Should You Drop Your Traditional Bank for a Virtual One?

NEW YORK (MainStreet)—Online banking is getting easier as consumers can now tap into their brokerage and credit card accounts to open checking and savings accounts.

Now even credit card and brokerage companies are jumping into the mix, offering consumers even more options without ever entering a bank, paying monthly fees or establishing minimum balances. One company is offering its banking services entirely via mobiles and allows you to pay what you think their service is worth each month.

Discover Card and Capital One are the latest credit companies to enter the market. Most credit card and brokerage companies are offering competitive interest rates, and the option to use any ATM since the fees are refunded. Discover will pay its customers $0.10 for every debit card purchase, online bill payment and paid check they write.

Many credit card issuers such as Citibank, Chase and Bank of America offer checking and savings accounts to consumers, because they are chartered as national banks and have a national network of branches, said Ben Woolsey, director of marketing and consumer research at CreditCards.com, the online credit card marketplace. Their retail banking business predated their credit card operations.

Credit card issuers that have recently entered the fray obtained bank charters that allow them to take in deposits in the form of savings and demand deposit accounts, he said.

"Their motivation for doing so are to access an additional and relatively inexpensive source of capital to help fund their credit card lending operations, to diversify their sources of revenue and to broaden their customer base to include those who may or may not have or want credit cards," Woolsey said.

Since these "virtual" banks lack a brick and mortar location, consumers face a draw back, because they can not walk into a branch to speak to a bank officer or a teller in case a face-to-face discussion is needed to resolve an issue, he said.

Another benefit is that deposits are made online or through a mobile device, which can save you both time and money.

"Consumers face a tradeoff in terms of sacrificing personal service, a sense of security and convenience in exchange for more the more favorable terms offered by some of these new players in the retail banking arena," Woolsey said.

Fidelity, the online trading brokerage, offers consumers many benefits which some banks lack such as no annual fee or minimum balance fees, an unlimited 2% cash back and mobile banking services on iPhone, iPad and Android devices, including mobile check deposits, bill pay, money transfers and account openings, said Sam McLimans, Fidelity's senior vice president of cash management.

"The account provides you with all the convenience of a branch with no hidden fees," he said. "You do not need to have a brokerage account with Fidelity. It is a tremendous value for young investors and for folks that already have Fidelity accounts that want to manage their retirement and cash in one place. The bank's operating model is truly challenged with the advent of new technology."

Green Dot, a bank holding company which offers reloadable prepaid debit cards, launched GoBank, the first bank designed specifically for mobile use. GoBank offers FDIC-bank accounts that anyone can open and manage from an iPhone, iPod Touch or Android device (or online). The bank also does not require a minimum balance, no overdraft or penalty fees, 42,000 fee-free ATMs, free mobile check deposit, free mobile checkbook and bill pay and free peer to peer payments via e-mail or text.

"GoBank was built from the ground up to be used entirely from a mobile device," said Alok Deshpande, VP product development, Green Dot Corp. "It seeks to reinvent the traditional checking account by bringing banking into the era of the app at a time when smartphones play a central role in our daily lives. One unique feature of GoBank is its 'pay what you want' monthly membership model, where members choose to pay anything from $0-9 a month, whatever they think is fair – similar to a tip."

Online banks also offer options such as putting a cash advance on your debit card for larger withdrawals, said Doug Lebda, founder and CEO of LendingTree, an online lending exchange.

"Using an online bank would make sense if you need a simple checking/debit account or low-contact accounts like savings," he said. "But you usually can't deposit cash or withdraw larger amounts of money."

--Written by Ellen Chang for MainStreet

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