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Digital banking offers convenience and easy access to your money.
The right online banking app can also help you better manage your money with value-added features like credit score tracking and budgeting tools.
Plus, comparing our best online banks, shows they offer higher savings rates than traditional banks due to their lower overhead costs.
If you're considering switching to an online bank—this article will guide you through how online banks work, their advantages, potential drawbacks, and whether digital banking is right for your financial needs.
Key Insights
- Many online banks offer impressive rates and fewer fees than traditional banks.
- While online banks have their perks, you can't access physical locations as you would with a traditional bank.
- Comparing account features, rates, and fees can help you select the best account for you.
What Is Online Banking and How Does It Work?
Traditional banks often offer digital services, such as online banking or a mobile app, but these banks typically aren't online-only. Chances are, you can find a traditional bank branch locally if you occasionally want to bank in person.
Online-only banks operate differently. Here's how:
- No physical branches: They function entirely online without local offices
- Digital services: Provide many of the same products and services as traditional banks
- Product offerings: May include checking and savings accounts, certificates of deposit, and business accounts
- Access methods: Banking happens via banking mobile app or online dashboard
- Customer support: Contact team via phone or other means with account questions
The main difference is that online banks deliver similar banking capabilities without maintaining physical locations.
Pros of Online Banks
Easily accessible via mobile app or online dashboard.
May have lower fees than traditional banks.
May offer higher rates on deposit accounts than traditional banks.
No physical presence means lower overhead costs when compared with traditional banks.
May have more sophisticated real-time transaction monitoring capabilities.
Your deposits are insured by the Federal Deposit Insurance Commission (FDIC).
Cons of Online Banks
No physical branches available for customers.
Mobile apps or websites could occasionally go down.
ATMs may have surcharges, depending on the network.
Not particularly accessible if you have limited or no internet access.
More due diligence is required to research and compare the best options.
Online Banking Security: How Safe Is Your Money?
In general, online banking security matches traditional bank protection levels. Digital banks implement similar security measures as brick-and-mortar institutions, including strong encryption and fraud monitoring systems.
Like traditional banks, deposits at FDIC-insured online banks are protected up to $250,000 per account, ensuring your money remains safe even if the institution fails.
You can enhance your account security regardless of bank type by taking these proactive steps:
- Enable multi-factor authentication: Add an extra verification layer beyond just your password
- Create strong, unique passwords: Use different passwords for banking than for other online accounts
- Update credentials regularly: Change your password periodically to reduce vulnerability
- Use biometric features: Take advantage of fingerprint or facial recognition if your bank offers these options
- Monitor account activity: Regularly review transactions to catch unauthorized access quickly
Online Banking vs Traditional Banking: Which Is Better?
The better option between online vs. traditional banking depends entirely on your situation and preferences. Here are some things to consider as you compare the two:
Service and Availability
Traditional banks provide the advantage of physical branches where you can handle transactions in person, speak face-to-face with bankers, and access services during business hours. This can be particularly valuable if you prefer personal interactions or occasionally need specialized services.
Online banks, by contrast, offer the convenience of 24/7 access to your accounts through websites and mobile apps, allowing you to bank anytime and anywhere with internet access, though without in-person service options.
Fee Structures and Interest Rates
Traditional banks typically carry higher costs, including monthly maintenance fees and minimum balance requirements, while offering lower interest rates on savings accounts due to their overhead expenses.
Online banks operate with lower costs, which they often pass on to customers through fee-free accounts with no minimum balances and significantly higher interest rates on savings. This can often be 10-20 times higher than national averages from traditional institutions.
Customer Service Approaches and Quality
Traditional banks offer the personal touch of in-branch assistance during business hours, supplemented by phone and online support options. You can sit down with a banker to discuss complex needs or resolve issues face-to-face.
Online banks provide support through phone, email, and chat channels. Some with extended hours or 24/7 availability, but never offer in-person assistance. This means relationships remain entirely virtual.
Account Options and Flexibility
Traditional banks usually offer comprehensive financial services under one roof, including checking, savings, CDs, loans, investment accounts, and specialized business services.
However, online banks now offer diverse account options—high-yield savings, checking accounts, CDs, money market accounts, and loans. Their key advantage is superior terms: higher interest rates, lower minimum balances, and fewer fees due to reduced overhead costs.
Special Services and Unique Features
Traditional banks often include access to physical services like safe deposit boxes, notary services, cashier's checks, and personalized financial advice from staff who you might know personally.
Online banks typically compensate for their lack of physical presence with digital tools like advanced budgeting features, automated savings programs, real-time alerts, and integrated credit score monitoring.
Best Online Banking Features and Services
When choosing an online bank, look for these key features that enhance your banking experience:
Innovative tools and security features, such as credit score tracking, budgeting tools, and biometric login options
Accessible mobile deposit options
Flexible deposit limits
Easy-to-use bill pay features
Low fees and reasonable minimum balance requirements
How to Choose the Right Online Bank
Don't rush to open the first account you find. Compare these key factors when selecting your online bank:
- Bank reputation: Check how long the bank has been operating and what actual customers say in reviews about their experiences.
- Valuable features: Look for helpful tools like budgeting assistance, credit score monitoring, and automatic savings options.
- Balance requirements: Find accounts with minimum balance requirements that match your typical account balance to avoid penalties.
- Fee structure: Compare monthly maintenance fees, overdraft charges, and other potential costs—many online banks offer truly fee-free accounts.
- Easy access to cash: Identify which ATM networks you can use without charges and whether the bank reimburses ATM withdrawal fees when using out-of-network machines.
- FDIC insurance: Confirm your deposits are federally insured up to $250,000 to protect your money if the bank fails.
Conclusion
Online banks often have higher deposit rates and lower fees than their traditional banking counterparts. However, you’ll want to compare multiple account options if you’re interested in opening a new account.
Comparing fees, rates, accessibility, customer service options, security, and features can help you find the best online bank for your needs. Make a short list of options as you research and reach out to prospective banks if you have questions about an account.
Frequently Asked Questions
1. What is an online bank?
An online bank is a financial institution that operates primarily through digital platforms such as websites and mobile apps. Unlike traditional banks, they often don’t have physical branches, relying instead on online and phone-based customer service.
2. Are online banks safe?
Yes, most online banks are just as safe as traditional banks. In many countries, they are insured by the same government-backed institutions (e.g., FDIC in the U.S.), meaning deposits are protected up to a certain limit. Always check that the online bank is properly licensed and insured before opening an account.
3. Are online banks better than traditional banks?
It depends on your needs. If you value convenience, low fees, and higher interest rates, online banks may be better. However, if you need in-person services or often deposit cash, a traditional bank—or a mix of both—may suit you better.
Written byJess Ullrich
Jess Ullrich is an insurance expert at BestMoney.com, bringing years of experience covering insurance, banking, and loans. Her work has been featured in Newsweek, Time, Fortune, Yahoo Finance, and other popular financial publications. Before joining BestMoney.com, Jess served as an editor at Investopedia, The Balance, and FinanceBuzz, honing her ability to deliver authoritative financial insights.