Over the past few years, consumers have become increasingly familiar with the powerful potential of digital tools to manage their finances. In 2017, Nielsen data showed that more than 73% of all U.S. households used internet banking services to access their accounts, transfer funds, and pay bills.
But although bank customers have been enthusiastic in embracing new technologies, a significant number continue to view online-only banks as less credible than institutions that maintain brick-and-mortar branches in their area.
Online banks usually market their deposit accounts as cheaper, higher-interest alternatives to traditional banking. However, their novelty and lack of physical branch locations make them a frequent target of skepticism. Nevertheless, online-only banks can play a reliable—if limited—role in boosting your savings rate.
Online Banking is Less Risky Than You May Think
Online banks are often seen as a risky, untested alternative to tried-and-true systems that people have relied on for decades. However, many online banks are actually backed by traditional institutions looking to expand their business. For example, the Marcus Online Savings Account represents a new division of financial giant Goldman Sachs. The involvement of established players in online-only banking guarantees a degree of stability that might not exist otherwise.
Even brand-new companies have found it advantageous to cooperate with existing banks. Simple Bank, an online startup that provides branchless checking account services, entrusts its customer deposits to BBVA Compass Bank and the Bancorp Bank. This grants Simple customers the protection of FDIC deposit insurance, which ensures that their deposits will be recovered if the bank fails. Such partnerships are widespread among online banks, making them far less risky than many consumers assume.
The Inconvenience Factor
However, the misperception of greater risk is also accompanied by the idea that online banks are less convenient when it comes to accessing deposits. While online banks generally do a good job of eliminating risk for their account-holders, some have yet to perfect the ways people can manage their deposits. Depending on the bank, electronic transfers must be done via apps, websites or phone. While you're unlikely to lose money deposited in an online account, you may well encounter delays in getting that money moved around.
True or not, the popular assumptions about the risks and inconveniences of online bank accounts are interesting when compared to the success that mainstream banks have had in adopting the same technologies used by online-only banks. While it's true that major institutions have more resources to develop and maintain sophisticated banking apps and web portals, they also leverage their brand reputations and extensive in-person services to make these new tools seem more reliable and accessible to their customers.
Banking, Old and New
In a recent PwC survey of bank customers, 62% responded that it was still important for their bank to operate local branches. People may no longer see branches as the main way to bank, but most still consider them a safety net for complex problems that require in-person service. As a result, longtime industry giants such as Chase Bank and Wells Fargo have invested in new technologies while maintaining their traditional networks of branches and ATMs.
By striking a balance between innovation and existing assets, the big banks have mostly managed to retain their huge base of customers. This leaves less opportunity for online-only banks, whose total reliance on digital channels means that people are less confident in the banks' ability to handle major customer service issues. Yet despite this disadvantage, online banks can still make sense as part of a larger financial strategy.
Using Online-Only Banks as Part of Your Financial Plan
Many online banks offer free high-rate savings accounts that far exceed the near-zero rates you'll find on standard savings accounts and major banks. Online banks can cut fees and boost customer interest rates because they aren't saddled with the heavy costs of a brick-and-mortar operation. At the same time, practically every online-only bank offers the same FDIC deposit insurance you can find at a brick-and-mortar institution.
The affordability, safety, and high rates of online bank accounts make them an ideal instrument for your long-term emergency savings. While they may not offer as much day-to-day convenience as a savings account with local branch support, online savings accounts are ideal for money that you don't plan to withdraw very often. Their interest rates aren't as high as the returns you might see on investments, but funds in an online bank earn a guaranteed rate and enjoy the protection of government insurance.
Maxime Rieman is Product Manager at ValuePenguin. Educating and assisting shoppers about financial products has been Rieman's focus, which led her to joining ValuePenguin, a consumer research and advice company based in New York. Previously, she was product marketing director at CoverWallet and launched the personal insurance team at NerdWallet.
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