What Is Online Banking: Definition, pros and cons

Learn more about this alternative to traditional banking

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Are you looking for a bank that offers minimal fees and a competitive interest rate? Do you value convenience and efficiency over face-to-face customer service? If so, an online bank might be for you.

Online banking allows you to perform regular banking tasks such as transferring money, cashing checks and paying bills using your mobile device or desktop computer. Online banks don’t offer physical locations or in-person customer service.

Key insights

  • Online banks allow customers to perform regular banking tasks using a mobile device or desktop computer.
  • Many online banks offer lower fees and higher interest rates than brick-and-mortar banks because they don’t have the overhead costs associated with physical locations.
  • Important factors to consider when choosing an online bank include fees, interest rates, access to ATMs and whether the bank is FDIC-insured.

Online banking explained

An online bank allows you to manage your account and conduct banking tasks using a mobile device or desktop computer. Walter Russell, president of Russell and Company, a financial advisory firm in New Albany, Ohio, said the main difference between an online and a brick-and-mortar bank is that online banks “generally don’t have traditional banking branches.”

For this reason, online banks often have lower overhead costs, allowing them to pass the savings on to their customers in the form of lower fees and higher interest rates.

Many traditional banks offer a larger range of financial products, including checking and saving accounts, mortgages, personal loans or lines of credit, insurance and brokerage accounts. While some online banks are expanding the range of products they offer to include products like certificates of deposit (CDs), individual retirement accounts (IRAs) and loans, the number of offerings usually is not as comprehensive as at traditional banks.

How does online banking work?

Two of the main benefits of an online bank are convenience and access — you can bank whenever and wherever you want. All you need is a secure internet connection and a mobile device or a desktop computer. There’s no need to adhere to traditional banking hours or stand in line waiting for the next available teller.

Some online banks also offer convenient features like mobile check deposits. You simply take a photo of your check using your bank's app, and it’s deposited into your online account.

While you can perform many of the same tasks with an online bank account as with a traditional one, there are some differences. For instance, online banks don’t have physical branches, so you can’t visit the bank to speak with a teller face to face. The lack of physical locations can also make it more challenging and time-consuming to perform certain banking tasks, like depositing or withdrawing cash.

Online banks are generally as safe as traditional banks if they are insured by the Federal Deposit Insurance Corporation (FDIC). When you deposit your money into a bank with FDIC insurance, your money is insured up to at least $250,000 per ownership category (e.g., single account holder, joint account).

When selecting an online bank account, confirm if it offers safety features like encryption and fraud monitoring. You can also take steps to improve the safety and security of your account. For instance, avoid performing banking tasks while on a public Wi-Fi network, and ensure you have up-to-date antivirus software on your mobile device or desktop computer.

Pros of online banking

There are several advantages associated with online banks, including:

  • Ease of opening an account: Opening a new account online is simple and often quicker than traveling to a physical bank location.
  • Convenience: With an online bank, you can access your account and complete common banking tasks 24/7 from anywhere with a secure internet connection.
  • Lower fees: With no brick-and-mortar locations to maintain, many online banks can afford to charge lower fees than traditional banks.
  • Higher interest rates: Some online banks offer higher interest rates, helping your money grow faster.
  • User-friendly: Because online banks are entirely digital, they tend to pay close attention to their user interface to provide a more seamless user experience.

Cons of online banking

There are also some cons to consider with online banks, including:

  • No physical branches: If you prefer face-to-face banking, note that it’s generally not an option with an online bank. If you need help, you’ll have to access customer service via online chat or over the phone.
  • Fewer banking products: Traditional banks tend to offer a range of financial products, from checking and savings accounts to mortgages, personal loans and more. By contrast, online banks tend to have more limited options.
  • Inconvenient cash deposits: With no physical locations, online banks may make it more challenging to deposit cash. While many online banks accept ATM cash deposits, some do not.
  • Minimum cash withdrawals: Similarly, if you need to take out a large amount of cash, you might find it more challenging, as some ATMs limit the amount you can withdraw

» MORE: Best Banks and Credit Unions

How to choose an online bank

Online banks have grown in number and popularity over the last decade, giving customers many options to choose from. Russell, from the financial firm in Ohio, believes the most important feature to look for in an online bank is whether it’s FDIC-insured.

Other factors you should consider when narrowing down your options include:

  • ATM access: Many online banks participate in ATM networks that permit you to deposit and withdraw cash. If having regular access to cash is important to you, look for an online bank with a large ATM network with convenient locations.
  • ATM fee reimbursement: If you incur fees using out-of-network ATMs, some online banks automatically reimburse those fees each month, while others will not.
  • Other fees: Check to see if there are other fees associated with the online bank, such as monthly service fees, overdraft fees or minimum balance fees. Look for an online bank that offers minimal or no fees.
  • Interest rate: In general, online banks offer better interest rates than traditional banks. Compare online bank options to see which bank provides the best deal.
  • Products offered: While traditional banks tend to offer a more comprehensive list of financial products, many online banks are starting to widen their scope. Compare your options based on the product offerings you need or want.
  • Customer reviews: Take some time to read customer reviews of online banks. See what customers say about the overall user experience. Also, pay close attention to what they say about the bank's online or phone-based customer service. Keep your eyes open for any red flags or ongoing issues.

» MORE: What do you need to open a bank account?

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Online banks vs. traditional banks – what’s the difference

The main difference between an online bank and a traditional bank is that an online bank has no physical locations. Instead, you perform common banking tasks like paying bills, transferring money and cashing checks using a mobile device or desktop computer.

Is online banking secure?

Online banks are typically as secure as traditional banks as long as they’re insured by the FDIC. In banks with FDIC insurance, deposits are insured up to at least $250,000 per depositor per ownership category.

What are neobanks?

Like online banks, neobanks are fintech companies that have no physical branches and offer basic banking services such as deposit accounts. Unlike online banks, neobanks are not FDIC-insured. If the neobank partners with an FDIC-insured bank, your funds are only insured once they’re deposited into the FDIC-insured bank account.

Bottom line

When deciding if a traditional or online bank is the right fit for you, consider your specific financial needs and what you value the most in a bank.

If your goal is to minimize fees and maximize your interest rate, you may want to consider an online bank. However, if you appreciate face-to-face interaction and want a full-service bank with access to a wide array of products, you may want to go with a traditional bank.

Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
  1. Federal Deposit Insurance Corporation, “ Deposit Insurance FAQs .” Accessed Feb. 12, 2023.
  2. Federal Deposit Insurance Corporation, “ Banking With Apps .” Accessed Feb. 12, 2023.
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