5 Things to Know Before You Switch to an Online Bank


NEW YORK (MainStreet) — Backlash over new debit card fees and an increasing disillusionment with large financial institutions is leading many consumers to look for new places to keep their money.

One alternative gaining some momentum is online banks, which lack branches and boast low fees and better deposit rates. But is the buzz too good to be true? MainStreet talked to industry experts about what consumers should know before making a permanent switch to online banking.

Fees will be lower and rewards will be higher.

For the most part, everything that you’ve heard about the lower fees and higher deposit rates associated with online banks is on the up and up. This is because these institutions don’t have to maintain bricks-and-mortar locations and most have been letting the savings trickle down to widen their consumer base, according to NerdWallet CEO Tim Chen.

“Generally, debit card offerings are attractive,” says Gerri Detweiler of Credit.com, adding that many online banks are continuing to offer rewards for debit card purchases, despite the Federal Reserve’s limit on interchange fees.

ATM fees, too, are largely nonexistent as online banks either offer free access through a partnership with an ATM network or reimburse users for any fee they may incur when they use a machine outside of it.

Some services may take more time.

While these offerings are undoubtedly attractive, online banking may not be for everyone. Detweiler says, for instance, that those who are heavily reliant on making big cash deposits might find online banking insufficient, since these deposits usually need to be mailed to the financial institution.

While online banks offer a variety of deposit alternatives – some let you send money via a MoneyGram while others, namely USAA, let you send checks via UPS – these can take a little longer to process.

“That’s the big hang up,” Detweiler says. “Customers who tend to cut close to the wire might be better off with a local financial institution.”

She adds that online banks may also be an adjustment for folks who like the idea of visiting their local bank branch where everybody knows your name.

Transitioning over to a new account takes some commitment.

Another reason folks may forgo the switch is the commitment required to transfer all your funds over from a traditional bank to a virtual one.  

“It’s not as simple as filling out an online application in 15 minutes,” says Marc Schwanhausser, senior multi-channel financial services analyst at Javelin Research & Strategy, a research firm that monitors consumers’ spending habits. He explains that many online banks will screen applicants and require extensive proof of identity in order to bypass fraud. These screenings often require prospective customers to provide documentation with signatures. The paperwork is not always readily processed, considering consumers can’t just hand everything over to a teller.

“These are instances where it’s easier to go to a branch,” Schwanhausser says, since you can deal with everything at once. The potential lag time can also be a problem for consumers who rely on automatic bill pay.

“You need to keep enough money in the old account to clear your bills before the new account is up and running,” he says.

The truth is, though, that severing ties with a bank can be challenging even if you’re moving your money to another brick-and-mortar financial institution. (You can check out this MainStreet article to learn how to quit your bank.)

Security concerns aren’t all that different from those at brick-and-mortar banks.

While its perhaps understandable to have security concerns about utilizing an entirely digital platform, experts point out that online banks, in many respects, aren’t that different from traditional institutions.

“The irony is, technological advancements make some of the concerns a bit irrelevant,” Chen says. He also points out that most traditional financial institutions let consumers cash checks without visiting a bank branch and utilize online bill pay and money transfers, and have even incorporated mobile payments into their business model.

Additionally, any concerns about an online bank’s legitimacy can be addressed through some simple vetting.

“Check to see if they are FDIC-insured,” Chen says.  Consumers can also do a Google search on prospective banks or check out credit card reviews sites to get insight into debit or credit products the online bank is currently offering.

Not all online banks are created equal.

“Generally online banks can be very competitive,” says Detweiler. “But you have to make sure you shop around to make sure the particular financial institution meets your needs.”

For instance, some online banks do cap reimbursements on ATMs fees, while others may have stringent overdraft policies.  Some may have 24-hour customer service hotlines customers can call should they discover mystery charges at 3 a.m., while others have limited hours. Additionally, certain online banks are easier to deposit checks or money into than others.

Some online banks, Chen points out, do have some bricks-and-mortar locations that customers who live nearby can visit. Charles Schwab, for instance, has a few branches in California, while ING Financial has branches in New York City. 

“If you live close to a branch, it can make everything much easier,” Chen says.

As such, prospective customers should review all banking policies and compare offerings before choosing which online institution is a good fit.

Which online banks have already established a good reputation among industry experts and the consumers who use them? Find out in MainStreet’s roundup of the best online checking accounts!

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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