The Facts About Online Banking

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Online banking is a fast-rising trend in the financial world. It’s touted as a more convenient and efficient way to bank. Many members of Generation Z and millennials have embraced it.

But is online banking really the best way to bank? There are pros and cons. Knowing the facts will help you determine if online banking is the right choice for you.

How Does Online Banking Work?

Online banks operate entirely online. They don’t have physical branches. You must do all your banking from a website or app. According to J.D. Power, approximately 27 percent of consumers use an online-only bank.

If you’re doing online banking with your traditional bank, using an online bank isn’t much different. Online banking connects your bank account to a secure website or mobile app, just like a brick-and-mortar bank.

With an online bank, you create a username and password to access your accounts. The bank links this to your profile.

To open an account, you'll need the required documents, just like any other bank. These documents include:

• photo ID
• proof of address
• Social Security number
• date of birth

This will allow the online bank to identify you. In most cases, you’ll need an active local debit card for transactions.

Once you’ve opened your account and deposited funds, you can bank as you would with a traditional bank. The online bank’s website and app provide built-in security measures to protect your account from unauthorized access.

What Online Banks Offer

Online banks offer everything a traditional bank does, including:

• checking accounts
• savings accounts
• ATM access
• CDs (certificates of deposits)
• money market accounts

The major difference between online and traditional banks is lower overhead. Online banks don’t maintain brick-and-mortar branches, so they don’t have overhead. The result is that an online bank offers higher interest rates on savings accounts, CDs and money market accounts.

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Another difference is that online banks have lower fees than traditional banks. Many online banks don’t charge overdraft fees.

All deposits with online banks are insured by the Federal Deposit Insurance Corporation (FDIC) up to the standard $250,000, just like traditional banks, so your money is safe.

Online Bank vs. Traditional Bank on Interest Rates

It’s often noted that online banks have high-yield savings accounts. Compared to conventional banks, this is true.

According to the FDIC monthly report, the average traditional bank savings account interest rate in March 2024 was an annual percentage yield (APY) of 0.46 percent. Unfortunately, that rate isn’t keeping pace with inflation.

But, online banks’ interest rates are significantly higher. As of March 2024, some online banks and their savings accounts interest rates are:

• Synchrony—4.75 percent APY
• brio direct—5.35 percent APY
• American Express National Bank—4.35 percent APY
• CloudBank 24/7—5.26 percent APY
• RBMAX—5.20 percent APY

None of these banks required a monthly service fee, and there were no minimum deposits except for RBMAX.

Depositing Funds in an Online Bank

Here’s the rub when it comes to online banking: How do you deposit your money? There are several ways, but some are cumbersome.

You can transfer funds from a traditional bank to an online bank. This is the easiest way, but you must still use a traditional bank. If you have a check, simply use the online bank’s mobile app to make a deposit. The app takes a picture of the check and deposits it into your designated account.

But what if you have cash? That’s a little challenging.

Depositing Cash Into Online Bank

If your online bank has an ATM network, you can deposit cash through the ATM. Another way is to buy a money order made payable to yourself. Then, make a mobile check deposit through the online bank app.

But, this requires you to go to a bank branch, store or wait in line at the post office; which sort of defeats the purpose of online banking.

You could also use your cash to purchase a pre-paid debit card and link it to your online banking account. The money will go directly into the account. However, these generally cost around five dollars to open and have a monthly maintenance fee.

How to Withdraw Money From an Online Bank

There are several ways to withdraw cash from an online bank, but, frankly, it’s not as easy as withdrawing cash from traditional banks.

You can use your online bank debit card to make cash-back transactions with a participating merchant. If your online bank is part of the ATM network, you can withdraw cash.

Although once more, it defeats the purpose, you can transfer money from the online bank to your traditional bank and withdraw it from there.

If you need the cash fast, you may want to have the online bank send you a wire transfer. But this will cost $10 to $30.

Why Use Online Banking

There are some reasons not to use online banking. But there is one major reason to make it part of your financial plan: inflation.

If you have your savings in a traditional bank with 0.46 percent interest and inflation is running at 3-plus percent, you’re losing money.

Online banking is challenging when it comes to transactional banking, it’s made for saving. If you have funds you never touch sitting in a traditional bank’s savings, certificates of deposit (CDs), or money market account, you’re a prime candidate for online banking.

Keep in mind that if you are receiving required minimum distributions (RMD) and need to park those funds for a while, high-yield online savings or other accounts may be a great option.

Online Banking Needs to Fit Lifestyle

Online banking works fundamentally like traditional banking. But it doesn’t have all the conveniences you’ve probably become accustomed to.

It does have a way to receive more bang for the buck regarding savings. If you don’t use your savings and want to watch it grow, consider online banking.

The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.