3 reasons to switch to an online bank
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If you’ve faithfully stuck by your bank, it may be time to find a new one.
The average American has used the same primary checking account and savings account for about 17 years, according to a January 2022 Bankrate survey. In that time frame, online banks have proliferated and are now among the best banking options for consumers.
With online banks more popular than ever, it’s important to understand the unique advantages that come with a bank account from a digital financial institution.
3 reasons to switch to an online bank
There are several reasons an online bank account can be a great idea. These banks tend to pay rates that are much more competitive than what big brick-and-mortar banks typically pay. For instance, it’s not difficult to find an online bank savings account with a rate that’s 300 times greater than the rock-bottom yields offered by big banks.
Online banks also tend to charge far fewer fees than traditional banks. Various online banks charge no monthly maintenance fees, for instance. Brick-and-mortar banks often charge a monthly fee that you’ll need to maintain a set minimum balance to avoid.
Many online banks conveniently offer mobile apps and websites that make it easy to transfer funds between accounts, pay your bills, deposit checks and more. They also usually offer fee-free access to a large ATM network. And online banks are just as safe as brick-and-mortar banks.
1. Competitive rates
Online banks are able to pay competitive interest rates because they aren’t running a network of branches. They have much less overhead, so they’re able to pass that savings to consumers in the form of better rates.
Consider this: The national average annual percentage yield (APY) on savings accounts is 0.19 percent, according to Bankrate data. Meanwhile, the top high-yield online savings accounts pay up to 4.1 percent.
Online banks typically pay much higher rates than popular brick-and-mortar banks, too. For example, Marcus currently pays 3 percent APY on its savings account, while Chase currently pays just 0.01 percent.
Putting your money in an online bank could earn you around 300 times more than you’d get from many brick-and-mortar banks. For instance, the savings accounts at online banks commonly pay an APY of 3 percent, whereas many large brick-and-mortar banks pay just 0.01 percent.
If you deposited $10,000 into an online bank savings account that pays 3 percent APY and another $10,000 into a big bank that pays 0.01 percent APY, and you didn’t add to or withdraw from the account for one year, here’s approximately how much you would have earned in interest at the one-year mark:
- Online savings account that earns 3 percent APY: $300
- Big bank savings account that earns 0.01 percent APY: $1
You’d earn around $299 more in interest in one year by keeping your money in the savings account with the online bank. Tools such as Bankrate’s savings account interest calculator can help you determine how much your money can earn over time based on the dollar amount and APY.
2. Fewer fees
Some brick-and-mortar banks charge fees on their accounts, and waiving them isn’t always easy. However, switching to an online bank can eliminate that problem altogether.
Many online banks offer fee-free accounts. They also don’t require a large deposit to open an account — in fact, many don’t have a deposit or minimum balance requirement at all. Here’s a sample of top-yielding online banks.
(Rates are accurate as of Dec. 15, 2022.)
|Bank||APY||Minimum balance for APY||Monthly fee|
|American Express National Bank||3.00%||$0||None|
|Marcus by Goldman Sachs||3.00%||$0||None|
In addition to not charging monthly maintenance fees, many online banks charge no fees for overdrafts or nonsufficient funds. Online banks also commonly don’t charge fees for using an ATM outside of their network. You may be hit with a surcharge from the bank that owns the ATM, and some online banks even reimburse those surcharges each month.
Online banks make managing money simple. As long as you can connect to the internet, you’ll be able to review your bank statements, pay bills and transfer funds at any time.
Some common online banking features include mobile check deposit, bank-to-bank transfers, bill pay and paperless statements. Handy automated alerts often sent by online banks (and some brick-and-mortar banks) can notify you of situations like a low account balance or unusual account activity.
Some online banks offer apps and website features designed to help you increase your savings. Ally Bank, for example, has a “buckets” feature that lets you designate a portion of your overall savings to specific goals. For instance, you may allocate a portion of your savings to your emergency fund and devote another portion to an upcoming vacation.
USAA Bank is an online bank that offers a tool called Savings Booster, which can be used to transfer money automatically to your savings account that the bank has paid you in rebates for ATM fees. The bank also allows you to set up periodic automatic transfers from your checking account to your savings.
How to open an account online
Compare multiple online banks
Compare multiple online bank accounts to evaluate APYs, fees, account features and more to find the right one for you. You may find that you’re willing to accept a slightly lower APY for a bank that offers tools that will help you save more over time. Many online banks don’t charge maintenance fees on their accounts, so you should be able to find a great option with no fees.
Bankrate offers various resources to help you compare online banks. These include articles that compare rates of return on savings accounts, money market accounts and CDs. Each year, the Bankrate Awards identifies the best banks and deposit products, and the list includes a category for the best online bank. As part of Bankrate’s bank reviews, experts regularly evaluate more than a hundred financial institutions, many of them online banks, to help you choose the right bank for you.
Gather the necessary documents and information
When you open your online account, you’ll need to provide:
- Personal details, including your name and contact information
- Your driver’s license or government-issued ID
- Your social security number
- A utility bill showing your current address
See Bankrate’s savings account checklist for everything you need to open an account.
Make an initial deposit
Banks often require a minimum initial deposit in order to open your account. This amount can vary from a few dollars to $50 or more, depending on which bank you choose. Find out about minimum opening deposits before picking an online bank.
Most online banks are insured by the Federal Deposit Insurance Corp. (FDIC), but don’t assume every online bank is. Confirm that your deposits will be insured by the FDIC before you open the account and make a deposit.
Online banks often have significant advantages over traditional banks, thanks to perks such as competitive rates, lack of fees, and digital features that can make it easier to manage your accounts and save more money.
— Lena Borrelli wrote a previous version of this story.