Advantages and Disadvantages of Online Savings Accounts

Making your money work is a very important aspect of saving money and building wealth. One way to facilitate this is by setting up an online savings account. For the most part, online savings accounts function in the same way as normal (brick-and-mortar) bank savings accounts. However, in the case of online savings accounts, you do not ever have to visit a bank physically in order to transact business. Online savings accounts offer a number of advantages -- in the past few years, millions of people have signed up for them. As you might expect, there are also disadvantages of online savings accounts.

Advantages of Online Savings Accounts

  • The single biggest advantage of dealing with an internet-only bank is that since they do not have to deal with the expense of having branch locations, they generally have lower costs and are able to pass on their savings in the form of higher rates of return on savings accounts, usually significantly higher rates, than brick-and-mortar banking institutions.
  • In addition to the interest rate, another important factor to consider when you compare savings accounts is minimum balance requirements. Some banks require consumers to keep a minimum balance in an account to avoid any type of maintenance fees or other service fees. In addition, some banks also require that a minimum deposit is required to open an account. For some banks, this amount can range from several hundred to several thousand dollars. Although this is not a major obstacle for some people, it may be more than some people are able or willing to deposit. This is especially true if the savings are intended to be for short-term rather than long-term use. Online savings accounts typically require much lower minimum opening and ongoing balances (some have no minimum balance requirement) than traditional savings accounts in order to avoid fees; and fees are generally much lower for those who do have fees.
  • There are a number of ways to deposit funds into your account. A check can be mailed in to the bank or the ACH (Automated Clearing House) debit facility may be used, which allows one to transfer funds from an existing account without having to make a trip to the post office or the bank. It is extremely easy to transfer funds between an existing account in a brick-and-mortar bank and an online savings account.
  • Many online banks also provide the ability to send free demand drafts or money orders online, free electronic funds transfer, and bill payment. 24-hour access for services or transactions and consolidated statement of accounts add to the convenience of online savings accounts.
  • You don’t really need to be particularly computer savvy to operate an online account; and the higher interest rates and convenience are often worth the effort of learning to understand the computer better. The interfaces in general are very easy to use.
  • With so many choices, it shouldn't be hard to find an online savings account that meets your needs. There are online savings accounts that not only offer a competitive interest rate, but also require no minimum balance. If you have a lot of money to invest, you might want to look at one of the savings plans that requires a higher balance in order to avoid fees, but also offers a higher interest rate than do the plans with no minimum balance requirement. Spend a little time doing some homework, and with some informed savings account comparisons you may be able to find just the right banking institution for you.

Disadvantages of Online Savings Accounts

  • Many people hesitate to sign up with internet-only banks because they are intimidated by the internet. If you still feel nervous about making online purchases, then internet banking may not be for you. 
  • After the initial sign-up with an internet-only bank, you usually have to wait several days for a direct-deposit verification.
  • It can take a few days to transfer money from your brick-and-mortar bank account to your online bank account and vice versa.
  • Even though online banks use the highest online security standards, you are transmitting sensitive information over the Internet. If your username and password are stolen, someone could have access to your account information. Users need to be aware of phishing scams and other scams to protect themselves. In addition, hackers, viruses, stolen passwords and system malfunctions can potentially interrupt access to your online funds for days. Traditional brick-and-mortar banks are generally less susceptible to such attacks, and require documented proof of identity to grant account access. Identifications such as licenses and passports are much harder to counterfeit or duplicate than computerized passwords.
  • Online bank accounts are usually only accessible by means of electronic devices, such as a smartphone, computer, tablet, or ATM. In the event you find yourself with a dead battery, a power outage, a broken computer, etc., accessing the funds in your online bank account can be extremely difficult, if not impossible.
  • Keeping funds in a brick and mortar bank account normally allows individuals much quicker access to cash than do internet-only banks in the event of an emergency. Having a bank account with a nationwide chain of brick-and-mortar banks can also allow you immediate access to funds when traveling via ATMs, often without fees, or with relatively small fees.
  • Many online banks are not directly affiliated with ATM networks, which results in many ATM transactions being accompanied by large fees. Many online banking customers are required to pay a withdrawal fee to both their online bank and the physical institution whose ATM they are using.
  • Customer service for online banks is often outsourced to call centers or automated phone systems, which can be frustrating to interact with and difficult to understand. Online banking customer service often has lengthy hold times, particularly during times of system malfunction when many customers are calling in. Traditional brick-and-mortar tellers allow for easier face-to-face communication when you have questions or concerns. Additionally, consultants and loan officers at brick-and-mortar banks can more easily offer individualized advice to customers in a way that online banks cannot.

No Longer an Advantage of Online Savings Accounts

  • A few years ago, online savings accounts also had the advantage of being able to conduct many more of the transactions typically performed by users than brick-and-mortar institutions without the need to use mail or physically go to the bank. Traditionally, banks fixed working hours during which they operated and people had to travel all the way to the bank from wherever they lived to open accounts, make deposits, withdraw money or for any other banking needs. Any emergency need for banking, except for ATM transactions, had to wait until morning when the bank opened.
  • Things are different now. With the increase in competition, many brick-and-mortar banks have also begun to offer online banking services, as well as all the associated transactions, to afford as much convenience as possible to their clients, as a way to attract new customers or retain existing customers. With the advent of the internet, customers can transact their business via accounts with brick-and-mortar banks while they sit in the comfort and convenience of their homes.