I still remember when online banks first appeared. People were wary of them because they were new. They were wary of putting their savings at a bank they couldn't visit. They were wary of the higher interest rates. They were wary of unfamiliar names.
However, over the last few years, online banks have assuaged these fears and I believe that an online bank account is pivotal piece in your financial plan.
An online bank account isn't the same as banking online, which is one of many services your local bank may offer. Online banks are different in that they have no physical branches you can visit. Most of your interactions will be on the Web or over the telephone, not with a teller or ATM. Not having a physical location may be troubling at first but as we'll soon see, there are many reasons why you should give them a look.
I'm a fan of online banks and have had an account ever since ING Direct opened its door in 2000. Here are the five reasons why you should join me:
Higher interest rates
Online banks offer higher interest rates than their traditional brick and mortar counterparts. For example, Bank of America recently offered 0.10% APY and Ally Bank offered 1.29% APY on savings accounts.
High yield savings accounts are known as high yield for a reason, they offer interest rates that make your local brick and mortar bank look stingy. They are able to offer higher rates because of their lower overhead. Bank of America has thousands of bank branches throughout the country; many online banks don't have a single physical branch. Instead of paying for and staffing branches, online banks pay you a high interest rate.
Online banks have the more sophisticated websites that allow you to perform many banking transactions. Online banks don't have physical locations, most of your business will be conducted online or over the telephone. The more features they can build into the website, the fewer people they need to staff the telephone lines. You can often pay your bills, make instant or scheduled transfers, change your information, open new deposit accounts like certificates of deposit, and even close your accounts.
Most online banks have no maintenance fees and no minimum balance fees. Ally Bank lets you open a CD or online savings account with $0. ING Direct requires an entire dollar, but has no maintenance fees or minimum balance requirements. A low minimum is the norm because of competition and lower overhead.
Significant time saver
You can open an online bank account in about five minutes. If you already have an account and want to open a new CD, it'll take you even less. If you had $100 and wanted to put it in a new 1-year CD, you can search online for the best CD rates, pick a bank, and open an account immediately. Gone are the days where you'd save up $1,000 before picking a CD. Since online bank processes are so streamlined, you can do it with as little as $1 now.
Online banks are safe
Online banks are FDIC insured, which your money just as secure as with any other bank. With other investments, higher risk means higher reward. With online banks, that's not true because the FDIC is your backstop and that insurance is enough safety for me. If that isn't enough, I'd also like to point out that the last online bank to fail was Netbank in 2003.
Are you a fan of online banks? If so, which ones and why? If you're wary of online banks, why? I'm eager to learn what people like and dislike about online banks.
Jim Wang is a personal finance blogger and writes regularly at Bargaineering.com.
5 reasons to switch to online banks