Personal Finance 101: An Online Banking Primer

Katie writes in:

I was wondering if you could do an article on how to set up an online savings account? I remember you mentioned using them and getting a high return on interest, and I think I’d like to switch my savings account over to one. What kind of benefits/penalties have you come across?

pf101The first thing to look at is what the differences between a “normal” bank and an online bank are.

With a normal bank, you have your usual checking and savings accounts. They issue you a checkbook with which to write checks and (usually) an ATM card to access your account. When you need to deposit something into your account, withdraw some cash, or make another transaction, you usually visit a branch location, visit an ATM, or use the bank’s online banking services.

With an online bank, all of the above is (typically) true, except that there is no physical branch location to visit. You conduct all of your business with the account via an ATM or via the online banking service.

What do you get in return for a lack of a physical branch to visit? You usually get a better interest rate than you would at a brick-and-mortar bank. You also usually get a very good online banking system and online bill pay service. Most online-only banks usually have minimal fees – no maintenance fees or other things like that. Typically, you get top-notch phone-based and internet-based customer service, too.

For a lot of people, that’s a trade they’re happy to make. The loss of a physical bank can be a big change, but the other benefits of the account make up for that.

How to Distinguish Between Online Banks
There are several things I look at when considering whether to use an online bank.

First, are the rates offered at least reasonably competitive? Banks change their exact interest rates all the time, so I don’t view it as a requirement that an online bank have the best interest rate in the land on a certain given day. However, the rate should be within a percentage point of that. I usually use BankRate.com when researching banks.

Second, is it FDIC insured? I look for the FDIC logo when I visit the website. I usually also follow up at the FDIC website using their bank search to make sure that the bank is registered with the FDIC. The FDIC is essentially insurance for your savings and checking (and CDs) that guarantees up to $250,000 of your account in the event of a bank failure.

Third, is it well-reviewed? Search Google for online bank reviews, particularly reviews of the banks you’re interested in. Get a diversity of opinions; don’t just rely on the first one you see. I have a series of online bank reviews ready to go for The Simple Dollar and will begin posting them soon (once I have a minor legal issue resolved with regards to them).

Fourth, does it offer all of the services you need? Do you need to have a paper checkbook or will online bill pay and an ATM meet all your needs? Do you need a very wide ATM network? Do you need easy access from your cell phone? Do you need Quicken compatibility? Do you have any other particular needs with regards to the account? Know what exactly you need with regards to the account and keep those needs in mind as you look at a few banks.

Fifth, once you decide on a bank, open the new account, but don’t close the old account. Transition slowly in order to ensure that you didn’t forget about any automatic payments or anything else like that. You may even choose to leave the account at your old bank open, particularly if it does not have any annual fees or maintenance fees, because of the convenience of the local branch.

Funding your new account is done electronically. You simply request a transfer using your new bank’s online banking system and the money moves automatically.

Good luck!

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6 thoughts on “Personal Finance 101: An Online Banking Primer

  1. John says:

    But how do you deposit checks if you can’t visit there’s no teller to visit?

  2. lurker carl says:

    Two concerns with on-line bankings. Don’t ever put all your ‘eggs’ in one basket, so to speak.

    1. When the customer becomes unable to manage their finances, either temporarily or permanently. An intermediary must take control; who would know such accounts exist or how to access without user IDs and passwords? There is a lot to be said for a monthly statements coming by snail mail.

    2. Wide spread and prolonged electrical power outage. Impossible to manage accounts without internet and zero access money without electricity.

  3. Eric says:

    @John: You either mail them in, or you keep your local brick/mortar bank account open, deposit it there, and EFT the money into your online account.

  4. AJ says:

    One problem: With current interest rates, being within a single percentage point isn’t all that helpful, since that’s pretty much anything above zero.

  5. Angie says:

    The Wall Street Journal just did a good article on this topic over the weekend.

  6. Jim Lippard says:

    @John (#1): In addition to the two answers already given (mail your deposits or keep a local account, deposit there and transfer, both of which I’ve used), some banks are starting to allow customers to scan checks and deposit them electronically–currently this service is offered by USAA Federal Savings Bank (Deposit@Home via flatbed scanner, or Deposit Mobile via iPhone camera) and by Chase Bank (Chase Quick Deposit, which also works via scanner or iPhone camera).

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