Using online banks

People have been turning to online banks for years as a way save themselves money from banking fees.  It is as well as a way to get a better return on their deposits then they can get from traditional banks.  However, there have been some people who have transitioned from the traditional banks only to later regret it when they discover that some services they took for granted are not available with their new bank.

Questions you may want answered before making the switch likely include:

• What services can I expect from an online bank?
• How do online banks save me money?
• Why doesn’t everyone use online banks?

What services can I expect from an online bank?

In general an online (or discount) bank provides most of the basic services that traditional banks offer as well.  Essentially this means that you can both deposit and borrow money from these banks, how this is performed and the portfolio of services offered varies greatly between online banks.

The first and standard service offered is typically a high interest savings account, the actual interest rate can vary between different banks but you are more or less guaranteed a rate much higher then any traditional bank.

Next are low interest loans which is effectively the counterpart to the savings account.  The reason why these banks can offer these services is because they have a low overhead having effectively no physical presence in the “real” world.

Other services that you might find include chequing accounts, mutual funds, and credit cards.  This may seem like an exhaustive list but for some it may not cover all their needs.

How do online banks save me money?

Unlike your traditional banks, online ones do not have a significant presence in the physical world.  This alone difference allows them to offer services at a substantially discounted rate.

Typically, you will not pay any fees for any services offered by online banks.  With this said there are some cases where they will charge for some services such as non-sufficient funds (NSF) fees or fees for using ATMs outside your network.

The next way is that these banks also offer better interest rates then other banks.   This means you get a higher interest on your deposits and you pay a lower rate on your loans from them.  Again, this is effectively due to the bank passing on their savings on to you for not have any (or many) branches.

Why doesn’t everyone use online banks?

The big one would be because they want to be able to talk to someone face to face.  Although some do have a handful of locations to talk to someone they are typically either not very convenient or not common.  Examples includes PC has locations in Loblaws (and subsidiary) stores, and ING has a couple in a few major cities.

There are also other reason too:

• perhaps you want to have an add-on trading account
• maybe you want to travel overseas and use ATMs there
• you need a chequing account
• etc

And then there’s just the comfort factor in knowing that there is a physical bank to got to if you wanted.  Although I believe the fear of dealing with companies without ever seeing them is going away I think this probably remains a common factor.