In the last decade, online banks have grown in number and popularity. What was once a niche market dominated by a few big players has become widespread, with a wide number of banks with strong reputations entering the space. Online banks differ from traditional banks in that they don’t have brick-and-mortar branch locations. This business model translates to increased operational efficiency because online banks do not have to pay rent for branch locations and hire branch employees. So why should you care about a bank’s business model?
The increased operational efficiency and reduced expenses incurred by online banks means lower costs and higher interest rates passed along to the account holders.
High yield savings accounts and certificates of deposits (CDs) have been the calling card of online banks, mainly because the difference in interest rates offered by online banks compared to traditional banks is so dramatic. For example, the interest rate on a standard Chase savings account is 0.01% and comes with a $5 monthly service fee that can be waived by maintaining a $300 daily balance among other options. In comparison, online bank Ally offers an interest rate of 1% on all balances and has no monthly service fees. On a daily balance of $5,000, the difference in interest rates alone translates to $47.50 over a 12 month period, plus any service fees.
While online banks have attracted many customers with their higher rates on savings accounts and CDs, they haven’t gained as strong a foothold in the checking account space. Like their savings accounts, online banks typically offer checking accounts with no daily balance requirements, no monthly service fees, free standard checks and offer higher interest rates. They also offer the ability to deposit checks remotely with your smart phone and online and mobile banking services.
Although there are benefits to switching to an online bank, there are also drawbacks as well. One of the primary reasons people have shied away from online banks, especially checking accounts from online banks, is the ability to immediately access funds. Most online banks partner with certain ATM companies to allow for free withdrawals, or reimburse fees charged at other ATMs up to a certain dollar amount. The bigger issue for most is what to do with cash. Though customers can use any ATM to withdraw their funds, online banks do not allow for deposits (cash or check) through ATMs.
While many are not happy with the monthly fees charged or daily balance requirements imposed by their bank to maintain a simple checking account, they are hesitant to switch banks. Switching banks requires updating your direct deposit with your employer (or Social Security), updating any automatic transfers to savings accounts or retirement accounts and changing any automatic bill payments.
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