Online-only banks offer a number of advantages over traditional retail banks, including lower fees and higher rates on average. If you don't use cash often, feel comfortable banking online and rarely visit your local bank branch, you may want to consider opening an online-only bank account. Online banks are also a good place to park rainy-day funds, as they may offer significantly higher interest rates than traditional retail banks.
What are the Pros and Cons of an Online Bank?
While many customers are attracted to the high yields and low fees offered by online banks, these advantages are tempered by the lack of branch locations and limited services that some provide. Depending on your personal banking habits, these trade-offs below may play a factor in whether you decide to deposit your funds with an online bank.
- Higher interest rate offers
- Lower fees
- Cashback and other rewards
- Emphasis on mobile and online banking
- No face-to-face customer service
- Limited capabilities compared to retail banks
- Difficult to conduct cash transactions
- No physical locations
How do Online Bank Rates and Fees Compare?
Based on savings account rates we obtained from several popular banks, we concluded that the majority of online-only banks offer significantly higher interest rates for both online savings accounts and high-yield CDs. We also found that online-only banks generally featured no monthly fees or minimum balance requirements.
Two of the biggest advantages to online-only banking are the high interest rates and low fees. Online-only banks don't pay overhead for physical branches or the employees to staff them. Instead, they pass those cost savings on to customers in the form of higher interest rates and lower fees.
Sample Online Bank Rates and Fees
Sample savings and CD rates from survey of five online banks. CD rates assume $2,000 deposit for a 12-month period. Your rates and terms may vary.
After evaluating our survey of savings account rates, we found a clear distinction between the APYs offered: interest rates at online banks were higher by over 100 basis points when compared to a number of major retail banks. In comparison to the FDIC-reported national average, the online banks we surveyed featured a consolidated savings rate that was 141 basis points higher.
Sample Retail Bank Rates and Fees
Sample savings and CD rates from survey of five retail banks. CD rates assume $2,000 deposit for a 12-month period. Your rates and terms may vary.
In terms of fees, almost every major retail bank charged monthly maintenance fees for account balances under $300. The fees we saw ranged from $4.50 to $6 per month, although most of these can be avoided by setting up automatic monthly deposits, maintaining a minimum balance amount or meeting a monthly deposit requirement. By contrast, none of the online-only banks we surveyed charged monthly maintenance fees, and most did not require a minimum account balance.
What are the Benefits of Online Banks?
One of the frequently cited benefits of online banking is its relative convenience. Borrowers can access their balances, transfer funds and set up monthly payments from their computers without ever having to leave their homes. Additionally, the majority of online banks offer mobile applications for your smartphone, although these are also offered by many retail banks as well.
Another increasingly popular feature is the ability to deposit checks through an app. Many online banks will allow you to do this, including Ally eCheck Deposit and CIT Bank's mobile app. Although this was previously limited to more tech-savvy banks, it has also been adopted by many retail banks in recent years.
Rewards programs are another feature that we don't typically see offered by retail banks outside of credit cards. Discover's Cashback Checking account allows customers to earn cash rewards on qualifying debit card transactions. Certain online institutions like MemoryBank provide special promotional rates for accounts that meet direct deposit, monthly purchase or balance requirements, which stands in contrast to many retail banks that often require you to meet certain requirements just to avoid fees.
Finally, online banks are almost always open. While most retail banks will be closed on weekends or holidays, online banks allow you to access your account 24/7 and have customer service representatives available around the clock. Online banks also offer many of the same account protections as traditional banks, including FDIC-insurance and account alerts.
How Easy is it to Access Cash Through an Online Bank?
The lack of physical locations seems like it could make withdrawing funds from an online bank difficult. Many online banks have recognized this issue and devised creative ways to make up for this. While this will be less of a concern if you conduct all your transactions electronically, being able to access your cash is still important to many consumers.
Third-Party ATM Networks
Some online banks partner with third-party ATM providers to provide easy access to cash. For example, Synchrony Bank relies on the Plus and Accel ATM networks to provide ready access to customers, while Ally Bank partners with the Allpoint network to provide free ATM access for their clients. Third-party ATM networks often cover more communities than many retail banks. For instance, the Allpoint network of ATMs covers almost the entire continental United States.
By contrast, Citibank is only concentrated in major metropolitan areas, while TD Bank is focused on the eastern seaboard. Depending on where you live or how much you travel, it may be easier for you to withdraw money through a network ATM than a regional bank branch.
Many online banks have resorted to ATM fee reimbursements to circumvent the lack of physical locations. Ally Bank provides its customers with a $10 monthly allowance to cover any ATM fees, while Axos Bank reimburses its customers for an unlimited number of ATM withdrawals. As a basis of comparison, we've included a list of ATM fees charged by some of the major retail banks here.
Some banks provide other ways access to cash quickly and efficiently. For example, the Marcus Online Savings Account by Goldman Sachs Bank U.S.A. provides customers with free wire transfers. Being able to rapidly transfer funds into and out of your account in a cost-effective manner is useful to customers who maintain multiple accounts at a variety of banks. It's also helpful in this instance, because Marcus does not currently have a relationship with any ATM networks.
What are the Disadvantages of Online Banks?
If you prefer face-to-face customer service or handle large amounts of cash, you may prefer a retail bank instead of an online-only bank. Additionally, while online banks offer more competitive rates and lower fees, they typically don't have the same breadth of offerings as most retail banks.
Dollar Savings Direct
Axos Rewards Checking
Italicized names indicate traditional retail banks
With some exceptions, online banks offer a limited scope of banking products. Many online-only banks including Marcus by Goldman Sachs and CIT Bank offer savings accounts with competitive rates but no checking accounts, which can be frustrating for people who prefer to conduct all their banking in the same place.
Benefits of Traditional Retail Banks
Many retail banks provide special promotions for mortgages, auto loans and credit cards to their existing customers. As seen in the chart above, all three retail banks provide a variety of lending services in addition to banking. The ability to visit a local bank and obtain financial advice, often free of charge, is not something that many online banks can offer. The local branch office of your retail bank can also be more lenient when waiving overage charges and other fees, particularly if you've been a loyal customer for a long time.
Finally, many retail banks now offer their own mobile apps, which feature the same convenient features offered by online-only banks such as mobile banking and e-deposits. Chase, TD Bank and Citibank all have comprehensive mobile apps which allow you to access your bank account on the go. Wells Fargo's mobile app even allows you to access an ATM if you've forgotten your debit card. This gives you the flexibility to bank online or at a branch, depending on what services you need.