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The Beginner’s Guide to Online Banks And Neobanks

Online banks, or neobanks, are growing in popularity—but what are they and how do they work? Here are some things you need to know.

Articles by Nick Holeman, CFP®
By Nick Holeman, CFP® Head of Financial Planning, Betterment Published Sep. 05, 2019
Published Sep. 05, 2019
8 min read
  • The rise of online banks and neobanks has changed consumers’ relationship with their finances, combining technology with traditional banking services.

  • Despite common misconceptions, online banks have the ability to offer customer support, access to ATMs, and modern online security.

  • Sign up for Betterment’s cash management products, designed to help you save and earn more for the future.

Banks have long been a central part of many people’s financial lives. However, in the past few years, the way people interact with their bank has undergone a radical shift. More and more banking services can be done from your computer, or even your phone. This trend has changed the banking landscape and given consumers more options for how they can manage their cash.

With increasing digital options to manage your cash, how do you know which option might be suited for you? In this article, we’ll cover:

  • What online banks are.
  • Misconceptions about online banks.
  • Pros and cons about online banks.

Please note that this article is intended to be purely educational: Betterment is not a bank.

Now, let’s dive in.

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What Are Online Banks?

Online banking, or the ability to conduct banking transactions from your computer, began in the 1990’s when the popularity of the internet took off. At first, online banking was mainly offered as an added service from “traditional” brick-and-mortar banks.

Not much later, some true online banks came to the scene. A true online bank does not have any branches or physical locations, and instead offers all of its services remotely. These online banks are sometimes also referred to as “neobanks” or “direct banks.” The rise of smartphones in the 2000’s led many banks to offer their own mobile apps, making it even easier to bank remotely.

Recently, there’s been an explosion of financial technology (fintech) companies who offer services like budgeting, investing and retirement planning completely from your computer and smartphone.

Misconceptions About Online Banks

Despite their growing popularity, there are still some common myths and misconceptions about online banking floating around. If some of these myths are preventing you from switching to an online bank, let’s clear up four common misconceptions out there.

1. Little To No Customer Support

While it is true that online banks and neobanks may not have physical locations for you to get assistance, that doesn’t mean you are completely on your own. Many of these companies have customer support staff to answer your questions five to seven days a week.

Most even offer multiple ways for you to communicate with them, like phone, email, or online chat. This means that you can get your questions answered from the convenience of your home, no branches needed.

2. Unable To Deposit/Withdraw Cash

According to CNBC, cash represents only 31% of consumer transactions. However, of course there are times when you need to deposit or withdraw cash.

With no physical locations, many consumers think they are out of luck if they bank with an online bank or neobank. That is incorrect.

Usually companies allow you to use any ATM in the country, so you can easily access your cash. Many of them will even reimburse you for any ATM fees you incur.

For the rare times you may need to deposit cash, some companies allow you to link your online account to a “traditional” bank account to make transfers easy. So, fear not when it comes to depositing/withdrawing cash when using an online banking provider.

3. Not As Regulated

Many online banks and neobanks also offer FDIC insurance for your money. This is the same protection that you would get from a brick-and-mortar bank.

In fact, many online banks and neobanks actually offer two to four times the FDIC insurance than normal.

If you bank online, you should be able to tell if your money has FDIC insurance or not.

4. Not As Secure As Traditional Banks

Just because online banks and neobanks don’t have physical vaults like traditional banks, doesn’t mean your money isn’t protected.

In fact, the argument can be made that most online banks and neobanks aren’t utilizing the clunky and outdated systems that traditional banks have.

Online banks tend to be early adopters of new security features like multi-factor authentication or app-specific passwords. This can make them more nimble and a secure option for handling your money.

The Pros And Cons Of Online Banks

Pros

May Offer Higher Interest and Lower Fees: No physical branches usually means less overhead costs. For customers, that may translate to higher interest rates and lower fees.

More ATM Access: If you’ve historically stopped yourself from using certain ATMs because of their high fees, then using an online bank or neobank may be the right fit for you. If you get ATM fees reimbursed, you are now free to use virtually any ATM you can find. Ironically, that can mean having no affiliation with a particular ATM actually gives you more ATM access.

More Modern Technology: A 2018 Bain & Company study found “traditional banks continue to lag behind technology firms and direct banks in providing simple, digital customer experiences.”

More FDIC Protection: As mentioned above, you may be able to receive the protection of FDIC insurance as you would with a traditional bank.

Cons

Fewer Services: Many online banks don’t offer some lesser-used services that traditional banks do. This can include: mortgages, credit cards, currency exchanges, notaries, and more.

No Branch Locations: No branch locations means no in-person assistance. Most of the time, phone/email access can compensate for this, but if you really value face-to-face interaction, online banking may not be right for you.

Difficult to Deposit Cash: As mentioned above, you can usually deposit cash, it just might require a few extra steps. If you frequently handle cash, this may affect your decision to bank online.

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Betterment’s Cash Management Products

Online banks and fintech companies are leading the way and driving innovation. If the pros outweigh the cons for your situation, consider using Betterment.

Betterment launched two online cash management products designed to help you make the most of your money today so that you can save and earn more in the future.

To explain what these are, I’ll break out our products into three key areas: a high-yield cash account, checking account, and other perks.

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1. Cash Reserve

Cash Reserve is a high yield cash account and consists of the components that many people consider to be the key benefits of a savings product.

  • Higher interest rate: Our business model allows us to offer a competitive rate compared to the national average: our high-yield cash account can earn you a variable rate up to *.
  • FDIC insurance up to $1 million†: Standard bank accounts offer FDIC coverage of $250,000. But, Cash Reserve is FDIC insured up to $1,000,000 once deposited at our program banks, giving you four times the standard coverage by spreading your money seamlessly across multiple banks.
  • No monthly withdrawal limit: Unlike many traditional savings accounts that place limits on how many times you can withdraw money from your savings account (usually 6 per month), Cash Reserve lets you access your money as many times as you need, penalty free.

2. Checking

Pairing your Cash Reserve account with Checking can make your experience even better.

  • Betterment Visa debit card: Debit cards accompany Checking accounts and will be issued by nbkc bank; Member FDIC.
  • FDIC insurance up to $250,000: Spend with confidence, knowing your money is secure.
  • No minimum balance: This means no hidden fees or gimmicks.
  • Unlimited worldwide ATM reimbursements: Access any ATM, in any country, where Visa is accepted,  as many times as you need.
  • Direct deposit (coming soon): No checking account would be complete without these core features.

3. Other Perks

As a fintech company on the cutting edge of financial advice and innovation, Betterment offers services that many banks don’t.

  • Cash Analysis: Our algorithms will monitor the cash in your Checking account and tell you if we think you have too much cash, or too little.
  • Two-Way Sweep: This optional feature will automatically sweep money into Checking if we think you have too little, and sweep it into your Cash Reserve if you have too much.
  • Investing: In addition to our cash management products, Betterment also offers investing accounts for short and long-term goals such as saving for a vacation, a home, or retirement.

Whether you choose to switch from a traditional brick and mortar back to a neobank or fintech company,  start maximizing your money so you can live better.


Cash Reserve

*The annual percentage yield (“APY”) on the deposit balances in Cash Reserve (“Cash Reserve”) is 0.30% and represents the weighted average of the APY on deposit balances at the banks participating in Cash Reserve (the “Program Banks”) and is current as of 04/06/2020. This APY is variable and subject to change daily. See Current APY. Deposit balances are not allocated equally among the participating Program Banks. A minimum deposit of $10 is required, but there is no minimum balance required to be maintained. The APY available to a customer may be lower if that customer designates a bank or banks as ineligible to receive deposits. APY applies only to Cash Reserve and does not apply to checking accounts held through Checking. Cash Reserve and Checking are separate offerings and are not linked accounts.

See Betterment’s Form ADV Part II and Terms and Conditions for additional information, including details of the deposit allocation methodology.

†Cash Reserve (“Cash Reserve”) is offered by Betterment LLC. Clients of Betterment LLC may participate in Cash Reserve through their brokerage account held at Betterment Securities. Neither Betterment LLC nor any of its affiliates is a bank. Through Cash Reserve, clients’ funds are deposited into one or more banks (“Program Banks“) where the funds earn a variable interest rate and are eligible for FDIC insurance. Cash Reserve provides Betterment clients with the opportunity to earn interest on cash intended to purchase securities through Betterment LLC and Betterment Securities. Cash Reserve should not be viewed as a long-term investment option.

Funds held in your brokerage accounts are not FDIC‐insured but are protected by SIPC. Funds in transit to or from Program Banks are generally not FDIC‐insured but are protected by SIPC, except when those funds are held in a sweep account following a deposit or prior to a withdrawal, at which time funds are eligible for FDIC insurance but are not protected by SIPC. See Betterment Client Agreements for further details. Funds deposited into Cash Reserve are eligible for up to $1,000,000.00 (or $2,000,000.00 for joint accounts) of FDIC insurance once the funds reach one or more Program Banks (up to $250,000 for each insurable capacity — e.g., individual or joint — at up to four Program Banks). Even if there are more than four Program Banks, clients will not necessarily have deposits allocated in a manner that will provide FDIC insurance above $1,000,000.00 (or $2,000,000.00 for joint accounts). The FDIC calculates the insurance limits based on all accounts held in the same insurable capacity at a bank, not just cash in Cash Reserve. If clients elect to exclude one or more Program Banks from receiving deposits the amount of FDIC insurance available through Cash Reserve may be lower. Clients are responsible for monitoring their total assets at each Program Bank, including existing deposits held at Program Banks outside of Cash Reserve, to ensure FDIC insurance limits are not exceeded, which could result in some funds being uninsured. For more information on FDIC insurance please visit www.FDIC.gov. Deposits held in Program Banks are not protected by SIPC. For more information see the full terms and conditions and Betterment LLC’s Form ADV Part II.

Checking

‡ Checking accounts and the Betterment Visa Debit Card provided by and issued by nbkc bank, Overland Park, Kansas, Member FDIC. Funds deposited into Checking will be eligible for up to $250,000 of FDIC insurance. Checking made available through Betterment Financial LLC. Neither Betterment Financial LLC, nor any of their affiliates, is a bank. Betterment Financial LLC reimburses ATM fees and the Visa® 1% foreign transaction fee worldwide, everywhere Visa is accepted. Checking accounts do not earn APY (annual percentage yield). Cash Reserve and Checking are separate offerings and are not linked accounts.

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