you're not able to use one of your online bank's ATMs, you may have to use one owned by another bank. That can trigger a foreign ATM surcharge and your online bank may also charge you a fee for using a different bank's machine. That can make getting cash or checking your balance more expensive than it needs to be. If you do opt for an online bank for checking or savings, look for one that offers monthly reimbursements for foreign ATM fees. 

Playing the waiting game: Because online banks don't have branches, your options for making deposits or withdrawals may be limited to ACH transfers, direct deposit, wire transfers or mobile check deposit. While you do have multiple ways to add money to your online savings or checking account, or transfer it to another account, those transactions take time to complete and time to clear once they hit your account. That can be an inconvenience when time is of the essence. 

Bottom Line

Overall, the benefits of high-yield savings accounts at online banks tend to outweigh the drawbacks. While they may not be ideal for conducting your day-to-day transactions, they make a great place to stash away some money for a rainy day or hold your emergency fund and earn above-average interest rates.