Understanding the Facts and Benefits of Online Banking
Online banking has become a popular trend in the financial world, offering convenience and efficiency to its users. While it may not be the best choice for everyone, knowing the facts can help you determine if online banking is right for you.
How Does Online Banking Work?
Online banks operate solely online, without any physical branches. This means that all banking activities must be done through a website or mobile app. According to J.D. Power, approximately 27 percent of consumers use an online-only bank. If you already have an account with a traditional bank and are doing online banking through their platform, the experience is quite similar.
To access your online bank account, you will need to create a username and password, which is then linked to your profile. Opening an account with an online bank requires the same documents as a traditional bank, including photo ID, proof of address, Social Security number, and date of birth. In most cases, you will also need an active local debit card for transactions. Once your account is open and funded, you can perform banking activities as you would with a traditional bank. Online banks have built-in security measures to protect your account from unauthorized access.
What Online Banks Offer
Online banks offer the same services as traditional banks, including checking accounts, savings accounts, ATM access, CDs (certificates of deposits), and money market accounts. The major difference between online and traditional banks is the lower overhead costs for online banks, as they do not maintain physical branches. As a result, online banks are able to offer higher interest rates on savings accounts, CDs, and money market accounts. Additionally, online banks tend to have lower fees compared to traditional banks. It is important to note that all deposits with online banks are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000, just like traditional banks.
Online Bank vs. Traditional Bank on Interest Rates
One of the notable advantages of online banks is their high-yield savings accounts. 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. In contrast, online banks offer significantly higher interest rates. Some examples of online banks and their savings account interest rates as of March 2024 include Synchrony with a 4.75 percent APY, brio direct with a 5.35 percent APY, and American Express National Bank with a 4.35 percent APY. None of these banks charge a monthly service fee, and most do not require a minimum deposit.
Depositing and Withdrawing Funds
When it comes to depositing money into an online bank, there are a few options. You can transfer funds from a traditional bank to your online bank, use the online bank’s mobile app to deposit a check, or deposit cash through an ATM if your online bank has an ATM network. If you have cash and no access to an ATM network, you can purchase a money order made payable to yourself and make a mobile check deposit through the online bank app. Another option is to purchase a prepaid debit card and link it to your online banking account, although this may come with additional costs.
Withdrawing cash from an online bank is not as straightforward as traditional banks. Options include using your online bank debit card for cash-back transactions with participating merchants, withdrawing cash from ATMs if your online bank is part of an ATM network, transferring money from your online bank to a traditional bank and withdrawing it from there, or requesting a wire transfer from your online bank, which may come with a fee.
Why Use Online Banking?
While there are reasons not to use online banking, such as the lack of convenience for transactional banking, there is one major reason to consider it: inflation. With traditional banks offering low-interest rates that may not keep pace with inflation, online banking can provide an opportunity to earn higher interest on your savings. If you have funds that you do not regularly use and want to watch them grow, online banking can be a beneficial option. It can also be a great option for receiving required minimum distributions (RMD) and parking those funds for a while.
Online Banking Needs to Fit Your Lifestyle
It is important to note that online banking does not offer all the conveniences of traditional banking that you may be accustomed to. However, if you are looking to maximize your savings and have funds that you do not need immediate access to, online banking can be a valuable tool.
In conclusion, online banking is a rising trend in the financial world, offering convenience and higher interest rates on savings accounts, CDs, and money market accounts. While it may not be suitable for everyone’s banking needs, it can be a beneficial option for those looking to grow their savings and stay ahead of inflation.
