The Risks and Rewards of Online Banking

In its truest form, online banking means doing business with an online-only bank. This differs from conducting business with a traditional bank that offers online banking services. Find out more about how online banking works, the pros and cons of banking online and what you can do to keep your deposits safe.

Unlike a traditional bank, an online-only bank doesn’t operate brick-and-mortar branches where you can seek help from tellers and other bank personnel. Instead, a customer of an online-only bank takes care of banking tasks on a website or app accessed with a computer, smartphone or tablet. These tasks can include depositing checks, transferring money and paying bills. In addition, a customer can typically use a debit card to deposit or withdraw money at an ATM or to make purchases online or in stores.

Financial products that an online-online bank might offer include checking accounts, savings accounts, certificates of deposit and loans.

Market research company J.D. Power reports that more than one-fourth of Americans (27%) use an online-only bank. A 2023 study by J.D. Power found that customer satisfaction with online-only banks is “climbing steadily,” thanks to high marks for competitive interest rates and the ease of managing accounts and transferring money.

There is a lot to like about conducting business with an online-only bank.

Online-only banks normally pay higher annual percentage yields on savings accounts, CDs and and other accounts that earn interest. Gary Zimmerman, founder and CEO of cash management platform MaxMyInterest.com, explains that online-only banks are able to do this because they don’t bear the costs of maintaining physical branches.

“Investors who want to safeguard their cash while earning more interest know that online banks are a smart choice,” Zimmerman says.

In some cases, only-online banks don’t charge any fees. Before opening an account, investigate what fees, if any, an online-only bank imposes. In 2022 alone, U.S. banks charged a total $7.7 billion in fees just for overdraft and nonsufficient fund transactions, according to the Consumer Financial Protection Bureau.

The Federal Deposit Insurance Corp. insures deposits at member banks, and the National Credit Union Administration insures deposits at member credit unions. This applies to both traditional and online-only banks and credit unions, meaning an account-holder’s money is protected up to a certain dollar amount.

Online-only banks might have mobile apps with more robust features than traditional banks’ apps. For instance, an online-only bank app might include financial management tools that enable automatic savings or automatic investing.

There are some downsides to banking online you should consider before opening an account.

Online-only banks don’t operate branches where you can do business. For some banking customers, that’s not a problem. But others might be put off by the inability to chat face-to-face with a teller or other banking professional, or to access services that may not be available online (such as getting a cashier’s check or renting a safe deposit box).

Kate Sullivan, vice president of marketing and communications at The Cooperative Bank, notes that some traditional banks offer the same online services as online-only banks but still operate branches that you can visit or call. Sullivan’s bank maintains four branches in the Boston area.

When you’re a customer of an online-only bank, you’ll need to be familiar with your bank’s ATM fee reimbursement policy. Some, but not all, online-only banks belong to ATM networks that offer fee-free transactions.

Consumers might question the banking prowess of online-only banks. Why? Because some of these banks technically aren’t banks. Rather, they’re financial technology companies whose banking services are backed up by a traditional bank.

Digital banking is on the rise. A May 2022 survey by polling company Morning Consult found 52% of U.S. consumers do most of their banking online or via mobile app, whether that’s with a traditional bank or an online-only bank.

Some folks riding this digital wave may be wondering whether online banking – doing business with a bank that lacks physical branches – is safe. Good news: In general, online banking is considered safe.

In most cases, deposits at online-only banks are insured just like deposits at traditional banks. Furthermore, online-only banks are regulated the same way as traditional banks. On top of that, online-only banks adopt security measures aimed at shielding your information from harm.

Even though all digital banking operations face cybersecurity threats, the ISACA professional organization for IT professionals points out that an online-only bank might be “a high-profile target for cybercriminals.” That’s due in part to the banks’ heavy dependence on technology.

Still, the Consumer Financial Protection Bureau emphasizes that online banking is safe as long as you follow the best practices for keeping your information secure. Here are four tips for improving the safety of online banking: