What is an Online Bank?

Online Bank Overview

Online Banking Screenshot
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Online banking gives you the ability to manage your money online – over the internet – so you do not have to visit a bank branch.

The world (and money) is increasingly electronic. We still use cash for small daily purchases, but other forms of payment are evolving and becoming more popular. The same is true for online banks: you’ve got more options, and they’re getting easier to use.

Online banking used to be limited to banks that operated exclusively online.

Now, even big brick-and-mortar banks offer services online. There are pros and cons to choosing an online-only bank, which we’ll discuss below.

Services Available

How can you use online banking? Skipping a trip to the branch means you can conduct business anytime, from (almost) anywhere.

To bank online, you’ll need to use your computer or an application (app) on your mobile device. Getting started can be a bit cumbersome, but once you’re set up with a username and password, everything gets easier.

Start from scratch: some banks allow you to open accounts online, without the need to print or sign anything. In the past, you had to sit with a personal banker during business hours. Learn more about opening accounts online.

Pay bills: instead of writing checks to pay bills, you can have your bank mail a check (or simply transfer the money to your payee electronically). Learn more about online bill pay.

Transfer funds: need to move money from your checking account to your savings account (or from one bank to another via ACH)? How about putting extra cash into a certificate of deposit (CD)? In the past you had to visit the branch or wait on hold to get this done. Online banking makes it easier. Find out how to move money.

Apply for loans: loans are a “paperwork” intensive process. But they don’t have to be. Type in your information, and your bank will get back to you with an answer.

Rates: online banks are known for better rates. In theory, you should be able to earn more in your savings accounts and pay lower interest rates on loans. It’s always a good idea to shop around and compare online banking rates to traditional rates, but you’ll almost always do better online. Some brick-and-mortar banks offer online options (you’ll have to live without paper statements and the ability to bank with a teller, for example).

Deposit checks: when you get a check, there are several ways to deposit it. The fastest and easiest option is to use remote check deposit: snap a photo of the check and submit it to your bank for payment. There’s no need to visit a branch or mail the check in. Learn how to deposit checks with your mobile device.

Text message: in addition to fancy applications and web pages, you can use “old-fashioned” text messages to manage your account, check balances, and more. This method is slightly faster for simple and repetitive tasks. Find out how to text with your bank.

Account history: need to see if that check cleared, or how much your employer paid you?

It's easy to view transactions online and even download historical statements online.

Pros and Cons of Online Banking

There are numerous benefits to online banking, and it’s worth at least having the option to bank online. But you might also prefer some features of traditional banks and credit unions.

If you’re not comfortable with technology, online banking may be more trouble than it’s worth. Plus, glitches happen, and if your computer (or the bank’s computer) isn’t working then there’s not much you can do. For complex situations (like pesky customer service problems or discussions about different types of loans), it might be best to have a face-to-face conversation.

There’s also the issue of getting cash. Online-only banks typically provide a debit card that you can use to withdraw cash, but you’ll need to find free ATMs (or pay hefty fees).

For more details, see 3 Reasons to Avoid Online Bank Accounts.

Security

Online banking is often considered safer than traditional banking. Having your pay directly deposited to your bank account eliminates the risk of your check being stolen from the mail. Plus, nobody can copy down your account information (because the computers send it back and forth securely). If fraud or errors occur, you are often protected as long as you act quickly.

Staying safe is relatively easy. Keep your computer and devices up-to-date (the operating system, antivirus, and firewall should be kept current). Use difficult-to-guess passwords, and never write them down. Finally, never respond to emails, phone calls, or text messages that ask you to provide sensitive account (or personal) information.