How Do Online Banks Work?

Close-up Of Businessperson Doing Online Banking On Laptop

In the past, if you wanted to open a bank account, you had to drive to your local branch and speak with an account specialist. Now, there is a new game in town: online banks. You may have heard of them, but you may not know exactly how they work.

Online banks, such as Ally Bank, Discover Bank, and ING Direct, have grown as traditional banking has declined. Since so many people pay their bills and manage their accounts online or via their mobile phone, the average branch is generally empty. In fact, the Federal Reserve said that the top three ways Americans are interacting with their banks are online (65%), ATMs (62%), and smartphones (54%).

Generally speaking, if you are already using the online or mobile features of your existing account, you will not notice much of a difference. You will still have a debit card to use for your in-store transactions and for use at ATMs. You will also have the option of ordering checks if you prefer paying bills in that manner rather than paying online.

Deposits

There are some differences, though. The first is how you will deposit checks. If you have direct deposit available at work, it will work the same as your current account. However, if you receive a hard copy of your check, you will need to upload it to your bank. There are a number of ways to do so. The most common way is to use your online bank’s mobile app and take a picture of the check. Depending on the bank and time of day, your funds could be available the same or next day. Other banks will allow you to scan your check with your desktop scanner and upload them via their website. If neither of these appeal to you, you can also mail the check to your bank, but the funds will take longer to appear in your account using this method.

Benefits

One of the benefits of online checking accounts is that they pay interest, which is rare for checking accounts at a traditional bank. In fact, since there are no branches to support, online banks can afford to charge fewer fees in general. For example, Ally Bank will waive ATM fees if you use your card at another bank’s ATM, which is not the general practice for brick-and-mortar banks.

Online transfers are also easy and generally free with online banks. You can transfer money between banking accounts and send money to customers of the same bank. Some banks will even allow you to make person-to-person transfers.

Online banking is not just limited to checking and savings accounts. Some even offer loans, mortgages, and auto financing, and almost all online banks offer CDs, money market accounts, IRA CDs, and Roth IRAs.

Disadvantages

If you do not feel comfortable with technology, you may not want to handle all of your finances online, especially if an issue arises. Also, since there is no branch, you will have to handle any problems with customer service on the phone, via chat, or by email, which can be problematic if your issue is complex.

Security

One thing you will not have to worry about is security. Online banking is considered safer than traditional banking. If your check is directly deposited, it cannot be stolen. Additionally, you do not have to worry about someone copying your account information, as transactions are handled digitally from computer-to-computer. If fraud does occur, your bank will not hold you financially responsible as long as you report unapproved transactions immediately.

As with all of your online accounts, you will want to take steps to stay safe on your end. Make sure your computer, mobile devices, and anti-virus software are up-to-date. Also, use different passwords for each of your accounts and make them difficult for would-be criminals to guess.

Finally, as with all of your accounts, be wary when you receive an email, text message, or phone call that appears to come from your bank. A common type of fraud is phishing, where someone will contact you pretending to represent a legitimate institution. The fraudster will ask for your log-in credentials or other personal information. Remember that your financial institution will never ask you for personal information when they contact you. If you receive a questionable email or phone call, it is best to contact your bank directly, via the customer service number on their website or on the back of your debit card, to verify that the communication came from them.

If you take basic steps to protect yourself, online banking can be an inexpensive, convenient option.

About Lynn Oldshue

Lynn Oldshue has written personal finance stories for BillSaver.com for twelve years. She majored in public relations at Mississippi State University.
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