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You may already use online banking to check your account balance or view bank statements via a mobile app, but this differs from having an account with a fully online bank.
Understanding Online Banks
Online banks operate entirely online without any physical branches. Examples include Discover, SoFi, and Varo. These banks are fully licensed, insured, and offer a range of financial services such as checking and savings accounts, and sometimes credit options like credit cards.
Additionally, some fintech companies offer banking products and services. These fintechs aren’t banks but partner with FDIC-insured banks to provide their services. For example, Chime collaborates with The Bancorp Bank, N.A., and Stride Bank to offer its banking services.
Advantages of Online Banks Over Traditional Banks
Online banks often have several advantages compared to traditional banks.
Since they don’t have the overhead costs associated with maintaining physical branches, online banks and fintechs typically offer free accounts with lower fees than those at traditional banks.
Traditional banks like Chase and PNC usually charge monthly maintenance fees on checking and savings accounts, typically ranging from $5 to $25.
Furthermore, online banks often provide significantly higher interest rates on savings accounts. It’s common to find online savings accounts offering annual percentage yields (APYs) that are ten times higher than the average. For instance, SoFi’s savings account offers a 4.60% APY with direct deposit, which is ten times the average rate of 0.46% according to the FDIC.
Drawbacks of Online Banks
The main disadvantages of online banks are the lack of in-person customer support and potential challenges in depositing cash.
Many online banks and fintechs face complaints about limited customer service options or unresponsiveness from their support teams. With no physical branches, communication is typically limited to phone support, email, chatbots, or online forms.
Additionally, unless the online bank allows cash deposits at ATMs or retail locations like Green Dot, you’ll need to transfer funds through methods like ACH, mobile check deposits, or wire transfers.
In contrast, traditional banks allow you to visit a branch, speak with a banker in person, and deposit cash directly. Regular visits to the same branch may also help you build relationships with the staff, making it easier to manage your account and resolve any issues.
Choosing Between Online and Traditional Banks
Your decision should be based on your individual needs and priorities. An online bank may be the right choice if you:
- Rarely visit physical bank branches.
- Don’t frequently deposit cash.
- Are comfortable with mobile banking apps.
- Prefer online or phone customer support.
- Want a fee-free bank account.
- Are looking for a high-yield savings account.
On the other hand, if these features don’t suit your needs, a traditional bank with physical branches may be more suitable for you.