Considering ditching brick-and-mortar banks? Here’s what you should understand first.

By Kristine Gill
September 10, 2019
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These days, you can do most of your banking on your smartphone or your computer, and many banks even let you deposit checks remotely—it may have been weeks or even months since you last stepped foot in a bank. But traditional bank accounts are still tied to brick-and-mortar locations, and online banks—while offering almost all of the same services—are not.

Is an online bank a safe spot to store your emergency fund? Will they smooth your way to financial independence? We’ll give you a rundown of the basics on the savings and checking accounts offered by online banks, which experts say are the way of the future.

How online banks work

Online-only bank accounts might sound super futuristic, but most of our banking is already done through the internet. With the exception of a few minor changes, your daily interaction with your money—checking your account balances, moving money between accounts, paying bills or depositing checks—remains the same.

“A lot of people have the misconception that you would also need some kind of supplemental bank account,” says Kimberly Palmer, a credit card and personal finance expert at NerdWallet. “But actually a lot of people just rely on an online-only account.”

Online banks and cash

Picking an online bank doesn’t mean bidding farewell to crisp $20 bills forever.

“These banks have ways to make sure you have access to your cash,” Palmer says. “Most have relationships with ATMs or ATM networks.”

Palmer says that these ATMs are usually easily accessible to most individuals and clearly labeled on the physical machines as in-network for your particular online-only bank. (Your online bank’s app will also likely also offer a method of finding in-network ATMs.)

Stefanie O’Connell, a personal finance author, says most online banks will also reimburse any withdrawal fee for an ATM outside of your network. But to avoid this, some folks opt instead to deposit cash into an account at a traditional bank before transferring it to their account at an online bank. These transfers are typically free, unless you’re looking to have the cash same-day. (Transfers can take a few business days.)

“It does add another step,” O’Connell says. “It’s about considering what your needs are.”

RELATED: So You Have Your Emergency Fund—Here’s What You Need to Do Next

Are online banks safe?

In short, online banks are just as safe as traditional, brick-and-mortar banks. To be sure yours is legitimate, look for a bank that is FDIC-insured, so you can be confident that your rainy day fund isn’t going anywhere.

“That’s the government backing on any bank that says we will cover up to $250,000 per account, insuring your deposits at this institution,” O’Connell says.

Palmer says FDIC (Federal Deposit Insurance Corporation) insurance is clearly marked on the homepage for online banks.

Is an online bank right for you?

Deciding whether to open an account at an online bank is a matter of personal preference.

“If you’re someone who loves going into your bank and talking to your teller, you’re not going to get that with an online-only bank,” O’Connell says. “You want to consider that tradeoff.”

Similarly, questions you have about qualifying for a mortgage or auto loan or looking to take out a personal loan will have to be conducted over the phone. (And you’ll have to find another place to take your loose change.) But, like brick-and-mortar banks, Palmer says online-only banks also have 24/7 customer service by phone and online.

Another downside is that not all online banks offer credit cards yet.

“The online-only experience is still very piecemeal,” O’Connell says. “I do think brick-and-mortar has the advantage of being a one-stop shop.”

The biggest perk of an online-only account is the high interest rate for your savings account and low (or no) fees. Online banks can offer those perks because they don’t have to pay for overhead costs, so the savings get passed onto the account holder, O’Connell says. Most traditional banks offer 0.1 percent standard interest on savings accounts, while most online banks offer 2.0 percent and above, she says. (Interest rate hikes or cuts from the Federal Reserve can impact rates for savings accounts accordingly.)

“That’s a huge difference,” O’Connell says. “You’re basically having [the account] earn money automatically, and at pretty much zero risk.” As far as personal finance tips go, that’s a pretty good one.

Palmer adds that you likely won’t have to pay account balance minimum fees at online banks, which can be great for teens and young adults just starting with a modest account to build credit or get in the habit of thinking about financial goals. Some online banks advertise no overdraft fees, too.

On the fence about an online bank? You can always open one for the interest benefits and keep your traditional account open in the meantime. When you’re ready to make the full switch, you can decide to close your original account.

The banks of the future

Whether you’re ready to take the plunge or not, this banking solution seems to be the likely way of the future, Palmer says.

“Younger people in particular are increasingly moving toward online-only services, including banking,” she says. “And into adulthood they’ll likely continue that comfort level.”

Palmer says Generation Z, young adults between the ages of 18 and 22 specifically, are most likely to have an online-only bank account these days. That percentage decreases as the age bracket increases, meaning Baby Boomers are less likely to have an account at an online bank. 

Even with that in mind, Palmer said she still got her 9-year-old daughter a traditional bank account when they opened one for her this year.

“I wanted her to have that experience of walking into a bank and handing her cash over as a deposit,” Palmer says.

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