How Online Checking Accounts Work
Online checking accounts function much the same way as traditional checking accounts you would open at a brick-and-mortar bank. Like traditional accounts, they are regulated and backed by consumer protections from organizations like the Federal Deposit Insurance Corporation (FDIC). For the most part, the only real difference is that you can open one over the internet, without ever visiting a physical bank branch.
Personal banking has undergone profound changes in recent years as financial technology (“fintech”) has disrupted the industry. As a result, a whole new generation of online-only banks are doing brisk business. What’s more, many of them attach appealing terms and conditions to their online checking accounts in order to attract new customers. In the following guide, we’ll deliver all the information you need to make an informed decision as you consider competing offers.
What Is a Checking Account?
Checking accounts are financial products designed for spending. People use them to manage regular and ongoing expenses, like rent and mortgage payments, bills, and utilities. They are also widely used to finance everyday purchases. Given this profile, some banks call them “transactional accounts,” as they are meant to support a higher volume of transactions than typical savings accounts.
Some checking accounts offer nominal interest rates to depositors. In other words, interest is usually less than you would earn on a savings account, reflecting its purpose as a spending account. In some cases, banks pay a fixed, flat interest rate regardless of your account balance. Others offer higher rates to customers who keep more money in their accounts. Alternately, variable rates that fluctuate in keeping with prevailing financial market conditions may apply.
However, in almost every case, interest rates are a secondary consideration when it comes to checking accounts. Their balances usually fluctuate, making it difficult for account holders to earn meaningful returns on their money. Savings accounts offer a better option if you are looking to earn interest. The main draw of checking accounts is that they carry far fewer limitations on when and how customers can access the funds they contain, relative to savings accounts.
Types of Checking Accounts
Banks configure their checking accounts in many different ways. Details will vary depending on the bank, but the most common types of checking accounts include:
- Standard: These accounts offer the essential functions customers rely on for their banking. For example, they provide debit cards, ATM access, check-writing privileges, and other transactional features. Banks sometimes attach monthly fees to these accounts, but will usually waive applicable charges if you maintain a minimum monthly balance.
- Premium: These accounts offer all the standard features of a regular checking account, plus perks like free checks, higher interest rates, and rebates on your ATM transactions. In exchange for these bonuses, customers usually need to keep $10,000 or more in the account.
- Interest-bearing: While some standard checking accounts pay a small amount of interest, others do not. Banks differentiate by offering interest-bearing checking accounts, which pay fixed or variable interest rates on balances. Rates are usually low and they seldom keep pace with inflation, but even a little extra money is better than none.
- Low-balance: These options are for people who do not have the means to build and maintain large balances. The extremely low or absent balance requirements usually come with some limitations on the number of checks the account holder can write, or the number of monthly transactions they can make.
Most people find that standard or premium checking accounts best meet their needs. Interest-bearing accounts split the difference between checking and savings accounts, making them an option worth considering as long as applicable fees and charges do not nullify the interest you stand to earn.
Low-balance checking accounts make a good option for depositors who do not build up sizable bank balances. Another type of checking account known as a second-chance checking account offers similar features but is more specialized and situation-specific.
Comparing Terms and Features
Take the time to research and compare offers. Fintech advancements have dramatically increased the number of options available to consumers. In the current personal banking landscape, companies compete hard to win business. Thus, they often extend highly advantageous offers to incentivize customers to choose them over competitors.
When performing head-to-head comparisons of various online checking accounts, consider these four core features:
- Monthly transaction limits: Some checking accounts offer unlimited monthly transactions, while others put a soft cap on the number of withdrawals or payments you can make each month. Penalty fees usually apply if you exceed these limits.
- Initial deposit requirements: Banks may only offer certain types of checking accounts to customers willing to meet an initial deposit requirement.
- Minimum balance requirements: Banks sometimes ask their customers to keep a certain minimum balance in their checking account at all times. You may have to pay a fee if your balance dips below the limit, or you may be subject to additional restrictions such as stricter controls on withdrawals and transactions.
- Interest rates: Some checking accounts pay no interest at all. In exchange, they usually remove limits and restrictions on transactions and banking activities. Checking accounts that pay interest are more likely to attach terms and conditions on check-writing, ATM withdrawals, and monthly transactions.
When considering these factors, remember that banks often make exceptions and remove restrictions if you maintain a certain balance. For instance, monthly transaction limits may be removed if you keep a specific amount of money in the account at all times. In other cases, the bank may offer interest (or higher rates) to customers who keep larger sums of money in their checking accounts.
How to Open an Online Checking Account
Online banks make it fast and easy to open an online checking account. Perform searches and use aggregator tools to source offers. When you find one you like, proceed to the company’s website and go through the indicated steps.
You will need to provide a few data points and documents, including:
- Your full legal name, address, and date of birth
- A work and/or personal telephone number
- A valid email address
- Your Social Security Number (SSN) or Internal Revenue Service-issued Tax Identification Number (TIN)
- A digital copy of your driver’s license, passport, or other state-issued ID document
You will then need to complete a few additional steps to finalize your account setup:
- Choose a login and password
- Set answers to login challenge questions, if required
- Confirm your phone number by entering a passcode sent to you by text message
- Link any existing financial accounts to your new checking account
From there, you will be all set to go. Simply add funds and use your account as you wish.
Using Your Online Checking Account
In some cases, banks will ask you to make your first deposit right away. In others, they may ask that you add money to the account within a set timeframe, usually 10-30 days after opening the account.
Supported methods of making deposits to your checking account usually include:
- Direct bank-to-bank transfers
- Wire transfers
- Paper or electronic check deposits
- Transfers from online payment processors, like PayPal or Stripe
Should you need help setting up or using your new checking account, a representative from your online bank will be happy to help you. Most fintech banks offer customer support in multiple formats, including telephone, email, and/or live chat features.