The harnessing of fire, the invention of the wheel, the discovery of electricity, and the creation of computers have been civilization’s game-changers. These discoveries/inventions changed and shaped the course of history.
Now the internet has joined this list, and its impact can be felt in our individual and collective lives. The internet has changed how we interact with each other, how we learn and create things…And how we bank.
The history of online banking can be traced back to the 1980s, but it became commonplace and truly started disrupting the gargantuan conventional banking market in the 2000s. Now, online banking has become the norm, and conventional banking has become obsolete.
The roots of banking can be traced back to 2,000 BCE. Banking has evolved for four millennia to become what it is now, and online banks are the natural next stage of this evolution.
Online banks are financial institutions that rely on the internet to provide banking services and connect with their consumers. In most cases, online banks have few or no physical branches and exist as purely an online entity. That doesn't mean they don't have financial experts or customer service representatives that you can reach out if you have any queries.
Still, their head-office or physical locations aren't accessible to clients, and almost all banking issues are taken care of online. They can courier you things like credit cards, debit cards, and checkbooks and usually offer all the same services/products that conventional banks do (typically at a lower cost).
The absence of physical locations is the core difference between online and conventional banks that rely on their physical locations (branches) for business. They have barely changed over the last 200 years, and you can bank the same way your grandparents used to. That’s a good thing if you seek familiarity, but not if you want to benefit from the perks that online banks typically offer.
It’s important to note that almost all conventional banks have a strong online presence now, and apart from a few things, can offer the same range of services and benefits that purely online banks can. Still, the overhead costs of running an extensive network of brick-and-mortar bank branches prevent them from passing on a significant portion of profits to their customers.
Online banks are also called digital banks. There is another “segment” of the digital banks called neo-banks. About 90 neo-banks are currently operating in the country, most of them catering to low-to-medium income individuals and families.
Even though online banks are the future, they still have some inherent weaknesses and cons that you should understand in order to make an informed decision.
The most prominent strengths of an online bank are:
Some weaknesses of online banks are:
Online banks might not be perfect (yet!), but their pros significantly outweigh their cons. There are many factors to consider and which one is right for you will depend largely on your personal situation.
We've considered three major categories of online banks:
Affluent individuals can be further broken down into two categories: High-net-worth individuals and high-earning professionals. But the following picks include online banks that are the best fit for people who can put away a significant amount of money into savings or people with large investment portfolios.
Unifimoney merges the concept of online banking and money management quite beautifully. It is created for high-earning individuals and offers a powerful three in a hybrid account (with 0.2% APY). Unifimoney’s money management super app also doubles as an investment platform with a cutting-edge robo-advisor as well as the option to self-direct trades. The bank also shines when it comes to investment assets as it allows users to trade both crypto and precious metals.
Other banking products include a credit card (with flat-rate cashback), a checkbook (rare in online banks), a debit card with access to over 50,000 no-fee ATMs, and you donate to ocean foundation with each use. Lending products include home loans, student loan refinancing, auto loans, HSA, and home improvement loans.
Its crown jewel is the robo-advisor, and Unifimoney is one of the online banks that actually combines all your banking and investing needs (with enough return potential) that you may not need to keep multiple accounts.
SoFi's core products used to be student loans and home loans, and it has now evolved as a banking and investing platform. SoFi has one of the most extensive ranges of loan products among online banks. The yield of a checking account is quite powerful (0.25%), and the credit card offers up to 2% cashback on qualified purchases. There is no fee to use SoFi's robo-advisor, and the online banking features are also free (including an overdraft fee). SoFi also offers financial products designed specifically for small businesses.
HM Bradley is ideal for people who can put away a substantial amount of money from their income into their savings account (ideally 20%). This pattern can help them earn unprecedented returns, even for online banks (up to 3%). It also offers a hybrid checking/saving account, and you earn interest on your entire balance, and the rate depends upon how much money stays in your account on a quarterly basis. It also offers a credit card with a 3-2-1 cashback system, ensuring that you earn the most cashback (3% on things you spend the most money on).
Wealthfront offers no-fee banking, a generous APY of 0.35%, and access to over 19,000 ATMs for fee-free withdrawals. The minimum balance requirement is $1, and up to $1,000,000 funds are FDIC insured. Wealthfront has one of the most trusted robo-advisors currently available, so you can grow your net worth through investing. It has no conventional loan products, but it does offer a portfolio-backed line of credit.
One of the core ideas behind online banks was to offer no-to-low fee banking. By eliminating overhead costs associated with traditional banks, online banks can offer better returns and make banking easier for everyone. The following banks stay true to that definition.
Chime is a fee-free online bank and offers three different types of bank accounts: A spending account (checking account), a savings account, and a credit-builder account. There are no fees for the spending account, including overdraft (of up to $100). Savings account lets you earn 0.5% APY on the funds in the account, and credit builder comes with a secured credit card and can help you fix your credit score. The bank offers automatic savings and cashback on qualified debit-card purchases. Transaction limits are fairly low.
Varo is another online bank that aims to make banking easy and approachable for everyone. It offers checking and a savings account. The returns on the savings account are quite significant, 0.81% to 2.8% (if you meet certain perquisites). There is no credit card, but Varo does offer a simple $100 Varo advance with a low fee. The banking is completely fee-free (including over-drafting and transfer fee), and you have access to an extensive network of 55,000+ fee-free ATMs.
Revolut is a UK-based bank that has started offering its services to US citizens. It's designed as one app to meet all your money management needs and is ideal for international banking since it offers the best possible currency exchange prices. Basic banking and investing are free, but for premium services and features, you might need to pay a flat monthly fee that can get quite as high as traditional banks. Its investment platform allows you to invest in cryptocurrencies and precious metals.
Ally is another full-service online bank that offers products quite similar to a traditional big bank. But since it's an online bank (one of the earliest ones), it offers significantly better rates at no cost. You can earn 0.1% APY on your checking account funds (if the balance is less than $15,000) or 0.25% (for a balance exceeding $15,000). The savings account is even more generous with 0.5% APY. CDs are infinity better than most conventional banks and pay up to 0.85% APY. The banking is almost fee-free, but there is a $25 overdraft fee. Its investment platform includes managed portfolios and Forex in addition to self-directed investments.
Simple was created with the aim of making budgeting (and by extension saving) and banking easier for its users. It offers 0.5% APY on funds in a protected-goals account (a savings account of sorts), no-fee banking, shared checking account, and CDs (0.4% APY). Pre-qualified customers are also eligible for a personal loan. The budgeting tools are in-built and can help you save more and invest more wisely (with their “Safe-to-spend” feature).
Many people try to make a difference in the world and do their part for its betterment. They might prefer to bank with a small number of green and socially impactful online banks that divert a portion of their profits to a good cause.
If you want to make a difference without making any drastic lifestyle or financial changes, banking with Aspiration is one way to do it. It rounds up your purchases/transactions to the nearest dollar, and the difference goes to a good cause: Planting a tree. The bank claims that you can set your own fee, and you can set it to zero. But whatever you pay them would go towards a good cause. It will charge you for whatever banking services it offers that cost money to the bank. Aspiration plus is available at $15 per month, and with it, you get 1% APY on your savings and up to 10% cash back on environmentally conscious purchases from a few vendors.
Whether or not you want an online bank right now, banking would mostly turn online in a few years. Most traditional banks are embracing the change, closing off branches, and focusing on their online presence. But if you compare the fee structure and returns (on checking and savings account or CDs) of an online bank and a traditional bank, the online bank might be a financially savvier option.
But the choice also depends on your banking and money management needs, so start identifying them and decide the online bank that fulfills those needs.
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