What are the advantages and disadvantages to dealing with internet-only banks?

By Albert Phung AAA
A:

In recent years, large companies have set up internet-only banks as a means of diversifying into the financial sector and providing personal banking services. For a company, the greatest advantage of providing internet-only banking services compared to a traditional brick and mortar bank is that this type of bank has very low costs. These savings come as a result of the low overhead costs that are associated with electronic transactions. For example, internet-only banks can avoid paying bank tellers, renting the physical location of the bank branches and other overhead costs associated with running a regular bank.

As a result of these low costs, internet-only banks are able to offer special deals such as higher interest rates on savings/checking accounts, unlimited free internet transactions and/or no-fee checking to their customers. These act as incentives and are typically unattainable at traditional banks. These benefits can be worth a substantial amount to a consumer when you realize that most traditional banks change fees every month for using checking accounts and pay little to no interest for savings/checking accounts.

As nice as these benefits sound, there are some drawbacks that should be considered before you rush off to join an internet-only bank. Seeing as internet-only banks do not have branches where you can conduct transactions, it can be hard to deposit money into your account. Someone who has direct deposit can easily direct an employer to send a paycheck to the online bank account, but for those who do not have direct deposit or want to deposit extra cash into their accounts, having an internet-only bank could be an inconvenience.

Another drawback to consider has to do with automatic teller machines (ATM) and the fact that most internet-only banks do not have their own machines. Typically, you will need to pay a fee of a couple of dollars in order to use another bank's ATM to withdraw cash. People who make frequent cash withdrawals with ATMs can incur large costs that may outweigh the costs of traditional bank transaction fees.

Depending on the internet-only bank you choose, you may have two solutions. Some internet-only banks can accept non-electronic deposits (cash or check) through the mail, which results in a time delay before you can access your money and/or a possible safety issue of mail theft. Other internet-only banks have another solution in which you create two accounts - this allows you to deposit your cash or check at a brick and mortar bank and then transfer your money to an internet-only bank account. This way, money can easily be moved back and forth between both accounts. While this solution is a lot safer and faster than the first method, it is still fairly complicated.

Overall, internet-only banking has some obvious benefits compared to traditional banks, but due to the inherent nature of internet-only banking, it may not be for everyone.

For related reading, see Credit, Debit And Charge: Sizing Up The Cards In Your Wallet.

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