What Is Online Banking? Pros, Cons, & What You Need to Know

Written by Brian LatchfordUpdated: 29th Sep 2021
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Long gone are the days where all banking services and transactions take place at the local bank. Most brick-and-mortar banks now offer intuitive mobile apps and online access that allows you to handle most, if not all, your banking needs.

Some banks have taken it a step further and are completely online, meaning no branches at all.

>> More: The Best Online Banks 

What Is an Online Bank?

An online bank is a bank that has few to no physical locations that enable its members to do all their banking services online or via a mobile app.

Online banks typically offer lower fees and products at better rates, such as higher interest rates on savings accounts.

Online banks are also FDIC insured (NCUA insured if it is a credit union), which means your funds are insured up to $250,000.

What Is Online Banking?

Online banking is the act of doing all your banking transactions (e.g., transferring of funds, paying bills, depositing checks, etc.) on a computer or another device that needs an internet connection.

Normally, the financial services industry is slow to adopt technology and often archaic; however, online banking is a step in the right direction.

Online banking is convenient, more secure, and an overall better experience for the consumer. Who doesn’t like to save money and avoid paying outrageously high fees?

How Does an Online Bank Work?

An online bank works through a web browser or a mobile app that provides you access to banking services 24 hours a day, seven days a week. However, it is important to note that transactions may only be processed during banking hours.

Are Online Banks Safe to Use?

Yes, online banks are safe to use. Their websites are SSL (encrypted), and their mobile apps tend to employ touch and face ID security.

Furthermore, you are not responsible for fraudulent activities on your debit card, and your account is insured up to $250,000.

Online banks are extremely convenient; however, they are not perfect. Here are the pros and cons of online banking.

>> More: How to Open a Bank Account Online

Benefits of Online Banking

Easy to Set Up & Start Using

You can set up and start using your online bank in under thirty minutes. All you need to do to sign-up is input your personal information and confirm your identity.

This normally entails entering and verifying your full name, contact information, SSN, and driver’s license.

Lower Fees

Because online banks have few to no, physical locations, their overhead expenses are lower than traditional banks.

This is why online banks normally have less, and sometimes no, monthly or transaction fees. Account minimum requirements are typically nonexistent with online banks as well.

Higher Interest Rates

Another perk for banking with an online bank is they offer higher interest rates. You will find most online banks currently offer APY at 0.40%, or higher, for Savings and cash management accounts compared to a brick-and-mortar bank paying less than 0.05% APY for the same type of accounts.

Better Mobile Experience

As you can expect, online banks invest more resources into their mobile app because it is where you will primarily bank.

Consequently, most online banks provide a better overall mobile experience which often includes interactive location maps for ATMs, support access, and the speed and process of completing transactions through the app.

You also do not need to worry about losing bank statements since you will have access to your past statements online.

Large ATM Networks

Since online banks do not have any physical locations, they end up partnering with other ATM networks, such as Cirrus and Maestro, where you have access to tens of thousands of ATMs, often at no costs if it is “in-network.”

Most online banks offer an ATM map within their app, so you can easily find the closest in-network ATM.

Some online banks will refund up to a certain amount on out-of-network ATM fees.

No Hidden Fees & Transparent

Most online banks make their fees clear and are usually located under a “fees” page.

As mentioned above, you will find that online banks have fewer fees (such as overdraft fees), and they are proud of it. Financial technology companies and neobanks are redefining the way Americans bank.

Disadvantages of Online Banks

As we said, nothing is perfect. Here are a few disadvantages to online banks. That said, we strongly believe the benefits outweigh the downsides.

Transaction Limits

Online banks typically have the same transaction limits regarding how many times you can withdraw from a Savings or CMA account.

With online banking, you may also have limits on how much you can spend per month from your debit card, as well as how much you can withdraw from an ATM each day.

Some online banks will also have a limit on how much cash you can load into your account on a daily and monthly basis, while other online banks may not allow any cash deposits if they do not have a partnership with a network such as Green Dot.

No Physical Branches

There are times that you need to go into a bank for services such as notary, deposit boxes, and cashier checks.

Unfortunately, online banks tend to lack these specific services, so you will need to use other companies to meet these needs.

You may also feel more comfortable going into a branch if you need some form of support, whereas when you are banking online, you will need to utilize their phone support or perhaps a live chat feature.

May Not Be a One-Stop-Shop

Another reason online banks can offer better rates is that their product offering is normally much narrower.

You will find most online banks offer checking accounts, saving accounts, and perhaps some limited investment products.

If you are looking for money market accounts, IRA accounts, or certificates of deposits, an online bank may not be the best fit. Banks like Chase, TD Bank or Marcus by Goldman Sachs tend to offer all of these services and more.

Additionally, online banks tend to not provide cashier’s checks, and you will not be able to utilize safety deposit boxes that your local bank may offer.

No Personal Relationships

If you enjoy going to your bank because all the employees know you, you will miss this with online banking.

You will not have a personal banker, which does have its perks, such as when you need a quick loan, local sponsorships, or someone to sit down and talk about your future when it comes to personal finance.

Often certain fees can be waived or reduced by a personal banker, which are perks you will not be able to find with online banking.

Technology Issues May Arise

Perhaps the scariest thought about online banking comes from the fear of technology concerns, both from a lack of understanding/knowledge and the fear of being hacked.

The fear is valid as hacking does happen, but it is normally the result of user error. Luckily, there is usually some protection offered by banks for such scenarios.

Bigger issues that arise are system maintenances, which prevents you from accessing your account until the maintenance is finished, and learning a new system/app for basic banking needs.

Online Banking FAQs

Are Neobanks Online Banks?

Although neobanks provide banking services, neobanks are not an online bank because they utilize another bank to provide the services and insure the funds up to $250,000. Neobanks are financial technology companies that facilitate banking services.

What Are Some Examples of Online Banks?

When people think of “online banks,” they are normally thinking of neobanks. As we said earlier, neobanks are financial technology companies that facilitate banking services on their partner/sponsor financial institution.

These companies are merely the front-end and handle the technology, customer service, and infrastructure, while the partner/sponsor bank holds the financial licenses.

That said, neobanks are revolutionizing the financial landscape and have forced traditional banks to adapt. Below the most popular neobanks:

Do Online Banks Charge Monthly Fees?

Most online banks do not charge monthly fees or require minimum deposits. However, it is usually cheaper than what your local bank will charge you if the online bank you choose does.

Should You Open an Online Bank Account?

If you do not find yourself going to your local bank often (or at all) and you do not need a wide variety of investment products, then online banking may be a great option for you. You will enjoy fewer fees, better interest rates, and quicker transactions.

Bottom Line: Online Banking Explained

The shift to online banking is certainly happening. With more people remote working and online banking apps allowing you to facilitate all your day-to-day banking needs, you no longer need to go to a bank.

Banking apps have become so sophisticated that you can take a picture of a check and deposit it into your bank account right from your phone while also receiving direct deposits that you receive up to two days earlier than with traditional banks.

You can perform all these services from an intuitive mobile app while enjoying fewer banking fees and earning higher interest.

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Brian Latchford
Brian Latchford

Brian is a serial entrepreneur that loves financial technology and personal finance. From working with start-ups to creating his own recruiting company, Brian knows first hand what it takes to manage money. Throughout his career, Brian has become a respected writer covering topics in personal finance, business, and financial technology.