How Online Banking Works
Online banking is an alternative to traditional in-person banking. It’s also a recognition that people increasingly prefer to do things online rather than in person. Online banking allows customers to manage their bank account over the Internet using a computer or mobile device. One big advantage of online banking is that people can bank when it’s convenient for them, including outside of normal business hours.
Types of Online Banks
There are essentially two types of online banks: online banks that are run by traditional banks and credit unions, and banks that are exclusively online with no brick-and-mortar branch locations. Typically, both types of online banks enable people to pay bills, transfer funds, apply for a loan, deposit checks, and verify transactions and account balances using a computer or smartphone.
Online Banking 101
Online banking is about convenience. It’s designed to allow people to access their money where and when they want, saving time and allowing people to bank on their own schedule. Almost anything that can be done at a traditional bank or credit union can also be done online.
Increasingly, people can open accounts online without having to go to a bank branch or sign forms in-person. Checking, savings, and other types of accounts can be opened online using electronic signatures. The process can often be completed in a matter of minutes. However, opening an online bank account still requires personal identification such as a driver’s license. Once registration is complete, people can log-in to their account and start banking online with Internet-enabled devices.
Once an account is opened, customers of the bank can conduct several transactions online, including paying bills via electronic fund transfers, transferring money from a checking account to a savings account or into a certificate of deposit (CD), sending money to friends and family, applying for loans, depositing a check through a mobile app, checking current balances, and making payments to a mortgage or other loan.
Advantages of Online Banking
There are some significant benefits to online banking. A few of the main advantages are that
online-only banks tend to offer higher annualized interest rates, often referred to as the annual percentage yield (APY), on deposits. Online banks also tend to charge lower interest rates on loans, which is called the annual percentage rate (APR). Online banks also tend to charge lower and fewer fees than traditional brick-and-mortar institutions
Drawbacks of Online Banking
Despite their many advantages, online banks may be an adjustment for those who frequently visit a brick-and-mortar bank location to complete their banking with the help of a teller. Traditional in-person banks can also provide safety deposit boxes and cashier’s checks.
Compare Our Featured Picks
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.
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 banking experiences 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 bank, and they are given an edge over competitors by their extensive network of ATMs, which keeps cash withdrawal free and easy. Read the full review.
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.
The Bottom Line
Online banking is part of the modern world and offers many benefits, including convenience and easy access to one’s money. With online banking, people can access and manage their bank account 24/7 on a computer, tablet, or mobile device. The process of online banking eliminates the need to physically visit a bank branch and lets people initiate transactions when it’s convenient for them.
Online-only banks also tend to charge fewer fees and pay higher interest rates than traditional banks. However, online banking requires people to be comfortable with technology, and exclusively online banks don’t always provide the full range of services that are available at brick-and-mortar financial institutions. Many online banks allow customers to use a combination of online and traditional banking, though.