In the smartphone age, you have access to unlimited information, entertainment, and education in your hands. Shouldn’t you have full control over your money too? Like nearly every industry, banking has been disrupted in the 21st century, and online banking has gained a lot of ground in the last decade. In 2013, 55% of customers used some form of online banking and just 23% used mobile banking. In 2017, those numbers were up to 63% and 40% respectively, according to an FDIC study.
People are also going to the brick-and-mortar bank less. Between 2013 and 2017 the share of people with bank accounts who went to the bank as the primary way to conduct their banking dropped from one third to one quarter, and the number of people banking on their mobile devices grew 174 percent!
As online banking has become mainstream, more and more people are trying to figure out if they can skip the branch altogether. Here’s what you need to know if you’re evaluating your banking options.
Pros of Online Banking
While there are tons of differences between these two banking options, it’s worth noting that they match up pretty evenly in the most important category: security. Most online banks are FDIC insured, just like traditional banks, and every cent you deposit will be just as safe.
1. High Earning Potential, Low Fees
Since online banks generally have lower costs than standard banks, they can afford to offer higher annual percentage yields (APYs) and low or no fees. In the long run, that means most online banks can help grow your money faster and take less of it away to pay for brick-and-mortar locations.
Comparing APY and interest rates is a good way to choose between savings account options. If you’re depositing your money into an account with a higher APY, you’ll accrue more interest over time and grow your money faster.
One or two percentage point increases in APY can earn you significantly more money over the years, and most online banks offer massive advantages here. Bank of America, for instance, offers a 0.03% APY on standard savings accounts. Compare that to Varo Money that offers a 1.21% APY and can move up to 2.80% APY based on qualifying balance and activity. If you set up an account with an initial $1,000 deposit with both banks and just let it sit there for 120 months, Varo would earn you $236 but the Bank of America account only returns $3.
While online banks can help expand your savings, they also won’t put a significant dent in them. Brick-and-mortar banks often hit you with transaction and maintenance fees that add up quickly.
Like many online banks, Varo does away with fees generally associated with the industry. Fees such as account maintenance, foreign withdrawal, and account closing are all gone.
Aspiration, another online bank, goes a step further. You set a fee that you think is fair – even if that is $0 – and that is what Aspiration charges you to have an account. They even donate 10% of their revenue to charity, so they’ll see 90% of the fee you choose and the rest goes to a good cause.
2. Better Online Banking
You probably don’t find yourself inside a bank anymore, and most of the time you are dealing with a bank account, you’re on your phone or computer. Online banks generally have apps that are more sophisticated and easier to use than standard banks.
You also get 24/7 access to your accounts and the freedom to do what you want whenever you want to. Mobile banks can process transactions more quickly, even on Sundays or holidays. Some even deposit your paychecks two days early, like Chime, meaning you get more control over your money.
The Cons of Online Banking: 1. Customer Service Concerns
By eliminating physical banks, online banks also remove the ability to meet face-to-face with a bank rep. Building personal relationships with people at the bank and working directly with them to handle your concerns is an important part of the process, should any issues arise.
Online banks offer some opportunities to work directly with other people, but for the most part, you’ll be flying solo through your phone or computer. This can be a serious detriment if you’re trying to take out a loan, for instance, where face-to-face interaction is key.
And while the principle of 24/7 online access to your bank is amazing, it doesn’t always work out that way. If your bank’s website or app crashes, you could be left in the dark indefinitely with no other way to access your account like you would if there was a nearby branch.
2. Transaction Problems
For all the convenience of an online bank, there are some drawbacks in terms of accessing your money.
First and foremost, online banks generally don’t have ATMs. While many online-only banks offer reimbursement for ATM transaction fees, you still may not be able to deposit money through an ATM or do any other type of banking while you’re getting your cash out.
Second, as just mentioned, cash deposits are tricky. Some online banks allow you to link your account to an account at a different bank, and you can transfer money between them through an ACH transaction. Boston, MA-based Radius bank has a network of partner ATMs that accept cash deposits. If you need to deposit cash into your account regularly, be sure to know what your options are when looking at online-only banks.
Online banking offers a lot of advantages over the standard brick-and-mortar alternative, but both have their strengths and weaknesses. The earning potential of a high-yield online savings account is almost too good to pass up, but if you strongly value personal interactions and often move cash around, online banking could create issues.
The best strategy may be a combination of the two — keep a checking account open at a traditional bank, and start a savings account with an online bank. This way you get the best that both options have to offer without missing out on anything.