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Online Banks: Out with the Old and in with the New

Updated: Mar 16, 2021


Back in the early 2000’s as a college student, I was always strapped for cash. My paycheck seemed to disappear as soon as it hit my bank account. There were days I would run a few errands, fill up the car, pick up some food at a drive through, and then on my last purchase, my card would be declined. I would hop online to find out that not only did I not have any money in my account, but that I’d been hit with multiple overdraft fees.

At times, these overdraft fees would add up to more than a $100. And to make things worse, they were often for small purchases like buying a Coke at a gas station or a burger at a fast-food place. Talk about feeling kicked when you’re down.


Has that ever happened to you?


Thankfully, today there is no reason to ever deal with fees like that again.


You never have to pay another monthly maintenance fee, overdraft fee, check ordering fee or any of the other fees that altogether start to feel like death by a thousand cuts. In this post, we’ll discuss some of the common misconceptions about online banks, why we no longer use a large traditional bank, other options for you to consider, and a side-by-side comparison of three banks we recommend and three we don’t.


What is an online bank?

Let’s start by explaining what an online bank is. Online banks, also known as online-only or internet banks, are financial institutions that have few or no physical branches and allow customers to do virtually all of their transactions online.


The only major difference between an online bank and the bank you see around ever corner is overhead. Overhead is the term used for ongoing business expenses. Large traditional banks like Chase or Bank of America have physical branches across the nation. Let’s take Dallas for instance. Here’s a google search of Chase and Bank of America locations in the Dallas area.

These physical branches cost money. Rent, staff, equipment, utilities, and other expenses at these branches are all types of overhead, meaning they all cost money. Lots of money.


And who do you think pays for all that overhead?


It’s you, me, the customers.


On the other hand, online banks have no physical branches, which significantly reduces their overhead cost. Those savings can then be passed on to the customer.


Common Misconceptions about Online Banks

Let’s touch on some common misconceptions and put them to rest.


Online banks can not be trusted

Several years ago, many, including myself, believed that a bank needed a physical location as a sign of stability and accessibility in order to provide good customer service.


Those days are long gone.


Not only do online banks tend to offer superior customer service, but they have the same FDIC insurance that traditional banks possess. Meaning that if the bank goes belly up, the federal government will step in and protect your checking, savings and C.D.’s, usually up to $250,000 per individual. This can vary depending on the bank and account type.


Services offered by online banks are limited compared to traditional banks


There are two common limitations with online only banks. For one, you no longer have the option of in person conversations. Online banks are accessed through a smartphone app, your computer or over the phone. The other potential limitation is if you are make regular cash deposits into your account. Some online banks will allow you make cash deposits through an ATM while other will not.


What customers of online banks lose with face to face conversations, they often make up for with higher quality customer service. For example, we find on most days your average wait time with Ally Bank is 1 minute. Just imagine never having to drive to a bank and stand in line…ever again


I have considered switching to an online bank but it seems like too much work to make the change


It took us 5 minutes to set up a checking and savings account with Ally Bank. It took another 20 minutes to transfer all of our bill pay information. Considering the benefits, taking 30 minutes is easily worth the trouble.


Why You Should Leave Your Large Corporate Bank


Large banks have preyed on the financially vulnerable for too long. Peter Smith, a Senior Researcher at the Center for Responsible Lending, co-wrote this report on overdraft fees, which reviewed fees of the 10 largest banks in the United States. The report shows that these banks collected over $11 billion dollars in overdraft fees every year between 2015 and 2019. That’s billion with a “B.”


At the top of the list of the 20 largest banks that collected the highest income from overdraft fees were Chase, Wells Fargo and Bank of America. Each of these banks can charge you up to $100 in a day for overdraft fees.


…And these aren’t the only fees.


Maintenance fees, monthly service fees, account closure fees, ATM fees, check ordering fees, paper statement fees... The list goes on.

Have you added up how much in fees you’ve paid your bank over the last several years?


They are quick to tell you that you can avoid some of the fees by making a direct deposit or maintaining a certain balance. The minimum balance fee is a personal favorite of mine.


For instance, if you have the Bank of America Advantage Plus checking account without direct deposit, and your balance falls below $1500 for a single day, you can expect a $12 fee for that month. This leaves you needlessly jumping through hoops and trying to understand the fine print so that the bank you've entrusted with your money does not continually charge you fees. It’s unchecked greed, and you don’t have to put up with it.


What Other Options Are Out There?


Thankfully, there are plenty of online banks that focus on high quality customer service without abusive practices related to fees. Our favorite full-service online banks are Ally Bank, Capital One 360 and Discover Bank.


Just FYI before you're convinced we're trying to sell you something in order to receive a kickback, we do not accept any contributions or endorsements from any financial institutions mentioned. Our opinion is not for sale. More on our disclaimer and policies at the end of the article.


Below is a side by side comparison of checking account fees of these three online banks compared with three large traditional banks.



The differences are pretty drastic. Traditional banks charge fee after fee while the online banks listed have little to no fees. Below we also did a side-by-side comparison of the savings accounts for the 6 banks.



When you look at what online banks offer on their savings accounts compared to the larger traditional banks, it’s…how should I put this, just ridiculous.


To be honest, none of the banks have savings rates that are impressive, but if you are looking to park your cash somewhere while you consider other investments, the choice is easy.


How generous of Bank of America and Chase to give me back $1 after depositing $10,000 with them for a year.


Stop, you’re too kind.


But wait, what if you are lucky enough to qualify for their highest tier? Surely as Platinum Honors level member you will receive great rewards.



Let’s look at how much you would make on $10,000 after one year?


That would be $5.


We switched to Ally Bank about a year ago and continue to use them for several reasons. The obvious being we no longer have to pay fees.


We also love that they offer an interest savings rate on your checking account. They actually pay you to have a checking account with them. You don’t find that at the larger banks. Ally offers 5 times the industry standard on their interest rates on savings accounts and CD’s. Before the pandemic, their savings rate was 3 times higher than it is currently, but has come down over the last several months. Even with the drop, it is still significantly better than most banks. They also offer a high interest CD with no penalties for early withdrawal. Something else you don’t see at other banks.

They also offer a brokerage account with no commission fees for buying and selling stocks. And last but not least, their customer service is exceptional. When you open an account, on their main page, after you log in, they will tell you exactly how long your wait should be if you were to call them.


Over the last year, their wait time has averaged somewhere between 1 to 5 minutes. That has not been my experience with larger banks. Not even close. My wait time with larger banks averages between 10 and 20 minutes, sometimes longer.


Overall, in our opinion, Ally Bank is just a great example of how a bank should do business in this day and age, but Ally is not the only option out there.


You need to decide what you are looking for in a bank. Whichever bank you choose, just make sure it is a bank that deserves your business.


If you have any suggestions, thoughts or questions about the article or you would like to share your own banking experience, please leave us a comment below. We would love to hear from you.

 

Disclaimer

We pride ourselves on not accepting any compensation or endorsements from financial institutions. That includes any organization mentioned in this article. This a personal blog with personal opinions. For more information on our policies and how we do business click here.

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