With more online banks available now than ever before, finding the best online bank has never been easier. In this article, we’ll explain how online banks work, whether or not they are safe, and compare how they differ from traditional banks. We’ll also explore some of the advantages and disadvantages of using online banks as well as provide information about some of their current offers and rates.
Deal of the Day: Earn 1.05% APY on an FDIC-insured savings account at Synchrony Bank.
Let’s start by looking at some of the best online banks of 2016.
Top Online Banks
Best Online Banks — Short Reviews
We like online banks because they offer competitive interest rates, low fees, and other options, all while making banking more convenient than it’s ever been. There are a number of different banks to choose from. I’ve personally have accounts at Ally and Capital One 360, and previously had an account at American Express Bank.
Based on my personal experience along with substantial research, here are some of the top online banks we feel stand out above the rest:
Ally Bank – Formerly known as GMAC Bank, Ally has been recognized by numerous publications – including Kiplinger’s and Money Magazine – as the best online bank around. With no brick-and-mortar locations to increase its overhead, Ally is able to provide their customers with some of the best interest rates available.
Capital One 360 – Captial One 360 may seem like a new arrival to the scene, but that is only because they’ve been acquired and rebranded by Capital One. Formerly known as ING Direct, they’re actually one of the first online banks in the space. Capital One acquired the bank in 2012 and rebranded it as Capital One 360 in 2013.
Synchrony Bank – Widely recognized as one of the best online banks around, Synchrony Bank consistently receives Bankrate.com’s “5-Star Safe & Sound Rating.” Additionally, Kiplinger’s ranked their 1- and 5-year CDs as the top yielding CDs in 2014. We track the best interest rates each month, and Synchrony Bank routinely makes the top of the list.
American Express – American Express offers high yield savings accounts through their American Express Personal Savings online bank. Additionally, customers can shop for high yield certificates of deposit through the online platform.
FNBO Direct – First National Bank of Omaha currently offers a competitive APY for its online savings account, with a minimum deposit of $500.00. Even more impressive, it offers an interest bearing checking account that currently pays 0.65% APY.
Discover Bank – Discover is more than just credit cards. Through Discover Bank, customers can find great rates on nearly any type of account they want – including checking, savings, money market, CDs, and IRAs.
EverBank – This is one of the few online banking institutions that offers users a high interest checking account, as well as unique certificates of deposit based on currency trades.
What is an Online Bank?
An online bank is a financial institution that does not have physical bank branches. All banking is done online. The advantages is that without the cost of physical locations, online banks offer higher interest rates on savings products and lower fees. And consumers have taken notice.
Although many consumers still love the idea of doing business with a traditional bank, the fact is that consumers are flocking in huge numbers to online banking options. According to the Federal Reserve’s “Consumers and Mobile Financial Services 2015” report, 74% of banking customers reported using some type of online banking application to access their bank accounts in 2014.
That number is up from 65% in 2011. Even more striking is that 35% of banking customers used mobile banking apps in 2014, up from just 20% in 2011. Clearly, the online banking trend is moving upward.
So what makes online banking so attractive to banking consumers? Online banking is extremely convenient, for one. Customers of online banks are able to access their information from anywhere with an internet connection. That makes doing all, or even some, of your banking online very convenient. Even traditional banks now include an online banking component for most of their customers.
Unlike their traditional counterparts, online banks do not have physical brick-and-mortar locations. Obviously, this presents both advantages and disadvantages for online banking customers. Because banks don’t have the high overhead costs of maintaining or staffing physical locations, they are able to pass those savings along to their customers in the form of higher yielding products.
Additionally, online banks typically are able to charge lower fees for the same reasons. However, customers who bank mostly in cash may find not having a branch location to be more trouble than it is worth. Customers who crave a personal face-to-face experience will also be disappointed.
Just as most traditional banks have the backing of the FDIC, online banks fall under their protection as well. Furthermore, many online banks offer the same banking products that you can find at traditional banks. Most online banks include checking, savings, CDs, and money market accounts. However, online debt focused products – such as mortgages and personal loans – are rare. Although some online banks do offer IRA accounts, many do not offer any type of investing products or services.
How Online Banks Work
Due to the nature of how they work, online banks are geared toward satisfying the needs of more mobile and tech savvy customers. Because online banks do not have physical branch locations, consumers need to make some adjustments in how they interact with their new bank.
If you already have your paycheck directly deposited into your bank account, you’ll notice little difference in depositing your monthly income. With direct deposit, online banks work the same way as traditional financial firms. However, if you receive a paper check, you’ll need to find a different way to make your deposits.
An online bank typically enables deposits in the following ways:
Mobile Deposits: Most online banks today enable customers to deposit paper checks via smartphones. The feature is as simple as snapping a picture of the front and back of the check.
Electronic Transfers: You can connect an existing bank account with an online bank. This makes it easy to transfer funds to your primary bank account. That’s what we do. We transfer funds to our online banks to take advantage of the higher yields. When we need to use the money, we then transfer it back to you brick and mortar institution.
U.S. Mail: In addition to direct deposits, customers can also mail in their paper checks. Doing so means that your check will not clear and be credited to your account for at least a few days.
Online banking customers can get access to their money in a number of different ways.
Debit Card: The easiest way to make a purchase is to use the debit card provided by your new bank. Typically, these cards will have a daily purchase limit that protects your account from unauthorized purchases.
Paper Checks: Online banks may also provide customers with access to paper checks and online bill payment systems. Customers may also transfer funds to a traditional bank, which can then be accessed at that bank’s physical location within a few days. This can typically be done without incurring any fees.
ATMs: Most online banks have agreements with ATM services that allow their customers access to cash from these machines without paying a fee. Again, ATMs may be subject to a daily withdrawal limit.
Electronic Transfers: As mentioned above, this is how we access are funds in most cases. We simply transfer the money to our primary checking account.
Is Online Banking Safe?
If you are new to online banking, you might be wondering if online banking is as safe as banking through a traditional bank. Although the act of physically handing your money to a teller may seem safer, the fact is that many traditional and online banks operate in a similar fashion.
Most online banks use the same type of security systems used in traditional banking. Furthermore, both traditional and online banks store your information on servers and databases that could potentially be vulnerable to cyber criminals. So, the perception of safety is not always the reality.
Before doing business with an online bank, make sure that they are a legitimate institution. Of course, we recommend using online banks that are insured by the FDIC. That way, your money is getting the same type of protection that it would get if you deposited it with a traditional bank (up to $250,000 in coverage).
Whether you choose to bank online or with a traditional bank, the safety of your account is really up to you. Monitor your accounts and look for any irregularities on a regular basis. With online banking in particular, make sure that you are secure private internet connections, rather than public wireless connections where your information may be visible to other users. Most of all, be vigilant about your online banking relationship. If you see something that doesn’t look right, take action immediately.
For more information about how you can keep your accounts safe, visit the FDICs tips for “Safe Internet Banking.”
Advantages of Online Banks
Due to the nature of online banking, there are some distinct advantages that online banks can offer over traditional banks. Here are a few:
Because online banks typically don’t have the same overhead costs of traditional banks, they are able to pass the savings on to their customers in the form of higher rates. Many banks are able to offer savings account and CD rates that are 0.5% higher (or more) than their traditional counterparts. Depending on the size of your balance, that can mean a lot of interest being put back into your pocket.
Again, because they have much smaller overhead expenses to deal with, online banks are typically able to offer lower fees than traditional banks. At most online banks, many of their account types offer zero fees.
Easy of Use
Since their entire business structure is based online, it makes sense that online banks would provide their customers with easy to use platforms. Additionally, most online banks now have mobile apps to help meet their customers banking needs even while they are on the go.
Disadvantages of Online Banks
Of course, making the switch to online banking presents some challenges as well. Here are a few disadvantages of online banks:
No Branch Locations
Although online banks are able to keep their overhead low due to the lack of physical branch locations, it does present some issues. For online banking customers, this means that face-to-face meetings with tellers and bankers are nonexistent. Customers desiring personal interaction will not find it in an online bank.
Difficulties with Cash
Another result of not having physical branches is that online banking makes it difficult to deposit and withdraw cash. Cash deposits are not allowed, and withdrawing cash must been done at an ATM machine. While online banks have agreements with ATM companies that eliminate processing fees, cash withdrawals are subject to daily limits.
Limited Product Offerings
Most online banks are able to offer the basic accounts that customers seek – checking, savings, and money market accounts. However, few online banks provide other products – especially debt products – that can be obtained from a traditional bank. Customers typically are unable to obtain home loans, personal loans, or brokerage accounts from an online bank.
No Safety Deposit Boxes
If you are somebody who uses a safety deposit box, you’re obviously out of luck finding those with an online bank. Since there are no physical locations, online banks are clearly not able to provide this service.
How to Open an Account
Opening an account at an online bank is pretty straightforward. Just visit the website of the online bank of your choice. Click on “Open Account” (or something similar). Choose the type of account you wish to open, and fill out the required personal information. You can then fund your through an online funds transfer, mailing a check, submitting an eCheck, or completing a wire transfer.
If you do not wish to open your account through the online process (and why wouldn’t you since you’re switching to online banking?), many online banks allow you to open your new account by telephone. Some also allow you to complete and mail paper forms to open your account.
List of Online Banks
Here is a list of online banks. Please note that, due to federal regulations, all savings and money market accounts are limited to 6 transactions per calendar month on certain types of transactions (wire transfers, phone transfers, etc.). Deposits and ATM withdrawals are not included in this number. Unless otherwise noted, there are no deposit or ATM withdrawal fees at participating machines.
Ally Bank – Ally Bank offers customers access to online checking and savings accounts, CDs, money market accounts, and IRAs. Customers can also obtain auto loans through Ally Auto. A mobile app is also available. On all accounts, there are no minimum balance or monthly maintenance fees.
Capital One 360 – Capital One 360 offers multiple online accounts, including checking, savings, CDs, business savings, and children’s accounts. Brokerage accounts, IRAs, and mortgages are also available. Checking and savings accounts include no minimum balance requirements and no monthly fees.
Synchrony Bank – Synchrony Bank’s online products include savings and money market accounts, CDs, and IRAs. On both their savings and money market accounts, Synchrony requires a minimum balance of $30 and charges a $5 monthly maintenance fee if you don’t maintain the minimum balance.
American Express Bank – American Express Bank provides online banking customers with access to online savings accounts and CDs. There are no monthly fees or minimums associated with the online savings account. The account links with your 3 of your current bank accounts, meaning that there is no need to completely switch banks.
Discover Bank – Discover Bank provides online banking customers with a number of different account options – including checking, savings, and money market accounts. IRAs and CDs are also available. Discover Bank customers have access to over 60,000 free ATMs. There are no monthly maintenance fees or minimum balance requirements for checking, savings, or money market accounts. You can also earn up to $10 in rewards per month for making purchases using your checking account.
CIT Bank – Customers of CIT Bank may open online savings accounts, CDs, IRAs, and custodial UTMAs. Savings accounts offer no account opening or maintenance fees. However, they do require a $100 initial deposit.
Bank5 Connect – Bank5 Connect is an online bank offering checking and savings accounts as well as CDs. They also offer person-to-person payments. Checking and savings accounts require a minimum balance of $10 to open and $100 to earn interest. There are no monthly maintenance fees.
GE Capital Bank – GE Capital Bank offers online savings accounts and CDs. There are no minimums to open a savings account, however there is a maximum deposit of $1,000,000. Interest rates are compounded daily and paid monthly and there are no transaction fees.
Sallie Mae Bank – Student loan giant Sallie Mae has also gotten into the online banking game. Currently, they offer savings and money market accounts, CDs, and Upromise GoalSaver college fund accounts. Savings and money market accounts offer no minimum balance requirements or monthly maintenance fees.
First Internet Bank – First Internet Bank is a full service online bank offering personal and business banking accounts, mortgages, CDs, IRAs, commercial loans, and more. They offer both free and interest earning checking accounts, with a minimum opening deposit of $25 and $100, respectively. Interest checking accounts charge a monthly maintenance fee of $10 a month for average daily balances below $500. Free and interest bearing savings accounts are also available, with minimum opening deposits also sitting at $25 and $100, respectively. A monthly maintenance fee of $2 will be assessed to regular savings accounts with an average daily balance of less than $1,000. Money Market accounts require a $100 deposit to open and an average daily balance of $4,000 to avoid the $5 monthly fee.
TIAA Direct Bank – TIAA Direct Bank offers checking, savings, and money market accounts as well as CDs. Borrowers can also apply for mortgages and home equity loans through this online bank. On all accounts, there are no minimum balance requirements or monthly maintenance fees. Checking and savings accounts require a $100 deposit to open, while money market accounts may be opened with a deposit of at least $2,500.
Barclay’s Bank – UK banking giant Barclays offers clients in the U.S. access to online savings accounts and CDs. Online savings accounts through Barclays feature no minimum balances to open and no monthly maintenance fees. In order for interest to post to your account, they do require that you maintain a minimum balance that would net you $0.01 in interest.
Simple Bank – Simple Bank offers an online bank account similar to a checking account. You can pay your bills through their system and use your Visa debit card to make purchases. Their “Safe to Spend” feature helps you keep track of both your current balance and future financial commitments (like monthly bill payments). Your funds are held through Simple Bank’s partner bank (Bankcorp Bank). Unlike most online banks, Simple Bank does not offer high-yield checking or savings rates. Thus, their current rates are nominal. So, if you are looking for high-yielding bank accounts, Simple Bank is not your best option. However, if you’re looking for an online bank with a great mobile app, online bill pay, and tools to help you budget, Simple Bank is a good option.
Nationwide Bank – Nationwide Bank is a full-service online bank offering personal and business accounts, as well as CDs, mortgage and home equity loans, car loans, IRAs, and a variety of other banking products. They offer 3 types of personal checking accounts, all requiring a minimum of $50 to open. Two of these accounts are interest bearing, and all of them have small monthly maintenance fees that can be waived by meeting varying direct deposit or minimum balance requirements. Regular Savings accounts also require a $50 minimum opening deposit and are charged a $3 monthly fee for minimum daily balances below $300. Money Market accounts are subject to a monthly maintenance fee of $8 for minimum daily balances below $1,000. Nationwide also offers a special “Holiday Club” savings account, helping you plan and save for holiday shopping throughout the year. The account is free, and you’ll receive a transfer to your Nationwide checking or savings account in October of each year.
The Bottom Line
Online banks can provide customers with high-yielding accounts and CDs that traditional banks may not be able to offer. Since there are both advantages and disadvantages to banking online, be sure to weigh the pros and cons before you make a complete switch.
The beauty of online banking is that you don’t have to switch entirely. You may consider keeping some accounts with a traditional bank while moving some of your money to an online bank in order to take advantage of the great rates. As always, do your research and think carefully before making any major financial decision.