How Online Savings Accounts Work

While bank branches and passbooks still have their place, personal banking is increasingly moving online. As a result, it’s now possible to open and use a savings account without ever setting foot in a bank.

Technological advancement has also created an entirely new industry of online-only banks. These offer a multitude of different savings accounts, which offer variable features that appeal to people in specific situations.

In this guide, we’ll look at the major types of online savings accounts and their various features. We’ll also offer guidance on when to consider particular options.

What Is a Savings Account?

A savings account is an interest-bearing account designed to hold deposits. Most savings accounts pay variable interest rates. This means the amount of interest paid to the account holder can change over time. If the Federal Open Market Committee elects to raise interest rates in response to market conditions, banks will increase the interest paid out on savings accounts. Conversely, banks will pay out less interest if the Fed chooses to lower rates.

Savings accounts offer several distinct advantages:

Historically, savings accounts have been subject to Federal Reserve Regulation D requirements. As a result, this meant that account holders were limited to six transactions per month on their savings accounts.

However, in April 2020, the Fed suspended Regulation D’s applicability to savings accounts in response to the COVID-19 economic fallout. As of May 2021, the suspension remains in place, and the Fed has not commented on whether the change is permanent.

Types of Savings Accounts

Banks offer many types of savings accounts. Some are designed for general use, while others help customers save for specific goals.

Standard savings account options include:

Most people opt for traditional or high-interest accounts. While specialized savings accounts also have niche appeal, they usually carry additional terms and conditions which can be quite restrictive.

Comparing Terms and Features

Four key points of comparison help you understand your options:

As you compare your options, keep the following rule of thumb in mind: the more interest the account pays, the more restrictive its conditions tend to be. As a result, a few pieces of general advice apply:

Spend time comparing offers, and use consumer reviews to research the bank. The fintech landscape has created unprecedented choices, making this more important than ever.

How to Open an Online Savings Account

Opening an online savings account is easy. After finding an offer you want, simply visit the bank’s website and follow the sign-up steps. You will need to provide:

You will create a login protected by a secure password. Many banks include extra security steps, such as challenge questions to verify your identity. They may also confirm your phone number by sending a text message with a special multi-digit passcode, then ask you to enter that passcode back into the system.

Using Your Online Savings Account

Most banks ask new customers to make a small initial deposit, which can be as low as $1. Others do not require an initial deposit at all, but instead request that you make your first deposit within a specified period of time.

You can use your choice of three main methods to deposit funds into your online savings account:

Many banks also work with major online payment processors like PayPal, allowing you to link the account and move funds back and forth as needed.

From there, simply add and withdraw funds as needed. Online banks usually maintain multiple customer service options, including telephone, email, and chat-based support. Finally, if you need assistance with your account, a representative will always be available to help you.