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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®
Financial Planning Expert, Betterment  |  Published: September 5, 2019

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.

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—and note that Betterment is not a bank. Now, let’s dive in.

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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