The definition of online banking is a simple one: a bank or institution that is available online.
The ins and outs of online banking are slightly more complex. There are:
- Banks with good interest rates and others with bad rates
- Solely online banks and others with brick-and-mortar locations
- And some with an easy-to-use interface and others that are clunky
Below you’ll find an overview of what the definition of a good online banking experience is to me. As the center of your finances, picking a good bank is often a crucial part of setting up your own personal finance system.
Choosing a bad bank can make your life harder, or even worse, leave money on the table.
Online Banking Definition
As mentioned already, the definition of online banking is pretty simple: a bank that can be accessed via the internet. Either through your laptop, computer, mobile phone, or any other internet-connected device you have.
It’s also 2020, so most banks by default are online banks. In fact, you’d probably be hard pressed to find a bank that doesn’t offer at least some services over the internet at this point.
This progression by banks is a great thing for consumers. It’s now more convenient than over to conduct banking transactions from the comfort of your own home (or anywhere you want to be) rather than having to wait in line at a physical location to talk to a teller.
While there are many more benefits to online banking than just convenience, there are also some tradeoffs involved with opting online.
The Pros of Online Banking
I’ll be up front here, I’m a huge proponent of online banking. I first used online banking a few years ago, and I know this sounds cliche, but I can’t imagine life without online banking at this point.
My list of pros will outweigh my list of cons, as it should in my opinion. That said, I will provide a balanced outlook with information from both points of view, but first, the pros of online banking:
Better Interest Rates
Arguably the biggest benefit of online banking is the high interest rates offered through savings accounts.
For example, right now, CIT Bank (an online bank) is offering a 1.85% interest rate. Compare that to Chase Bank’s savings account, which is offering a miserable 0.01% interest rate! Net of inflation, you’re losing money with the traditional banks.
Don’t get me wrong, Chase does a lot of things well (like their credit cards and checking accounts), but when it comes to savings accounts there are far superior offerings.
One main reason for the difference in interest rates is the fact that banks operating solely through the internet have a lower cost of doing business. CIT Bank doesn’t have to worry about the extensive real estate cost that Chase does, and that allows them the opportunity to offer you more attractive terms. Like a higher interest rate.
Anyway, back to what you care about, here is what your annual interest earnings would be on $10,000 in both accounts:
- CIT Savings Builder: $185
- Chase Savings Account: $1
I’ll take a free $184 any day of the week (or year of my life)!
Following that on a similar note, since online banks have lower-cost operations, they typically have lower fees as well.
Just like better interest rates can help savings accounts grow faster, lower fees can help keep more money in your checking account each month.
I know I hit on this point up front, but it’s the second biggest benefit to online banking behind interest rates.
Online banking is convenient in so many ways. Not only can you manage your bank accounts and view a statement on the web, including (searchable) transaction history, but you can do it super quickly! At a high level, it’s never been more convenient to be a bank customer.
Here are some more specific ways that online banks address convenience:
Pay Bills: Pay any monthly bill over the internet with one click.
Transfer Funds: Move money around to both internal and external accounts quickly and easily. This is especially useful if you have your checking account with one bank and your saving account with another.
Fund Investments: Easily make electronic transfers to your brokerage account (or other investment account).
Related: How to Invest in Index Funds.
Deposit Checks: One of my all time favorite financial perks of online banking is the ability to deposit checks into your account with the snap of a photo. This is a huge benefit for personal consumers and small businesses alike (who process a lot of payments each month).
I might get a little pushback when I define security as an online banking “pro”, but I’m sticking with it. Arguably it is more safe to bank online. Mainly because there is no risk of losing a check or cash as you bring it to the bank if you set up direct deposit.
With online banking, you eliminate the potential for human error. I think we can all be in agreement that eliminating human error is a good thing.
On top of that, most online banks are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000. You’re getting the same protection as traditional banks on that front.
The last piece to address in this section is internet security. Yes, this is a known risk, but there are actions you can take to protect yourself against online theft. For one, be sure to use hard-to-guess passwords (meaning, not Password123) and take basic pre-cautions to avoid online scams. In other words, don’t send money to the Prince of Narnia ASAP.
The Cons of Online Banking
There’s no doubt that online banking is a great thing for everyday banking customers. Though, here are some of the cons to be aware of:
Customer Service (In-Person)
While you can still get customer service over the phone or through online chat (using their website), you lose out on the option of in-person service if you opt to a primarily online bank.
On a similar note, you run the risk that if you have technology or internet connection issues, you might lose access to your bank altogether for a time being.
Not Always a One-Stop Shop
Online banks don’t always offer all the services of a traditional bank.
For example, when you go to Chase, you can open a checking account, savings account, CD, or any other account that your heart desires. On the other hand, some online banks only offer savings accounts.
This means you may have to spread your assets across multiple institutions depending on which ones you choose.
Cash is Not Always an Option
While I rarely use cash, I know a lot of people regularly do, and it’s something that not all online banks can handle easily. It’s a pretty basic problem: if you don’t have physical branch locations, where can you make physical cash deposits?
Some online banks have solved the issue, but not all, so it’s something to check on if you use cash regularly.
The Best Online Banks
Just Start Investing has a full list of our favorite banks published here; you can use it as a resource as applicable. From checking accounts to savings accounts, we listed a wide variety of the best banks available for consumers.
We’ll highlight one of our favorites below:
CIT Savings Builder from CIT Bank
CIT Bank is one of our all-time favorite online banks. Specifically, when it comes to their CIT Savings Builder saving account, few perform as good at CIT Bank. The CIT Savings Builder offers one of the highest APYs on the market in a convenient and easy-to-navigate online interface.
- 1.85% APY*
- No fees
- FDIC Insured up to $250,000
- $100 minimum to open
*Must maintain a balance of $25,000 or deposit $100 monthly in order to receive this APY.
You can apply to CIT Savings Builder here.
Summary: Online Banking Definition
It’s no surprise at this point that I love online banking. Being able to access your bank accounts online is a huge perk. To me, the pros defined above clearly outweigh the cons.
If you’re on the fence, I suggest you do some further research before rushing into a decision. If in-person support is a need for you, that could be a potential deal breaker for online banks. However, if you’re looking for a more convenient option that pays better interest rates, then that is the definition of online banking.