Banks have always been viewed as the safest place to park your money but, in the wake of the financial crisis, this perception has changed. Not only have people’s confidence in the stability of banks been shattered by collapse of WaMu, etc., but ever increasing bank fees and executive payouts have engendered distrust. On a more practical level, there are just fewer banks to go around. Many banks have either folded or been swallowed up by larger financial institutions, forcing people to look around for more options.
Online banking is a relatively recent phenomenon that has become increasingly popular as consumers become more comfortable with doing the majority of their activities — from shopping for books or music to booking their airline tickets — in the cloud. Most major banks offer online services today, which provide 24/7 access to your accounts and advanced services such as the ability to pay bills online. There are even Internet-only banks such as First Internet Bank of Indiana or Smartypig that, because they don’t have the overhead of physical infrastructure, can offer substantially higher interest rates on savings accounts. Smartypig pays an APY of 2.75%. Let’s take a look at the pros and cons of online banks.
- They tend to offer higher interest rates than local banks due to lower overhead costs such as paper mail, lease and other real estate expenses.
- Some banks offer customer service available 24/7 or till late evening hours.
- You can quickly initiate transactions online such as a transfer, withdrawal request or a bill payment in a matter of minutes.
- Most paperwork can be filled out on the computer and transmitted electronically.
- You can set up alerts so the bank will let you know when your balance is low.
- Less paper mail such as bank statements and utility bills will decrease the amount of paper trail left behind for identity thieves.
- No Fees– The majority of online banks do not charge fees. HSBC for example has no monthly fees and no minimum balance requirement for their online savings account.
- Limited Access – you can’t just drop off your deposit like you would at a local bank. It must be mailed or transferred from another account.
- At some online banks, the customer doesn’t have the opportunity to get to know the staff. Calls are often handled through a random system where you will get to speak to different customer representatives every time you call for an issue.
- Make sure you select a bank with many ATM’s available, otherwise you will end up paying fees for using machines not part of the bank.
- It takes longer to clear a deposit.
- Paperwork requiring signatures has to be done through mail, taking longer to process.
- Your bank’s website can go down, limiting access to accounts temporarily
Just to give you an idea of the services online banks offer, HSBC has an online savings account with an interest rate of 1.85%. Wachovia has several online services available in addition to online banking such as bill pay, brokerage and retirement accounts. Bank of Internet has an online interest checking account that pays an APY of 1.30% and a high yield savings with an APY of 2%. At the time this article was written, national overnight averages for savings accounts were of .77% for interest checking accounts and 1.39% for a savings.
Although some consumers have remained skeptical about doing their banking online, the majority have been easily seduced by the ready access to balances and the ease with which these services categorize transactions. The advancements in technology and privacy protection have also pushed more people to take the leap.
On the other hand, with distrust in the banking industry at a fever pitch, some people are taking solace in the old-fashioned comfort that can be found in a local brick and mortar bank where you know the teller by name and she remembers yours. Let’s take a look at the pros and cons of local bank accounts.
- Easy access – you can just drop off by your local branch to make deposits or get cash withdrawals.
- Familiarity – by becoming a regular customer, you get familiar with staff, getting to know some on a first name basis.
- Quick access to cashier’s and certified checks.
- Limited hours of operation – At most banks, after 4 or 5 pm you can’t get a representative to help you – you’d have to wait till the next day.
- Interest rates tend to be on the low end in comparison to online banking.
- More opportunity to spend your money because it is so easy to access it.
With the banking industry in a state of reorganization, there’s never been a better time to be a customer. All banks, whether an established brick and mortar institution or a scrappy newcomer that only exists in cyberspace are scrambling to regain your trust. Of course you want the best interest rate you can get but you’ll also want to consider things like ease of access to your money, any fees that may be associated with your accounts, and the security and stability of the financial institution in question Decide what options you would like to have and what you can do without when considering the pros and cons of either method of banking. And it doesn’t have to be an either/or decision. The best approach if you decide to open an online account is preferably to keep your local bank account open, this will enable you to have the access you need to some of your cash if an emergency arises.