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There’s a strong possibility you’ve engaged in online banking, such as checking your account balance or viewing bank statements via a mobile app. However, online banking differs from having an account with a fully online bank.
What Are Online Banks?
Online banks operate entirely on the internet without any physical branches. Examples include Discover, SoFi, and Varo. These banks are fully licensed, insured, and offer various financial services, including checking and savings accounts, and sometimes lending options like credit cards.
Additionally, there are fintech companies that provide banking products and services. These fintechs aren’t banks themselves but partner with FDIC-insured banks to offer their services. For instance, Chime is a fintech that partners with The Bancorp Bank, N.A., and Stride Bank to provide its banking services.
Are There Any Advantages to Online Banks Over Traditional Ones?
Online banks offer several benefits compared to traditional banks.
Typically, online banks and fintechs provide free accounts since they don’t incur the costs associated with maintaining physical branches. This cost-saving allows them to offer accounts with lower fees than those found at traditional banks.
Traditional banks like Chase and PNC often charge monthly maintenance fees on checking and savings accounts, generally ranging from $5 to $25 per month.
Moreover, online banks usually offer much higher interest rates on savings accounts. It’s common to find online savings accounts with APYs that are ten times higher than the average. For example, SoFi’s savings account offers a 4.60% APY with direct deposit, which is precisely ten times the average rate of 0.46% according to the FDIC.
What’s the Downside of Online Banks?
The primary drawback of online banks is the absence of in-person customer support and the potential difficulty in depositing cash.
Many online banks and fintechs receive complaints about limited customer service options or unresponsiveness from their support teams. Without physical branches, communication is restricted to methods like phone support, email, chatbots, or online forms.
Additionally, unless the online bank accepts cash deposits at ATMs or retail locations like Green Dot, you’ll need to transfer funds to your account via ACH, mobile check deposits, or wire transfers.
In contrast, with traditional banks, you can visit a branch, speak with a banker in person, and deposit cash directly. Frequent visits to a specific branch may also allow you to build a rapport with the staff, making issue resolution and account management more straightforward.
Online Banks vs. Traditional Banks: Which Should You Choose?
Your choice depends on your personal priorities and needs. An online bank might be the right fit for you if you:
- Rarely visit physical bank branches.
- Don’t frequently make cash deposits.
- Are comfortable using mobile banking apps.
- Prefer online or phone customer support.
- Want a bank account with no fees.
- Seek a high-yield savings account.
However, if these aspects don’t align with your preferences, a traditional bank with physical branches might be a better choice for you.