Personal Finance: Should You Use an Online-Only Bank?

More and more of our lives are migrating online, including our personal finances. As such, our banking options have grown by leaps and bounds, including some institutions that are located entirely online. This leads to the question: should you consider using an Internet bank?

Internet banks (also known as online-only banks) share similarities with their bricks-and-mortar peers, though there are some key (and fairly obvious) differences as well. Here is how the two types of banks compare.

What Is an Online-Only Bank?

Online-only banks, as the name suggests, are based entirely online. Many offer the same basic services as the standard bank down the street, just without a physical location. This can include checking accounts, savings accounts, and Certificates of Deposit.

Because they do not need to pay for the upkeep and maintenance of physical properties, they will often be able to offer greater interest rates, lower fees, and no minimum balance requirements. These favorable terms can present a compelling reason to bank with an online-only financial institution.

In addition, most Internet banks will have a spiffy online presence where you can conduct your financial transactions. Many will also operate a call center, where you can speak with a customer service agent if you run into any issues or require individualized attention for a specific need.

Internet banks are regulated just like brick-and-mortar banks and must abide by the same capital requirements as their physically located peers. If you do decide to take your business to an Internet bank, make sure that it is insured by the FDIC (Federal Deposit Insurance Corporation). Being FDIC-insured will ensure that up to $250,000 of your deposits will be refunded if the bank ceases operations.

What Are the Main Disadvantages of an Online Bank?

By definition, an online-only bank does not have an actual location for you to visit. This can be a source of frustration, especially if you wish to have an in-person session to discuss your finances.

The inability to sit with a financial professional is one downside of banking with an Internet-only institution. However, the lack of a physical presence extends beyond the more limited customer service options.

Internet banks will not have their own (or affiliated) ATM chains most of the time, meaning that making cash withdrawals will need to be done elsewhere (likely triggering a fee). For those less technologically savvy, depositing checks online can serve as another barrier against moving to an Internet bank. Instead of going to the bank and physically depositing your check, you will likely need to use your smartphone to scan your check digitally.

An online-only bank can, therefore, be a less comfortable banking experience, especially for those who place a premium on having face-to-face interactions and transactions.

How Do You Know if an Online Bank Is Right for You?

Understanding whether an Internet bank is the right fit for you depends on both your financial goals and your comfort level with technology.

For individuals who conduct most of their financial transactions either online or without cash, an Internet bank can be a good fit. The savings rates are higher, the management fees are lower, and you may not miss the various in-person amenities offered by a brick-and-mortar operation.

This depends, of course, on how you will feel moving to a 100% virtual financing arrangement. Though online banks have customer service support, sometimes it can be easier to simply go to your local branch and sit with a banker. Those who are banking exclusively online will no longer have this luxury.

If a physical presence is important to you, then moving to an online bank may not be the right decision.

Think About Diversifying

Diversification with your finances is generally a smart decision. This holds true with your investment portfolio, and can also make sense for your banking needs as well.

For instance, chances are that you have used the same brick-and-mortar bank for years for your checking account needs. This includes relatively easy and convenient cash withdrawals from ATMs at a variety of locations.

It might make sense to keep your current bank for your day-to-day needs while going online for your savings goals. (However, keeping your historical accounts open and functioning is a good idea, as length of time is one of the metrics that goes into calculating your credit score).

Having multiple accounts will allow you to benefit from the convenience of the physical presence of your local bank while enjoying the higher savings rates of an online financial institution.

Creating this distinction has the additional advantage of helping you better organize your finances by separating your daily spending from your longer-term objectives. This would require slightly more maintenance on your part, as you will need to manage multiple accounts.

Conclusion: Making the Right Choice for You

Where to bank depends on a number of different factors. Ultimately, this decision boils down to your individual preferences.

You can likely achieve all of your banking needs at any number of FDIC-insured institutions, regardless of where they are located. Understanding the trade-offs between physical and online institutions can help you make the right decision for your banking needs.

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