An online bank is not much different than a traditional bank except for the fact that it doesn't always have a physical, brick-and-mortar location. You can still deposit and spend the money you keep in an online bank and, depending on the type of account, your money could also earn interest.
There are online-only banks (also called "internet banks") and banks that mostly exist online but which may have a handful of branches in the real world. You can also choose between an online bank and an online credit union.
Online banks have several major advantages over their brick-and-mortar cousins but, just like with anything else, there are disadvantages to consider as well. Ultimately, you may get the most benefit from having both an online-only bank and traditional bank. Before going online-only, make sure you know the advantages and disadvantages.
Advantages of Online Banks
There are several pros and cons of using an online bank instead of a traditional bank with physical branch locations. Whether you should choose an online bank or a brick-and-mortar bank may come down to your personal needs and financial goals.
Easy to set up: To sign up for an online bank, all you need is your Social Security number, if you're an American citizen, or a tax ID number if you're a permanent resident. You may sometimes have to submit a photo of your driver's license or other form of identification. You can also choose whether you need a checking account, or a savings account, including personal savings accounts, money market accounts or certificates of deposit. (This guide can explain more about the different types of savings accounts.)
Easy to use: Online banks work just like traditional banks. Depending on the type of account, you can use a debit or ATM card to spend or withdraw the money. You can also transfer money from another checking or savings account to your online bank account and deposit checks using an app. Some online banks also let you draw against the count from a paper check and will even send you free checkbooks -- but not all online banks allow this, so be sure to look for this feature if check writing is important for you.
Higher interest rates: Because they don't have to spend overhead on maintaining physical locations, internet banks are frequently able to offer the highest interest rates for savings and checking accounts. Online-bank interest rates, expressed as the annual percentage yield, may exceed those of brick-and-mortar by more than 1 percent. That may seem small, but it adds up fast. For example, a savings account at Ally, an online-only bank, currently gains interest at a rate of 1.90 percent per year, while a similar product from Chase only offers 0.01 percent.
More ATMs: Online banks typically don't have any kind of presence in the nondigital world, including ATMs. However, they belong to a vast network of ATMs administered by a third-party company, meaning that you can use your debit card or ATM at between 20,000 and 60,000 ATMs worldwide.
Reimburse ATM fees: If you need to use another financial institution's ATM, your online bank may reimburse you for any fees you incur doing so. ATM fees are one of the many fees you can avoid -- here are several others.
Cashier's checks: Some online banks will allow you to receive a cashier's check by mail. You can even use expedited delivery.
Disadvantages of Online Banks
Technology hasn't quite caught up with banking, so internet banks don't always come out ahead when comparing the pros and cons. In some ways, the disadvantages of online banks are not reasons to avoid them, but they do suggest that having an account a traditional bank may complement your online bank accounts.
No in-person options: Although setting up an online bank is easy, you have to transfer the money in from somewhere. The easiest way to do so is an electronic transfer from your current traditional bank to the online bank. But if you prefer taking cash into your local branch, that option is gone with online-only banks.
Transaction limits: Not only do online savings accounts have the same six-transaction limit as traditional-bank savings accounts; they also may limit how much you can withdraw from an ATM. A common withdrawal limit is $1,000 per day, so if an online bank is your only cash account then you could be in a rut during an emergency.
No cash deposits: Because online-only banks don't have their own unique ATMs, there's no way to deposit cash. Some online banks that have minimal real-life presences may be more useful for you if you frequently carry bills.
Can't get foreign currency: Not being able to exchange your U.S. dollars for another country's currency at a bank is a huge inconvenience for some. However, online banks may make up for this by offering free ATM usage abroad as well as reimbursement of exchange fees.
Are online banks safe?
The Federal Deposit Insurance Corporation, a government agency, insures up to $250,000 of every checking and savings account in FDIC-insured banks. (The National Credit Union Association, or NCUA, does the same thing for credit unions.) Online banks are also backed by this guarantee, but double-check the website to make sure.
Because online-only banks exist entirely at a web address, you might believe that they're more susceptible to being hacked. However, there's no more risk of losing your money to a hacker at an online bank than at a traditional bank. Both traditional banks and online banks use largely the same security protocols.
If you're looking for new ways to meet your saving goals, check out these five ways to save more in five minutes or less.
This article originally appeared on Policygenius and was syndicated by MediaFeed.org.