Last month, we examined how advancements in technology have fueled the rapid growth of online banking. We looked at pros and cons of using a traditional bank's online services. This month we're going to consider banks that operate exclusively online, and discuss safety concerns of banking online.
It's not uncommon to see banks operate entirely online these days. Online-only banks are able to achieve huge savings by avoiding the overhead expenses of operating physical, "brick and mortar" branches. They use these savings to offer better interest rates than traditional banks. These significantly higher rates are the "carrot" that attracts customers, in spite of some of the challenges we're going to discuss below.
The most obvious drawback to using an online-only bank is being unable to interact face to face, as you can at a local bank. Online banking is limited to email, the Internet, phone, or snail mail.
Accessing your money can also be a bit slower. Since most online banks don't have their own ATM machines, you may face ATM fees when withdrawing your money from another bank's ATM. However, some online banks will reimburse a certain amount of monthly ATM fees. It's also possible to at least partially avoid this issue by withdrawing excess cash when making purchases from retail stores using a debit card.
Unfortunately, making bank deposits is still an issue for online-only banks, despite the huge shift in recent years away from paper checks and toward electronic payments. If your work doesn't offer automatic payroll deposits, the process of mailing paper checks to be deposited is likely to grow tiresome. Of course, online banks offer simple electronic transfers from a local bank account, if you have one — so you can make deposits locally, then transfer the money to an online account. But what if you don't have a local account?
Thankfully, a growing number of online-only banks now offer smartphone apps that utilize a phone's camera to enable you to make remote deposits of checks into your account. If your bank doesn't have such an app yet, you could open a free PayPal account, link it to your checking account, then use PayPal's app to accomplish the same thing (although Paypal does limit the amounts that can be deposited this way each day). If you don't have a smartphone, many online banks offer discounts on UPS/FedEx overnight delivery. In addition, some ATMs allow for deposits to online banks. Bottom-line: depositing money into an online-only bank can still be a hassle.
Security concerns keep some people from online banking. Identity-theft worries make many people reluctant to put their account numbers and other personal information on the Internet. These fears aren't completely unfounded, but the likelihood of being affected is small. While identity and data theft is an on-going concern, most ID theft and fraud takes place offline. Even when it does happen online, it typically involves database breaches of stored customer data that isn't unique to online users. In other words, your chances of becoming a victim aren't significantly higher because you bank online — every bank is going to have your information stored on their computers where it is potentially at risk.
In fact, online banking may provide a benefit if your identity is stolen or your account hacked. Since people who bank online typically check their accounts more frequently, they are able to spot fraud more quickly. As a result, they are often able to limit their losses. Studies have indicated that the average consumer who detects fraud online experiences significantly lower losses than those who wait for paper records.
If you're comfortable using a computer, are looking to manage your finances more efficiently, and are interested in achieving higher interest rates, online-only banks are worth considering. But start first by investigating your current bank's system and compare it to larger bank offerings. This could combine the comfort of "real" bank branches while also providing the practical features of online banking. Online-only banks are able to offer better rates than local banks in most cases, but are they enough better to be worth changing your banking habits? We'll examine that topic next month.