If you’re like most people, you’re probably interested in online banking. These banks in the cloud often promise to pay higher rates on your deposits, charge lower fees and save you tons of time. It’s an attractive proposition. But before you take the online plunge (or decide to stay with your current online bank) there are nine crucial points to consider:
1. Don’t Do Business With an Online Bank Based on Rates Alone
Most people choose their online banks mainly based on the rates they pay, and that’s a colossal mistake. I know you are probably thinking I’m crazy, but when it comes to banking these days, what you earn on your money isn’t that important. Here’s why.
Nationally, one-year CDs are paying 1.25%, which is a little better than chicken feed. Let’s say you found a bank willing to fork out 25% more, 1.55%. This is still a snoozer.
Even on $100,000, the difference between the normal rate of 1.25% and this bonus rate of 1.55% is only $300 a year. $300 per year is nothing to laugh at of course, but’s it’s not worth putting a ton of energy into either. Now, if you were talking about putting gazillions into a CD it would be another story. On a gazillion dollars, .3% could add up. But for most of us, getting a little more interest usually isn’t anything to get excited about with rates this low. There are other considerations that are far more important.
The problem is that people do get excited about it. And the result is they open accounts all over town in search of getting the highest rates. This ends up costing them a lot in time because it complicates their financial situation and makes it easier to lose track of what’s happening. And that can cost you a lot more than $300 a year my friend.
This isn’t to say you should ignore rates entirely. What I’m trying to say is that rates should not be your main or sole concern. Look for banks that offer consistently higher rates and avoid those who try to lure you in with pumped-up teaser offers.
2. Consider Fees and Minimum Balances
Before you sign up with an online bank, ask about fees and minimum average balances. These two are related because fees could go up considerably if you fail to maintain a certain minimum balance. Ask how much you’ll need to open an account of course. And find out about the costs for check writing and deposit fees. Believe it or not, some online banks charge you if you make too many of either. (For related reading, see: The Ins and Outs of Bank Fees.)
3. Bill Pay
Automatic bill payments are a must in my opinion because when you use this service you save hours each month and eliminate late payment charges from your life. Sometimes you’ll have to keep a daily minimum average to qualify for free bill pay so find out what that number is.
4. High Yield Checking
Depending on your banking needs, a high yield checking account might come in handy. This is especially good if you have a business account, usually run high balances and don’t need to write that many checks each month.
Just keep in mind these accounts frequently come with restrictions on the number of free transactions you are allowed to make. Usually that number is six and if you go over that limit, you’ll get dinged.
5. Downloading Transactions
For me this is non-negotiable. If the bank doesn’t make it easy to download transactions, don’t sign up with them. Having your information easily accessible and available for your bookkeeping program gives you amazing control and power over your financial life and is simply a must. Entering data by hand into the computer is way too time-consuming and is not an option.
6. Financial Fortitude
How long has the bank been around? Look at their balance sheet and find out if they’ve been growing or not. Ask about the bank’s CAMEL rating.
This is a multi-faceted rating system done by the FDIC to determine how strong the bank is. They rate the bank on six different criteria and in this case, the lower the number, the stronger your bank is. Make sure to only do business with institutions that have a rating of less than two on average. A rating above two is generally considered less than satisfactory.
7. Service and Availability
The beauty of online banking is that it is usually available 24/7. The banking staff may not be available that much, but look for a financial institution that has people to pick up the phone when you are most likely to call.
8. Physical Locations
You shouldn’t need a brick and mortar presence in order to get all your banking needs taken care of, but sometimes you want to speak with a representative face-to-face.
Even if you don’t think you need to meet face-to-face with the bank staff, you will very likely need access to ATM machines. Look at the bank’s homepage. Is it easy to find out where the nearest ATM is? How many do they have available throughout the United States? Do these machines cost money to use? (For related reading, see: eBank or Brick-and-Mortar Bank?)
If you have a side gig and or a small business, you want the convenience of being able to deal with one bank for your business and your personal finances if possible. Find out if the online bank you are considering using can oblige.
Online banking can be a game-changer for you. If you do a little homework and ask the right questions, it can take a ton of bricks off your shoulders. Make sure you know what’s important to you as a banking customer and find a bank that provides the services you need.
(For more from this author, see: How Poor Credit Hurts You as an Investor.)