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Should You use an Online-Only Bank?

By Garrett

Nov 25, 2021

Welcome to the future where you don’t have to interact with a human to bank. But the more important question is, should you?

To help you understand whether you should or shouldn’t, it’s essential to determine your own needs first. Here are a few questions to help you decide whether an online-only bank is right for you: 

  • Do you take cash out of an ATM often? 
  • Do you need local ATMs from this bank? 
  • Are you looking for lending services and feel it would be nice to have someone local to help you navigate that process? 
  • How important is it to you to keep your money in your community?

Starting there will help you decide whether an online bank is right for you. And this isn’t an either/or selection. You may decide that a traditional brick-and-mortar bank is best for specific uses, while an online bank is better for others. This dual banking situation is how I see most of my clients setting up their investment structures. 

What is an Online Bank?

So before we dive into the pros and cons, let’s first define what an online bank is. An online bank is just that–it’s online. However, while brick-and-mortar banks do have online features, such as online banking, an online-only bank doesn’t have any branches. So you can’t go to the bank and sit in front of a banker to discuss what’s going on with the accounts you have at their bank. That said, they do have customer service and phone helplines that allow you to talk to a live human being and answer questions you may have.

Pros of Online Banking

Let’s dive into the pros of online banks. Online banks have fewer or no fees for banking with them. This is huge because many brick-and-mortar banks charge you a monthly fee to have accounts with them unless you maintain a certain minimum balance, have a certain number of accounts with them, utilize direct deposits or meet some other threshold. All of these stipulations can add up very quickly, especially if you have more than one checking account at a particular bank. And if you are looking to do bucket-based budgeting–see this article I wrote on that–it could get expensive quickly.

Conversely, some online banks have eliminated overdraft fees, have no ATM fees, or reimburse up to a limit. And again, these fees can add up, so it’s something to consider heavily. Online-only banks generally have better savings and lending rates. The better rates are because they aren’t paying for the overhead that brick-and-mortar banks do so they can pass those savings along to consumers. With online banks, you can open multiple or, sometimes, unlimited accounts. This ability is helpful when you have different savings goals and want to open multiple accounts for each particular principle, such as an emergency fund, a new car, a down payment on a house, or a European vacation. Keeping those savings goals in different buckets allows you to see your progress easily. The last benefit of online banks includes tech-forward features like intuitive interfaces. They can have virtual savings buckets, which Ally Bank premiered last year and other helpful features that brick and mortar banks lack. 

Cons of Online Banks

Now, there are also cons to online banks. No personal relationship with a human being means that there’s less flexibility in navigating your financial situation. So if you take out a mortgage with an online-only bank and you run into financial hardship, you can’t go down to the branch and sit in front of someone who can help, or perhaps be accommodating because they have a better understanding of your financial position. Most online banks don’t allow you to deposit cash. If you receive money in cash, having an online bank as your primary bank probably won’t work. You’ll need a traditional brick-and-mortar bank to deposit money into an ATM. Also, online banks don’t have their ATMs, so fees add up depending on how much you frequent the ATM. Online banks usually reimburse you for ATM fees, but there’s a limit–perhaps $10-25 a month. Because of these limits, depending on how much you use ATMs, this could become costly. Another con of online-only banks is the lack of services options, from insurance to investment accounts. 

So, should you sign up for an online-only bank? The answer depends on your situation and your needs. You might opt for a combination of having an online bank and a brick and mortar bank or multiple of each. 

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