3 Reasons To Switch To An Online Bank

If you’ve been loyal to the same bank for years, you’re not alone. The average American sticks with their primary checking account for 19 years and their primary savings account for about 17 years, according to Bankrate’s latest Checking Account Survey. But while you’ve been staying put, online banks have quietly become some of the best options available.

An online bank operates entirely through digital channels — websites and mobile apps — without physical branch locations. This business model allows them to offer significantly better rates and fewer fees than traditional banks. Here’s why making the switch might be the smartest financial move you make this year.

1. Dramatically higher interest rates

The biggest reason to switch? Money. Online banks consistently pay rates that make traditional banks look ridiculous.

Consider this reality check: The national average APY on savings accounts is just 0.57 percent, according to Bankrate data. Meanwhile, top online savings accounts are paying over 4 percent APY — over five times the national average.

The difference is even more stark when you compare online banks to big traditional banks. Chase, for example, pays just 0.01% on most savings accounts. That’s not a typo — it’s one hundredth of one percent.

Imagine you had $10,000 and put it in both accounts for a year. With an online bank earning 4 percent, you’d earn about $400 in interest in one year. At a big bank that offers 0.01 percent, you’d earn about $1. That’s a difference of $399 in extra earnings.

Use Bankrate’s savings calculator to see exactly how much more you could earn by switching.

Why online banks pay more

Online banks operate with a simple advantage: no expensive real estate. Without branches to staff and maintain, they can focus their resources on what customers actually want — better rates and lower fees.

This isn’t a temporary promotional gimmick. Online banks have consistently outpaid traditional banks for years because their business model is fundamentally more efficient.

Check out Bankrate’s online bank comparison to see current rates from top online institutions.

2. Fewer fees (often zero fees)

Traditional banks love fees. Monthly maintenance fees, overdraft fees, ATM fees, minimum balance fees — the list goes on. Online banks? Not so much.

Many online banks operate on a fee-free model. No monthly maintenance charges, no minimum balance requirements and often no overdraft fees either. Here’s what some top online banks currently offer:

ATM access without the fees: Most online banks provide fee-free access to large ATM networks. Many even reimburse ATM fees charged by other banks, giving you access to virtually any ATM without cost.

If you’re tired of getting nickel-and-dimed by your current bank, explore Bankrate’s fee-free checking accounts to see your options.

3. Digital convenience

Online-only banks make managing money simple. As long as you can connect to the internet, you’ll be able to review your bank statements, pay bills and transfer funds at any time.

Some common online banking features include mobile check deposit, bank-to-bank transfers, bill pay and paperless statements. Handy automated alerts often sent by online banks (and some brick-and-mortar banks) can notify you of situations like a low account balance or unusual account activity.

Many online banks offer tools to help you save more effectively. Ally Bank’s “buckets” feature lets you divide your savings into specific goals — emergency fund, vacation, new car. USAA’s Savings Booster automatically transfers small amounts to boost your savings without you thinking about it.

Plus, unlike traditional banks with business hours, online banks work when you do. Need to transfer money at 11 PM on Sunday? No problem.

Contrary to popular belief, online banks often provide excellent customer service. Many offer 24/7 phone support, live chat, and comprehensive help centers. Some customers actually prefer this to waiting in line at a branch.

What about the downsides to online banks?

While the upsides of using an online bank often include higher rates and fewer bank fees, a potential downside can be the lack of physical branches. If you regularly need to deposit cash, work with cashier’s checks, or prefer face-to-face banking, online banks might not be ideal.

However, there are some workarounds. Many online banks partner with retail locations for cash deposits, or have ATM networks that allow cash deposits at certain machines. You may also be able to deposit cash via mobile check deposit.

Just because your money is in an online bank doesn’t mean it’s “stuck” there.

Online savings accounts work exactly like traditional savings accounts — your money is available whenever you need it. You can transfer funds, withdraw cash at ATMs or move money to other banks just like any savings account.

The only accounts that restrict access for set periods are CDs, and that’s true whether you get them from online or traditional banks. Regular online savings accounts provide full liquidity.

The hybrid approach

You don’t have to go all-or-nothing. Many people keep a checking account at a local bank for convenience while moving their savings to an online bank for better rates. This gives you physical branch access when you need it, potentially higher interest rates on your savings and the flexibility to use the best features from each.

Start by moving your savings first, then consider switching checking later if you’re comfortable with digital banking.

How to make the switch

1. Compare multiple online banks

Don’t just pick the highest rate. Consider the full package: rates, fees, features, and customer service. Bankrate’s online bank reviews offers detailed comparisons of top institutions.

2. Gather the necessary documents and information

When you open your online account, you’ll need to provide:

• Personal details, including your name and contact information
• Your driver’s license or government-issued ID
• Your social security number
• A utility bill showing your current address

See Bankrate’s savings account checklist for everything you need to open an account.

3. Make an initial deposit

Most online banks let you open accounts entirely online in 10-15 minutes. You can fund your account via electronic transfer from your existing bank.

Most online banks are insured by the Federal Deposit Insurance Corp. (FDIC), but don’t assume every online bank is. Confirm that your deposits will be insured by the FDIC before you open the account and make a deposit.

Once you’re settled, you can close your old account and update direct deposits, automatic payments and other banking relationships. Check out Bankrate’s guide to switching banks for a detailed step-by-step process.

Bottom line

Online banks aren’t the future of banking — they’re the present. With rates much higher than traditional banks, minimal fees and superior digital features, they offer solid advantages for most people.

The main trade-off is giving up physical branches, but for many banking tasks, that’s not a significant limitation. And you can always maintain a relationship with both online and traditional banks if needed.