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In recent years, online-only banks have surged in popularity as an alternative to traditional banks. These digital banks offer financial products comparable to traditional brick-and-mortar banks but lack physical branches.
Keeping things digital only means online-only banks have less financial overhead and may pass on that savings to customers in the forms of better interest rates and fewer fees. And as long as they are backed by the Federal Deposit Insurance Corp., online-only banks are just as safe as traditional banks. They do have some drawbacks, however, such as the inability to visit a local branch and talk to a banker or teller.
If you're wondering whether it's time to make the leap into digital banking, here are five of the most important factors to mull over.
1. How Comfortable Are You With Technology?
One benefit of online-only banks is they typically make it quick and easy to open an account, and they allow you to do most things from the convenience of your computer or phone. But before you go that route, think about how many times you've been inside a bank building. If every teller knows you by name and you'd miss making your regular bank visits, an online bank might not be for you.
Perhaps you only visit a bank branch to deposit checks or to deposit or withdraw cash. With online-only banks, you use their network's ATMs to withdraw cash, and you will deposit your checks via a mobile app. Depending on the bank, you may not be able to make cash deposits (some may allow it via ATM). If you frequently make cash deposits, make sure to find out if and how this would work with a digital bank since that could be a deal breaker.
While most traditional financial institutions now offer mobile check deposits as well, switching to online-only banking means you would need to get comfortable doing everything without the help of a teller (though of course digital banks still have customer support). You may run into hurdles if you need to deposit a large amount or other form of payment, though the digital bank's customer service may be able to give you alternatives (such as doing a wire transfer or money order).
2. Are You a Big Saver?
Online-only banks may offer interest rates that are competitive with brick-and-mortar banks, thanks again in part to their lower overhead. However, the interest rate your savings account may earn depends on many factors, including the economic climate and the bank's margins, so the difference may not always be huge.
If you have a significant amount of cash savings and your current financial institution doesn't offer competitive interest rates, switching to online banking could help you net far more interest over time.
3. What Fees Do You Currently Pay?
Some traditional banks and credit unions hit customers with frequent fees, such as monthly account maintenance fees, minimum balance fees, ATM fees, direct deposit fees, over-limit fees, and so on.
One of the most compelling benefits of online-only banks is their reputation for having fewer fees than traditional banks. For example, Capital One's online-only 360 Checking product advertises having no fees "to open, keep and use." Compare this with a traditional checking account with a larger bank that may charge a $10 monthly service fee unless you meet certain requirements, such as maintaining a minimum daily balance of $500.
If you find yourself frequently hit with bank fees, switching to a no- or low-fee online-only checking or savings account could help you save money in the long run.
4. How Often Do You Need Cash?
One of the downsides of online-only banks is that you don't have your bank's ATMs nearby at your disposal.
To address this issue, however, many digital banks have partnered with ATM networks that allow their customers free withdrawals, and some will reimburse ATM fees charged by out-of-network machines. For example, Ally bank allows their customers free use of the Allpoint ATM network, and if you have to use ATMs out of the network, they'll reimburse you up to $10 per statement cycle for fees. Before you sign up, however, find out which ATMs you'll be able to use for free and whether there are any near you.
5. What Types of Financial Products Do You Use?
If you tend to only use your bank's checking and savings accounts, it might be easy to switch over completely to an online bank.
But if you have other financial products at your bank, such as certificates of deposit (CDs) or a safe deposit box, switching completely might not work. Keep in mind, however, that there's no requirement to have all your financial accounts in one place.
For example, you could keep most of your accounts with your primary financial institution and open a high-yield savings account with an online-only bank. If you park your emergency fund there, the higher interest rate will help you build your savings faster, and keeping it separated from your other accounts could actually may reduce temptation to tap into it.
You Can Have It Both Ways
Switching from traditional banking to online-only banking may make sense for some consumers, especially those who are comfortable with technology and never visit a physical branch.
If you value the comfort of being able to walk into a bank branch, though, you don't have to abandon it to reap the benefits of online banking. You can keep most of your accounts where they are and just open an online-only checking or savings account for a specific purpose—just like how you can open a credit card account with a bank you have no other accounts with.
Plus, as digital banks compete with traditional banks, and as the pandemic has pushed more consumers to do their banking online, it's possible that traditional financial institutions will eventually adopt some of the friendlier features that make online banks so alluring.