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.


RELATED FAQS
  1. What economic indicators are important to consider when investing in the banking ...

    Find out which economic indicators are most useful for investors in the banking sector, especially those influenced by central ... Read Answer >>
  2. How does the deposit multiplier affect a bank's profitability?

    Find out how a deposit multiplier affects bank profitability, how it increases the supply of money in the economy and why ... Read Answer >>
  3. How does investment banking differ from commercial banking?

    Discover how investment banking differs from commercial banking, the responsibilities of each and how the two can be combined ... Read Answer >>
  4. What are the major categories of financial institutions and what are their primary ...

    Understand the various types of financial institutions that exist in today's economy, and learn the purpose each serves in ... Read Answer >>
  5. What developed countries have the highest concentration in the banking sector?

    Learn about the developed countries that have the greatest concentration in the banking sector and the most important emerging ... Read Answer >>
  6. What are the main reasons an investor should consider an allocation to the banking ...

    Learn about investment opportunities in the commercial and investment banking industry. Find out why many investors choose ... Read Answer >>
Related Articles
  1. Markets

    Choose To Beat The Bank

    From internet banking to credit unions, it's in your power to cut fees and maximize service.
  2. Personal Finance

    Online Banks: Lower Costs And Little Sacrifice

    For many, online banking has become a day-to-day routine. Still, there are some holdouts who refuse to accept the method.
  3. Personal Finance

    2015's Top Checking Account Promotions

    Open a checking account in 2015 and the bank could give you a cash bonus. Check out these top offers.
  4. Investing

    Banking Has Changed: What Does It Mean For Consumers?

    Banks have long been leading spenders on technological innovations. Learn the key changes in the banking industry and what institution is right for you.
  5. Personal Finance

    Your First Checking Account

    This owner's manual will show you what to expect from your bank.
  6. Managing Wealth

    Retail Banking Vs. Corporate Banking

    Retail banking is the visible face of banking to the general public. Corporate banking, also known as business banking, refers to the aspect of banking that deals with corporate customers.
  7. Investing

    How To Break Up With Your Bank

    Whether you're moving or have just found a better no-fee plan, find out how to switch banks with ease.
  8. Investing

    Cut Your Bank Fees

    Find out how to get the bank to pay you for using their services, not the other way around.
  9. Investing

    The Banking System: Commercial Banking - Operations

    ByStephen D. Simpson, CFA Retail BankingRetail banking is the banking that almost every reader will find most familiar. Retail banking is the business of making consumer loans, mortgages and ...
  10. Personal Finance

    Best Checking Accounts For Small Businesses

    What you need to know to choose the best checking account for your small business – and where to look.
RELATED TERMS
  1. Online Banking

    The performance of banking activities via the Internet. Online ...
  2. Commercial Bank

    A financial institution that provides services, such as accepting ...
  3. Limited Service Bank

    Any type of banking business facility that is located separately ...
  4. Bank Deposits

    Money placed into a banking institution for safekeeping. Bank ...
  5. Interbank Deposits

    Any deposit that is held by one bank for another bank. In most ...
  6. Universal Banking

    A banking system in which banks provide a wide variety of financial ...
Hot Definitions
  1. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  2. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  3. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  4. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  5. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  6. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
Trading Center