Are Online Banks Good Options for Underserved Communities?

Are Online Banks Good Options for Underserved Communities? article image.

Banks play a vital role in the community: They provide home mortgages, small business loans, safe places to keep your money and much more. Unfortunately, many people in underserved communities don't have access to critical banking services due to the lack of local bank branches. This makes it difficult for them to do common transactions like open a new account, cash checks or get loans. The rise of online banks could be an important part of the solution for many people who live in communities without access to traditional banks. Read on to find out more.

Why Access to Banking Is Important

People who are unbanked or underbanked may feel financially excluded from services needed to manage their money. Those who are unbanked do not keep any money in a traditional financial institution, while people who are underbanked might have a bank account but may not use other financial services. The common thread between those who are unbanked and underbanked is that they often rely on alternative financial services like money orders, title loans, check-cashing services and payday loans rather than traditional loans and credit cards to manage their money and fund purchases.

The problem with many alternative financial tools like payday loans and check-cashing services is they often charge sky-high interest rates and fees—sometimes nearly as high as 700%—and make it difficult for borrowers to pay back what they owe. Relying on these types of financial services makes it hard for people in under-resourced communities to thrive and puts them in dangerous financial situations.

According to data from the Federal Reserve, about 16% of U.S. adults are underbanked, while about 6% are completely unbanked. Together, that accounts for almost 25% of all U.S. adults. Data from the Federal Reserve also found that many unbanked adults "used some form of alternative financial service such as a money order, check-cashing service, pawn shop loan, auto title loan, payday loan, paycheck advance or tax refund advance."

Without access to banking services, many families could be at risk of losing their cars (which allow them to get to work) and even homelessness. Online banks, which are accessible with an internet connection, may offer solutions for those who don't have a physical bank branch nearby or who are reluctant to open a traditional bank account due to banking fees and requirements.

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What Is an Online Bank?

An online bank—sometimes called a digital bank—is a bank that doesn't have a physical location or branch. While most traditional banks offer online services like depositing a check, for example, they're not digital banks because they still have physical locations.

There's a growing number of online-only banks, many of which offer fewer fees and requirements than their more traditional counterparts. Ally Bank is one example: It recently scrapped all overdraft fees, and doesn't require a minimum account balance or charge monthly maintenance fees on its standard checking account. If you compare this with a traditional bank that has physical branches, you might pay over $100 a year in fees for the same type of standard checking account unless you meet certain requirements, like maintaining a minimum daily balance of hundreds of dollars. In a survey from the Federal Deposit Insurance Corporation (FDIC) of unbanked and underbanked households, over 30% of respondents said they didn't have a bank account because the fees were too high or too unpredictable.

That same FDIC survey also revealed almost 15% of respondents said they didn't have a bank account because the bank locations or hours were too inconvenient. Often people in underserved communities lack transportation options and work alternative job shifts, challenges that can make using a traditional bank a major roadblock for many people. Could online banking be a better option?

Is Online Banking Right for You?

No matter where you live, figuring out whether online banking is right for you depends on your financial needs and preferences. Below are some of the main pros and cons to consider when thinking through your decision.

Pros of Online Banking

  • Online banks have less overhead; this means they can pass the savings on to you in the form of better interest rates and fewer fees. If you find yourself getting hit with bank fees a lot, switching to an online-only bank could help you save money over time.
  • You don't have to worry about finding or arranging transportation to a physical location. This is good news for those who don't live near a bank branch.
  • Online banks are always "open." Since online-only banks aren't bound by traditional bank branch hours, their customer service also tends to have more flexible hours compared with traditional banks. Also, online banks may offer a smoother online experience.

Cons of Online Banking

Depending on your needs and preferences, it's possible digital banking might have some drawbacks too.

  • You can't make in-person transactions. This might not matter for most simple financial transactions, but for more complex questions and needs, you might miss the ability to visit a local branch and talk to a banker or teller.
  • It requires reliable access to the internet. If you don't have consistent access to the internet, you'll find it challenging to conduct your business with an online-only bank.
  • Online banks typically don't allow you to deposit or withdraw cash, while traditional banks do. Some online banks are part of independent ATM networks that allow you to deposit and withdraw money as well as reimburse any ATM fees you get. If you deal with a lot of cash on a consistent basis, you'll need to look a bit more closely at what benefits different online banks offer in this area.

Concerned about the safety of your money? You shouldn't be: Online-only banks are just as safe as traditional banks as long as they're backed by the FDIC, which is the government agency that protects bank deposits up to $250,000.

How to Find an Online Bank

If you're interested in trying out an online bank, the first thing you'll need to do is decide what matters to you. For example, do you care most about earning more interest on your money? Low or no account fees? Ample amounts of ATMs for getting cash? Or something else—like a really great app that's easy to use?

A simple internet search will turn up sites that compare and contrast different online banks. Starting there should give you an idea of which types of features are standard and which types are unique to different banks. From there, you can go to each online bank's site and dig into the specifics. Don't forget to read the fine print before signing up for an account: This is one area where the details matter.

The Bottom Line

Online banking could be a great option for those who lack access to traditional banking by providing convenient and accessible services. If you need basic financial tools and want the convenience of online banking without all the fees associated with traditional banks, then opening up an account is worth a closer look.