Should I Switch to an Online Bank?

Many people have begun to switch to online banks for savings accounts. You may choose to work primarily with an online bank for all of your accounts. Since many people use direct deposit and online bill pay, they rarely go into an actual branch. If you rarely do transactions at your physical bank, you may want to consider the benefits that an online bank can offer you. Online banks can offer higher interest rates on savings accounts and lower bank fees because the operating costs are lower without physical locations.

When to Have an Online Bank as Your Only Bank

Close-up of woman's hands doing online banking with mobile phone

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Most online banks do not offer as wide a variety of accounts. Some only offer savings products. Other banks may offer more services, like checking accounts or loans. You may consider switching to get a lower loan interest rate.

If you can find an online bank that offers everything you need, you can switch all of your accounts over. You need to be sure you have a convenient way to make physical deposits to the bank. Most people will use an online bank as well as a local bank to meet their banking needs.

Advantages of an Online Bank

The biggest advantages of banking online are that you can often find higher interest rates on your savings products. You may wish to open an online account for your emergency fund. Online banks may charge lower fees than traditional—brick and mortar—banks. They can offer these benefits because their operational costs are lower. Many online banks are connected to other lending institutions because they are required to have a set percentage of the money they have loaned out in accounts at the bank.

Another advantage of using an online bank is that you do not need to worry about finding a new bank when you move. Since you do not visit the branch in person, you can keep the same account no matter where you go. 

Some online banks may offer additional rewards that you cannot find at your local bank. There may be cashback earnings for spending in specific categories or a bonus if you open an account with them. Take the time to research all of the available options to take advantage of all the money available to you. 

Problems You May Encounter Using an Online Bank

When you are looking at an online bank, you must find an online bank that is guaranteed by the FDIC. Then you need to work to keep your deposit amounts below the limit that the FDIC guarantees. If it is a credit union, the NCUA offers the same protections. If you choose a bank or credit union without this guarantee, you run the risk of losing the money if the bank goes out of business.

If you use only online banks, you may face difficulties with cashing checks that you receive from others. You can cash the checks at local branches if they are close to you, but you may face a fee if you do not have an account there. Some stores will cash payroll checks for you, but will not work with personal checks. 

Another issue you may run into is if you need to deposit cash—as opposed to checks—to your bank account. Since you do not want to mail a large amount of cash to your bank, you will need to change the cash to a check. If you make regular cash deposits or daily deposits, you will be better off choosing a local bank. Most business accounts work better with a local bank. Before you switch to an online bank as your primary bank, you may want to try it out for a few minutes.

If you open an online savings account, you need to plan when you make transfers because it may take three days for the money to transfer between banks since they need to go through the clearinghouse. 

How to Open an Account With an Online Bank

It is easy to open an online bank account. You will still need to provide your social security number, the bank account number where you will transfer your funds from, and an Internet connection. Once you have verified that the bank is FDIC approved—NCUA approved if it is a credit union—you will click on the link that says open the account.

It may take a few days for everything to process as the money transfers between banks. You may have a slight lag when you transfer the money back and forth in the future, as well. This delay is because electronic transfers can still take a day or two to completely clear. You may also be able to open the account over the phone, depending on the bank that you choose. Be sure you can deal with an online-only bank before you begin the process of switching banks or closing your current bank account.

If you have any questions, you can always reach out to the customer service department at the bank. There should be a number you can call. Each bank may have slightly different guidelines for the account, so be sure to read the product disclosure statement.