What Is Online Banking?

Online Banking Definition & Examples

The benefits of online banking—quicker, easier, and safer—outlined in an illustration

The Balance / Julie Bang 

Online banking gives you the ability to manage your bank account over the internet using a computer or mobile device. There’s no need to visit a bank branch, and you can do all of your banking tasks when it’s most convenient for you, including outside of normal banking hours.

Learn more about online banking and why it is often easier, less expensive, and safer than in-person banking.

What Is Online Banking?

You can bank online through an online-only bank or online-only credit union or through the suite of online services that most brick-and-mortar banks and local credit unions now offer. You can typically pay bills, transfer funds, apply for a loan, deposit checks, and verify transactions and account balances.

The one advantage traditional banks and credit unions have had over their online counterparts is the ability to withdraw funds using an ATM. Increasingly, online banks and credit unions are providing access to a network of ATMs that won't charge you a fee. And some financial institutions will reimburse your ATM fees up to a certain amount each month.

How Online Banking Works

Online banking is designed to be convenient, saving you time and letting you do banking on your own schedule rather than only during the hours your local bank branch is open. Almost anything you can do at a traditional bank or credit union location you can accomplish online, starting with opening an account.

Opening Accounts

You can open checking, savings, and other types of accounts online, often without the hassle of printing or physically signing anything. With electronic signature capability, the entire process might now take less than 10 minutes.

If you're a customer of a financial institution that offers online banking, you can register for online access through that institution's website. At a minimum, you'll usually need the following items to get started online:

  • An internet connection
  • A device with a web browser: a computer, tablet, or smartphone
  • Your bank account number
  • Personal information to verify your identity, such as your birth date and Social Security number

You will need the same things, excluding the bank account number, to open an account with an online-only bank or credit union with which you do not have an existing relationship. You may be asked for additional ID verification, such as a driver's license.

Registration involves setting up a log-in—often your email address—and password. Once you complete registration, you can log in to your account and start banking online with only your internet-enabled device.

Paying Bills

Instead of writing checks to pay bills, your bank can print and mail a check for you month after month. But for greater convenience, it’s also possible to send money to a payee electronically, even if the amount you owe changes every month.

Transferring Funds

If you need to move money from your checking account to your savings account or into a certificate of deposit (CD), you can carry out these intrabank transfers online. You can even link your accounts at different banks or send money to friends and family almost instantly through person-to-person services accessible through your bank.

Applying for Loans

Getting a loan is traditionally a paperwork-intensive process, but it doesn’t have to be. Filling in your application online speeds the credit-check process, enabling your bank or credit union to respond with an answer more quickly. Some financial service providers with online loan applications make funds available the same day you get approved for a loan. Other lenders that operate entirely online can make near-instant lending decisions.

Depositing Checks

When someone pays you with a check, it's easy to deposit the check from home if you have a smartphone. Using mobile check deposit, you snap a photo of the check through the mobile app of your bank and submit it for payment. There’s no need to mail the check.

Viewing Current and Past Transactions

Most credit unions and banks make it easy to check your available balance, verify your latest transactions went through, and review previous monthly statements online. You should be able to search transactions by time frame and type, such as a bank card payment.

Staying Informed

Another big benefit of online banking is the ability to set up alerts. You can receive a text or email when your bank notices potentially fraudulent activity or your balance goes below a certain amount. You can be notified when deposited money is available and when a check has cleared.

These alerts are great for informational purposes, but more important, they can help you quickly stop criminal actions. For instance, if you are notified of a change in your password and you did not make that change, you can immediately contact your bank and ask them to prevent the perpetrator from draining your account.

Online Banking vs. Traditional Banking

There are important benefits to be gained by using a bank through which you primarily or exclusively manage your account online. But traditional banks have advantages too.

Better Interest Rates

Online-only banks tend to offer a higher annualized interest rate, often referred to as the annual percentage yield (APY), on your deposits. That's because they don't have the overhead of brick-and-mortar banks and can pass some of the savings along to you. However, the online division of some traditional banks may also offer competitive rates. Online banks also tend to offer a lower interest rate on loans, which is called the annual percentage rate (APR).

You generally want higher interest rates on savings accounts to make your money work harder for you. On the flip side, lower interest rates are desirable for loans because they reduce the total cost of the loan. It’s smart to shop around and compare online bank rates to traditional bank rates, but you’ll almost always do better online.

Lower Fees

Online-only banks typically charge lower fees than traditional brick-and-mortar institutions for the same reasons they pay more in interest. In fact, they are less likely to charge fees at all for certain services or for failing to maintain a minimum average balance.

In-Person Transactions

Despite offering the ability to deposit checks via mobile deposit or withdraw money through affiliated ATMs, an online bank may be impractical if you frequently make large deposits or withdrawals and need to do so through a bank teller. Some banks have a daily mobile deposit amount limit and ask you to visit an ATM or branch to make deposits exceeding that limit. This may prove difficult if your bank doesn't have a large network of free ATMs or a branch nearby.

Most banks also place daily limits on the amount you can withdraw from ATMs. If you need more cash and can't convince your bank to increase the limit, you'll need to request a cash advance in person, which you can't do if you can't visit a branch.

Traditional banks can also provide notary services, safe-deposit boxes, and cashier's checks. Online-only banks typically can't.

Consider keeping accounts at an online-only bank and a traditional bank to capitalize on higher-interest savings account rates and low fees at the former while retaining the option to use in-person services at the latter.

Technology Issues

If you’re not comfortable with technology, banking online may come with a steep learning curve. Plus, glitches happen, and if your computer—or the bank’s system—is down, you may have to put off a pressing transaction.

For complex situations like pesky customer service issues or discussions about different types of loans, you might benefit from a face-to-face meeting at a traditional bank.

Safety Issues

In many respects, online banking is more secure than traditional banking. Having your pay directly deposited into your bank account eliminates the risk of someone stealing your check from the mail. Plus, no one can copy your account information from checks that you send out; bank computers send that information back and forth securely, without storing it.

If fraud or errors occur during an electronic funds transfer, federal law often protects you, as long as you act quickly.

Online scams such as phishing schemes that use an email or text to get you to divulge important information are a cause for concern. But as long as you send information only to people you trust, and through authentic websites, you can avoid many of them. Be careful about what you click on, and contact your financial institution if you have any concerns.

Key Takeaways

  • Online banking lets you manage your bank account using a computer, tablet, or mobile device.
  • It eliminates visits to a bank branch and lets you initiate transactions when it's convenient for you.
  • You can choose to bank online with a traditional bank or credit union you have an existing relationship with or to open an account with an online-only institution.
  • Online banks generally pay higher interest rates on deposits and charge lower interest rates on loans but may not offer the full range of services a local brick-and-mortar institution does.