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Tags: banking | online | digital | cash

Should You Switch to Banking Online Exclusively? Consider These Pros and Cons First

Vitali Michkou/Dreamstime

Maxime Rieman By Tuesday, 07 July 2020 01:05 PM Current | Bio | Archive

According to one estimate, there will be 7 billion mobile banking users worldwide by 2021. After months in COVID-19 quarantine, many of us are even more aware that visiting a physical bank is less important than we previously thought.

The Bank of Scotland created the first online bank offering as early as 1983. Although some of the earliest providers didn't survive, many others that came after did. Dozens of digital-only banks now offer attractive perks — so you can finally make the plunge and ditch the traditional banking experience.

But you shouldn't make the switch to online-only banking without doing your research. Online-only banking has significant benefits to explore, but there are a few downsides to consider as well.

Advantages of online-only banking

You'll be hard-pressed to find a national or even local bank that doesn't offer online banking options. All banking can be done fairly effectively without visiting a physical bank. Here are some advantages to the digital banking experience:

1. You may get high-yield interest rates.

Interest-bearing savings and checking accounts offer a return on money you plan to use in the near future. Online banks tend to provide higher yields on savings accounts, money market accounts and CDs. In 2019, the average interest rate for savings accounts at U.S. banks was just 0.09%. For checking accounts, the average interest rate was just 0.06%. This was the average for all banks, but physical banks typically bring this number down.

Meanwhile, many online-only banks, or the online-only divisions of some traditional banks, offer savings account yields that tend to top 1.00%. And a few high-yield accounts even offer interest rates well over 2.00% (though these typically require a large deposit).

2. Fees are typically lower.

Many banks charge monthly or annual service fees to keep the account open. For savings accounts, you may pay the fee directly from the interest you earn (which at times could negate the amount you've earned in interest). For checking, however, the fees come directly from your account balance. Since most checking accounts have no interest yield or minimal yields, you'll need to ensure you maintain a certain amount at all times to avoid overdraft fees.

Most online-only banks deliver their services free with no balance limits and no fees. Ally Bank, one of the most well-known online-only banks, provides completely free checking and requires no minimum balance for savings accounts.

Digital-only banks can provide services with no or minimal fees because they have much less overhead. Although this type of cost is decreasing year over year for physical banks, they have to spend money maintaining their branch networks. Some recoup that cost through added fees.

3. You may be able to access ATMs.

Most digital-only banks — but not all — participate in ATM networks. These networks typically have ATMs spread across the U.S. and allow you to use them for free even when the ATM isn't owned by your bank.

While all online banks will issue debit cards, not all of them offer fee-free ATM networks. If the ability to make free cash withdrawals is important to you, then check for a fee structure and ATM network when comparing banks.

4. You're not tied to a physical location.

Many brick-and-mortar banks still require you to visit a physical location for certain services. This is especially true of small, local credit unions, many of which haven't invested widely in digital or online services.

If you move or you're traveling in an area that lacks a physical branch, you may encounter some difficulties. For example, you'll likely need to get a cashier's or certified check to pay home closing costs. Most traditional banks offer certified and cashier's checks from a physical branch location, though you'll have to ask your online bank whether it offers this service.

Disadvantages of online-only banking

Don't move your banking online if these limitations give you pause:

1. You may experience limited or interrupted account access.

If you need immediate cash, you may be out of luck with an online bank. If no ATMs are available and the power is out, traditional banks may still be able to process cash-withdrawal requests. Online banks won't be able to process this request.

While the chances are small that you'll end up in this situation, it's still a possibility. If you use an online-only bank, you may simply need to keep some physical cash tucked away just in case you can't withdraw from an ATM.

2. Cash deposits are more difficult.

If you get paid in cash, you may want to avoid online banks altogether. Many do not accept physical cash deposits at all. Some will accept wire transfers from services like Western Union, but you'll have to pay additional fees to get cash into your account. Most will accept checks, which you can scan on your phone, but that may require you to use a cash-to-check service.

A handful of online banks allow ATM cash transfers or ACH transfers from traditional banks, but these options may be few and far between.

For cash-based workers, such as babysitters, restaurant staff or pet sitters, online banking may complicate things or be more expensive and time-consuming. You'll experience a significant lag between when you mail the cash and when it gets into your account.

Is a digital-only bank right for you?

Before you ditch your brick-and-mortar bank for a digital-only one, make sure you carefully consider your needs. Check out the bank's app to make sure you find it easy to use. Evaluate your cash flow. If you find yourself dealing in physical cash quite often, a physical bank may be a better route for you. But if you only use physical cash sparingly and don't rely on cash payments as part of your work, switching to an online-only bank may be the right move.

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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According to one estimate, there will be 7 billion mobile banking users worldwide by 2021. After months in COVID-19 quarantine, many of us are even more aware that visiting a physical bank is less important than we previously thought.The Bank of Scotland created the first...
banking, online, digital, cash
Tuesday, 07 July 2020 01:05 PM
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