Are Online Banks Worth the Sacrifices?

Dear Lifehacker,
I'm trying to choose a bank and like the idea of online options like ING and Simple, but am afraid of losing the ability to visit a branch. Are the benefits of online banks worth the sacrifice, or are they not quite ready for wide use?

Sincerely,
Bank Branchless

Dear BB,
It sounds like you're thinking of completely ditching a physical bank and going online entirely, but you don't have to choose one option over the other. While you can bank entirely online with some sacrifices, or stick with the a more traditional bigger bank, you can use both to suit your needs exactly the way you want. Of course, every option has its ups and downs.

Bank Online

Banking online sounds great because you, theoretically, get to avoid actually going to the bank and get all the benefits that a particular online bank offers. For example, ING Direct advertises its higher interest rates. Simple offers better customer service, financial management tools, practically no fees, and a great smartphone app. Perk Street provides rewards for most purchases. You can find a handful of others with a quick search (or in this post), but they all have something in common: they forego traditional, physical banking by handling all transactions online.

How Do I Know It's Safe?

This gets scary for some people because you're essentially sending your money into the ether and trusting people you've never met to keep it safe. Larger banks with physical presences don't really offer any greater comfort, however, but rather an illusion of safety. Yes, you get to hand your money over to a human being if you want to but they essentially have no more power over what happens to your money than an ATM machine. If you're going on reputation, those of Bank of America and Chase?two of the largest consumer financial institutions in the United States?aren't stellar. The difference is that they have a reputation and online banks are often building theirs from the ground up. Of course, a little research will identify whether or not an online bank is FDIC-insured, how they store your money, and their various policies. You'll also often find good and bad reviews from customers so you can determine if an institution is legitimate or not. It may seem scary because it's only on the internet, but ultimately a physical presence doesn't make a huge difference when it comes to handling problems?that's going to depend on the company, and many online banks try to focus on better customer service as a selling point.

What Can't I Do?

A lack of physical presence often poses a problem, however, as you cannot do the following:

• Withdraw or deposit money at a branch
• Deposit cash
• Withdraw more than $500-600 per day from an ATM or spend over $3,000 through your debit card
• In some cases, write a check the day you need to use it (because some online banks require all checks to be issues directly from them, via your account, which means the money is withdrawn earlier than you may prefer)
• Identify a fee-free ATM by its branding

Of course, online banks know about these inconveniences and often provide workarounds. For example, if you need to withdraw more than your ATM spending limit you can often go to any bank branch and get a cash advance on your debit card. Many branches don't charge for this service (e.g. Chase and Wells Fargo) and online banks tend to keep fees low as well (around $1). Online banks often have a method for deposit that doesn't require a branch. Some allow you to mail in checks or deposit checks by photographing them with your smartphone. For many people considering an online bank, the majority of our money comes via direct deposit anyhow. In most cases, deposits and withdrawals don't pose unsolvable problems.

When it comes to locating an ATM, chances are your online bank offers a smartphone app to help you find one quickly. Most online banks utilize the Allpoint ATM Network, which gives you access to about 50,000 surcharge-free machines across the United States. You can look for the Allpoint logo on these ATMs, but for the most part you can expect them in most drug stores, malls, and other retail areas that don't provide bank-affiliated ATMs.

While there are some conveniences physical bank branches offer that online services cannot, in many cases you'll just need to learn how to do things differently rather than give them up completely.

What Should I Do if I Want to Switch?

Using an online bank for all of your personal finance needs is a realistic option for some people, but it's a switch you'll want to make gradually so you have time to learn how things work. If you have specific questions, write them down and ask the online bank that interests you before signing up for an account. Make sure the service fits your needs and try it out with a small amount of money before switching entirely. Banking online is great?it's a switch I've personally made and love it?but it's not what you're used to in both good and uncomfortable ways. If you want to give it a shot and ditch your traditional bank, take the time to know what you're getting into and try it out first.

Bank Offline

Banking offline isn't new?it's how we've guarded our wealth for many, many years. It offers many advantages, but also comes with its share of problems as well whether you decide to go with a big bank or a small one.

What Are the Pros and Cons of Bigger Banks?

Banking with a physical branch offers a lot of advantages: you have ATM access virtually everywhere, you'll often find branches everywhere you go, and you can receive in-person customer service from a human (although that's no guarantee of quality). Many of the larger banks offer a solid set of online features as well, from up-to-the-minute balance updates to check deposits via your smartphone. If you want better financial management tools, most banks integrate with Mint?and Mint doesn't cost you anything to use. We've known traditional banking for quite some time now, so little of this should seem like news to you.

For the same reasons, most of us know that the bigger banks tend to offer poor customer service and frequent fees for virtually every non-traditional transaction they can imagine. While I've never personally experienced a problem beyond a small surprise fee I didn't know about, the larger banks have caused numerous and significant problems for many people. Perhaps this is a result of the number of people they serve every day, the quality of their employees, a lack of general interest in the well-being of their customers, or some combination of the three, but they don't offer the greatest reputation.

Finally, most large financial institutions won't offer interest-bearing accounts if you're simply signing up for personal checking and don't intend to store amounts of $10,000 or more. Interest rates tend to be lower with larger banks as well, even if you do. While you're never going to earn much off interest unless you have a lot of cash anyhow, you certainly shouldn't expect it from a bigger institution.

What About Credit Unions and Local Banks?

When people want a bank with fewer annoying fees, better customer service, and/or accounts that bear a reasonable amount of interest, they tend to turn to credit unions or local banks. If you're considering online banking, chances are you will not like either of these options as they offer few frills and special features. In return for sacrificing great online banking and a smartphone app, you'll often get better benefits (more often with credit unions than local banks, however). For example, many institutions will reimburse a set number of ATM fees per month regardless of the brand of machine you use. You can often expect more personal service, simply because the institutions are smaller, and most offer interest bearing accounts with rates reasonably higher than larger banks without the need to store more money than you may have. Credit Unions, specifically, aren't in it for profit. Because they aren't motivated to make as much money as possible, they have less of an incentive to hide fees and conduct the ethically questionable business many have come to loathe about larger institutions. If you'd like to learn more about the advantages of credit unions, read this post and our guide to switching (if you decide a credit union is right for you).

Why Should I Bank Offline?

You're familiar with offline banking, you likely know the problems with it, and if you're vigilant and responsible with your money you can avoid fees in most cases. You may not get the greatest customer service through a big bank, but generally speaking you won't need it. Personally, I've never gotten anything but excellent customer service from the banks everyone seems to hate. While I bank online, I didn't switch out of frustration but rather because I liked the offerings better. If you like your traditional bank and don't really care much for the things you get with online banks, you shouldn't switch. For a fair number of people, online banks cause more frustration than they're worth. If you find yourself in a bank branch a few times a month, you rarely incur fees (if ever), and things are good, stick with what you've got. If you're unhappy with an offline, physical bank, you should consider leaving it behind.

Bank Both Offline and Online

Switching to an online bank doesn't mean you have to close out your existing bank account and leave it behind forever. If you need faster deposits, the ability to write checks immediately from time to time, need services like purchasing a cashier's check, or a variety of other banking services that require a branch, just keep your account. If you need it for any reason, it's there regardless of how much money you have in it (even $0). You don't really need to manage the account at all if you don't use it, and you can use it if you want to. Basically, you don't have to make a choice between online and offline banking. If you want to give online a shot, you can still use your offline account for the things it does well and your online account for the advantages it offers. The two options can coexist peacefully.

Love,
Lifehacker

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neil armstrong