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How do online banks work?

| MoneyRates.com Senior Financial Analyst, CFA
min read

Q: I've read some of your articles about the advantages of online banking, and I like the idea of free checking and higher money market rates. However, I'm just unsure about how it all works. Compared to normal banking, where I walk into a branch to make a deposit, and get a statement in the mail, how do these things work with an online bank?

A: At first glance, online-only banks may seem like a strange new world. However, if you think about how banking has evolved over the years, online banks may not seem so strange after all.

For example, whereas once upon a time people went to the bank every week to cash or deposit their paychecks, now they are more likely to have that money directly deposited into the bank. When they need to draw out some cash, they are likely to use an ATM rather than visit a branch, or bypass the cash altogether by using a debit card.

So ask yourself this: How often do you actually walk into your local bank branch? If you realize that those occurrences have become more and more infrequent, then online banking will not seem so strange to you.

Regarding statements, these are typically available online via a password-protected website. You should be able to download them to your own computer for record-keeping purposes, or even print out a copy.

When it comes to transferring money, there are a couple of procedural notes you should think about, because not all online banks are the same. When you are considering online banks you will want to know:

  1. What is the procedure for depositing money? Look for a bank that makes it easy to do this electronically, by taking a smartphone picture of a check or scanning and emailing the check's image.
  2. What is the ATM policy? Since an ATM will be your main point of physical contact, you'll want to know how convenient their ATM locations are. Even banks that don't have their own machines may belong to a broad ATM network, or have a policy of reimbursing ATM fees.

Finally, as you mull over the differences between online and traditional banking, keep the fundamental advantages in mind. Online banks typically offer higher interest rates on savings accounts and money market accounts. They are also nearly twice as likely to offer free checking as traditional banks.

Still, even if you decide not to go with an online bank, make sure you do some comparison shopping for interest rates and checking account fees. There are big differences between the rates and fees that banks offer, so whether you bank online or at a traditional bank, the key is to shop actively.

Got a financial question about saving, investing or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

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Richard Barrington:
Richard Barrington is the primary spokesperson and personal finance expert for MoneyRates.com… (more)
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travis 18 September 2015 at 5:30 am

I get paid in cash. What methods would I have to use to contribute money to the accounts?

James Murawski 6 August 2014 at 5:26 am

I have a joint account with my wife. Jim and Charlotte and no debit cards. How do I keep her from withdrawing money out of our account online?