What Is Online Banking?
Learn the pros and cons between online banking versus traditional banking, and decide which is the better fit for your small business.
The COVID-19 pandemic accelerated the already speeding shift to online services for just about every industry, and the banking industry was no exception.
In the past years, online banking has grown more prominent, more prevalent, and a necessary part of managing money. In this article, we’ll go over the difference between online banking and online-only banks, the differences between online and traditional banking, and the pros and cons of both. Thankfully, the best small business bank accounts all offer some degree of online banking.
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What Is Online Banking?
Strictly speaking, online banking is any bank account management that is done online. Transferring funds from one account to another, depositing a check digitally, or paying bills/taxes from your computer or an app on your phone all count as online banking. Traditional banks will offer online banking services to their customers through their website and/or app, but they are not considered online banks. If you can walk into a branch — it’s not an online bank.
The kind of online banking we’ll be discussing in this article is banks that only offer online/mobile services to their customers. Online banks include Ally and Axos, but also more popular names from the credit card arena like Discover Bank or Capital One 360 Bank.
With no bankers to meet face-to-face, faster application processes, and easier account access than ever before, online banking is more than just a post-COVID niche. These banks are viable options for small businesses that may utilize their features if they don’t have a need to ever visit a brick-and-mortar bank building.
How Does Online Banking Work?
Online banking is similar to traditional banking. You make an account (or several), receive a credit/debit card tied to those accounts in the mail, and start using your funds.
Now, there are a couple of differences between the two, obviously, but there are very few situations where banking exclusively online is going to leave you missing features or access.
Online Bank VS Traditional Bank
There aren’t many features that are going to change between an online bank and a traditional bank.
The main difference you’re going to run into with an online bank is that there is no physical location for you to visit. If access to real humans is important to you, an online bank is not going to be a good fit.
Although a good and reputable online bank will be part of an ATM network like Allpoint or MoneyPass, so you don’t have to worry about an inability to take cash out/put cash into your account(s). Online banks are just as secure as traditional banks, so there’s no need to worry about that either.
Pros & Cons Of Online Banking
Let’s dive deeper into why your small business might or might not choose online banking.
- Lower Fees: Because there is no physical location to maintain/pay for, online banks are a lot less likely to charge monthly service fees. Some have even waived overdraft fees.
- Better Interest Rates: The best online bank savings accounts have annual percentage yields (APYs) of around 0.45%. The larger your account balance, the more interest rates are going to matter to you.
- No ATM Fees: Along with being part of an ATM network that allows account holders access to thousands of ATMs with no fees required, some online banks will also reimburse you for any out-of-network ATM fees you may have to pay in a pinch.
- No Branches: Online banks have no physical branches for you to visit. Online banks will offer phone or chat-based customer service vs. face-to-face. This also means you have to make any accounts online, and there is no in-person option with a live bank associate there to help guide you.
- Difficult Deposits: Even though online banks might work to make sure you have access to as many ATMs as possible, it still may be more difficult for you to deposit cash into your online bank accounts vs. your traditional ones. You could find yourself at an ATM that services your account but doesn’t accept deposits, meaning you might need to deposit money into your traditional account and then transfer it into your online banking account, which is a definite pain.
- No One-Stop-Shop: An online bank could offer incredible savings accounts but have no checking account options (or vice versa). You might have to open one kind of account at an online bank and another at a traditional bank or another online bank. There’s also no way to get a cashier’s check from most online banks, so you could run into problems with paying for commercial rentals or other situations that might require a specific kind of payment other than an online one.
Pros & Cons Of Traditional Banking
And here are some reasons why traditional banking may or may not be a good fit for your small business.
- Tons Of Options: As the most established of the two options, traditional banks are going to have more options when it comes to accounts, loans, and other financial products they offer to their customers.
- Stability: For the most part traditional banks have been around for longer than online banks and are less likely to fall victim to sudden collapses. Obviously, there are exceptions to this, but as always, do your research and make sure that your money is going to be insured by the Federal Deposit Insurance Corporation with any bank you consider.
- ATM Access: If you’re an envelope budgeter or make consistent withdrawals from your account(s), it’s crucial for you to have easy access to an ATM. If you live in a rural area where there might only be one or two traditional bank locations, an online bank might not allow you to use their ATMs, leaving you high and dry with a commute to access your money.
- Branches: If you’re a product of 2023 (like a lot of us), you prefer to do just about everything online. Some traditional banks may still require you to visit in person for certain services. This can be a problem if you move away from the local branch where you originally made your account.
- Higher Fees: With traditional banking, there are almost always going to be higher fees. They have to pay their employees, rent, cleaners, insurance, and other expenses associated with a brick-and-mortar branch, so those added costs get passed onto you.
- Lower Interest Rates: Lower is not better in the case of checking or savings accounts. The national average savings APY is 0.37%, and if you’re keeping large amounts of money in an account with a bank that offers low-interest rates, you could be losing money in the long run.