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Katie OrmsbyOnline Banking Expert

Katie enjoys helping readers make sense of Online Banking options. She's previously written business and shopping features for The Seattle Times and Seattle Met magazine. She has a degree in journalism and political science from the University of Washington.

How Online Banking Works

Online banking has transformed the banking industry. Virtual banks allow you to safely manage your money anytime, anywhere. In other words, you no longer need to visit a physical branch location during limited business hours. And because of mobile apps, you can also bank on the go.

If you’ve always banked with a traditional financial institution, then you may be wondering how online banking providers work. This guide explains everything you need to know to get started with online banking.

What Is Online Banking?

Online banking, also known by other names such as internet banking, is a method of banking that allows customers to access and manage their bank accounts via the internet. It makes transferring money, paying bills, and generally staying on top of your finances fast and convenient. While many traditional banks and financial institutions have embraced online and mobile banking, top online banking providers stand out in a few key ways: many have little to no fees, highly competitive interest rates, and no minimums.

Many digital banking providers can offer such benefits in part because they have few if any physical branch locations. This vastly reduces their operational costs, which online banking providers often credit as part of the reason they can provide these advantages. However, this structure means that electronic banks often lack their own ATM network. In most cases, online banking companies compensate for this by offering fee-free ATM access up to a set number of monthly transactions, reimbursing ATM fees up to a specified monthly limit, or partnering with an existing ATM network.

Pros and Cons of Online Banking

Pros
Cons
Generally, fewer fees
Few physical branch locations
Often have better rates
Can be trickier to deposit cash
24/7/365 availability
Some don’t have fee-free ATMs

What Is an Online Savings Account?

An online savings account is a digital bank account that pays an amount of interest. Savings accounts at brick-and-mortar banks typically offer modest interest rates. Online banking providers, on the other hand, are known for better interest rates. So, it’s important to keep the APY in mind.

Unlike some other savings-related accounts, savings accounts are generally relatively liquid. Even though there are usually restrictions on how often you can withdraw from the account, online savings accounts are usually accessible enough to be used as emergency funds. For this reason, they can also be a good way to set aside funds for a particular goal like buying a car.

Additionally, many online banks offer cross-product benefits for savings account holders with multiple accounts at the same institution. One such perk is that many digital banking providers allow customers to set up automatic savings deposits from their other accounts. For instance, if you deposit your paycheck into a checking account, then you may be able to have some of that money automatically diverted to your savings. So, this can help you grow your savings.

What Is an Online Checking Account?

Online checking accounts are designed for daily transactions. They’re for receiving deposits, making cash withdrawals, and completing electronic payments with your debit card. Many people get online banking to open a checking account, allowing their paycheck to be directly deposited.

Unlike savings accounts, checking accounts don’t usually pay interest. However, they typically have higher monthly transaction limits or no limit at all. Savings accounts typically place caps on the number of no-fee monthly transactions a customer can make. After all, they’re for building your savings, so institutions want to give customers an incentive to keep their money banked.

Banking experts usually describe checking accounts as the most liquid of all personal account types. So, this means your money is always as accessible as possible. Withdrawal limits may be the one exception: many online-only banks impose maximum limits on the total value of your daily checking account withdrawals. Limits usually start at $300 and max out around the $5,000 mark.

How Are High-Yield Savings Accounts and Money Market Accounts Different?

Some online banks offer specialized accounts such as high-yield savings accounts and money market accounts. These products have special features which add to their appeal, depending on what you’re seeking from your banking experience.

High-yield savings accounts are much like regular savings accounts, except they pay higher interest rates. That benefit comes with a trade-off, as you’ll usually encounter stricter limits on your monthly transactions. Usually, high-yield savings accounts carry higher initial deposit and monthly balance minimums.

A money market account functions like a hybrid that bridges the features found in savings and checking accounts. They pay interest: rates are usually higher than you’ll find in a regular savings account but lower than a high-yield savings account. In exchange, you’ll get ATM access, a debit card, and the ability to write checks.

As with high-yield savings accounts, money market accounts often restrict transactions and carry deposit and balance minimums. Some also have monthly fees, which can often be waived if you meet your monthly balance minimum.

Which Online Bank Account Is Right for You?

Specific account features vary from one bank to the next. So, you should always look at the details and compare your options head-to-head. Identify your priorities, then seek out accounts and institutions that offer the best match. While it’s true that specifics will vary, generally, each type of account breaks down as follows.

 
Savings Account
Checking Account
High-Yield Savings Account
Money Market Account
FDIC-insured
Earns interest
ATMs
Debit card
Check writing
High APY potential

It’s also worth noting that top online banking providers often offer multiple types of accounts. Opening multiple accounts at the same institution can maximize your flexibility and access to your money while also taking advantage of opportunities to earn interest. So, many customers will want a combination of bank accounts.

Compare Our Featured Picks

Aspiration

Founded in 2015, online banking entity Aspiration seeks to set itself apart from competitors with a unique approach to financial services and a sense of social consciousness. For example, members are rewarded for socially conscious spending with 10% cash back on purchases from approved companies. Aspiration also takes a unique approach to fees — you pay what you want, and the company promises to donate 10% of all profits generated from fees to charity.

One thing you’ll want to understand before committing to an Aspiration or Aspiration Plus account is their checking/savings hybrid model, called Spend and Save. It doesn’t work exactly like a traditional checking or savings account, but you can still get up to 1.00 APY%. In conclusion, Aspiration is a forward-thinking online bank that may not be for everybody, but for many, the benefits will outweigh the drawbacks. Read the full review.

Chime

Founded in 2013, Chime aimed to take advantage of new financial technologies and provide a convenient alternative to brick-and-mortar banks. Today, they remain a great option for people looking to move their financial services entirely online. Now that access to remote services is more important than ever, Chime has grown to an estimated 12 million active users.

Of course, Chime has the downsides that other online-only financial companies do. While they have reliable customer support, the lack of physical locations does limit their services. But Chime remains a great option for people looking for an online financial technology company. Although it isn’t a bank, Chime has an edge over some competitors by their extensive network of ATMs, which keeps cash withdrawal free and easy. Read the full review.

Discover

Discover provides secure remote banking services under the umbrella of the larger Discover financial brand. Online banking comes with some convenience but also some downsides—however, working with a well-established company can help make up for any drawbacks. As you would expect from a large entity, Discover is reliable and their 24/7 customer service is ready to respond to any issue.

Discover is entirely online. This is — of course — a benefit if you’re looking for a digital exclusive banking experience but may be a downside if you prefer having a more personal relationship with your financial services provider. However, with no minimum deposits and cash back debit options, Discover brings credit card sensibility to your checking and savings experience. Read the full review.

Online Banking Glossary

TermDefinition
APYAnnual percentage yield: the total amount of interest your deposit earns in a calendar year
Certificate of depositA savings product with a fixed length and a relatively high interest rate on a lump sum
Compound interestThe interest you earn on interest (commonly referred to as interest on interest)
Debit cardAllows the cardholder to conduct electronic transactions with their checking account
Direct depositThe direct, electronic transfer of funds from an originating account into your account
FDICFederal Deposit Insurance Corporation: the federal agency that insures bank accounts
Joint accountAn account with more than one holder with each account holder having full access
Minimum balanceThe minimum amount of money an account must hold to avoid monthly fees
OverdraftWhen an account holder withdraws more money than the account contains
Wire transferA cash-free electronic money transfer usually completed between two different institutions

Frequently Asked Questions

Can you open a bank account online?

Yes. Since many online banks have few if any physical branch locations, opening an account over the internet is usually the way to get started. The entire process normally takes only a few minutes to complete.

Are online bank accounts safe?

Online bank accounts are as safe as traditional accounts. Balances are FDIC-insured. Virtual banks also use the most advanced cybersecurity and encryption technologies available.

Can you still make deposits and withdrawals?

Online bank accounts support a full range of regular transactions, including deposits, withdrawals, and debit card transactions. However, the number of transactions you can make within a given monthly period may be limited. It depends on the type of account you open.

Do online banks have rewards?

Many online banks have promotional programs that offer valuable rewards to customers who open new accounts. These can include fee waivers, cash bonuses, and other perks. Some companies also offer cross-product rewards programs for customers with multiple accounts.

Is switching to an online bank worth it?

If you’re tired of paying high fees and want more banking freedom, then online baking providers offer an excellent alternative to regular banking. Online banks often offer better interest rates as well as few to no fees since they have lower overhead and operating costs.

Too Long, Didn’t Read?

Online banking has created an exciting new range of possibilities for consumers. You can open a full range of account types, earn higher-than-usual interest, and enjoy 24/7/365 accessibility. The downside is that your in-person options may be limited, as most online financial institutions don’t have many if any physical branches. Despite this, online banking offers freedom and flexibility. Many customers find it to be a convenient and low-cost alternative to traditional banking.

Chime Disclaimer: Chime is a financial technology company, not a bank. Banking services provided by, and debit card issued by, The Bancorp Bank or Stride Bank, N.A.; Members FDIC. Credit Builder card issued by Stride Bank, N.A. Chime Spending Account and $200 qualifying direct deposit required to apply for the secured Chime Credit Builder Visa® Credit Card. See chime.com to learn more. ^Early access to direct deposit funds depends on payer. ˜Out-of-network ATM withdrawal fees may apply except at MoneyPass ATMs in a 7-Eleven, or any Allpoint or Visa Plus Alliance ATM. Cash deposit or other third party fees may apply. *Eligibility requirements apply. Overdraft only applies to debit card purchases and cash withdrawals. Limits start at $20 and may be increased up to $200 by Chime. See chime.com/spotme. ¹ The Annual Percentage Yield (“APY”) for the Chime Savings Account is variable and may change at any time. The disclosed APY is effective as of November 1, 2021. No minimum balance required. Must have $0.01 in savings to earn interest. ² Round Ups automatically round up debit card purchases to the nearest dollar and transfers the round up from your Chime Spending Account to into your savings account. Save When I Get Paid automatically transfers 10% of your direct deposits of $500 or more into your savings account. ³ The average national savings account interest rate of 0.06% is determined by FDIC as of November 1, 2021 based on a simple average of rates paid (uses annual percentage yield) by all insured depository institutions and branches for which data are available. Visit https://www.fdic.gov/regulations/resources/rates/ to learn more.