What is online banking? Know the pros and cons

  • By Matthew Goldberg,
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Online banking allows you to manage your money without having to step foot in a bank branch.

As long as you can connect to the internet, you'll be able to review your bank statements, pay bills and transfer funds on your own time.

Online banking includes banking at an online-only institution that doesn't have any physical presence, as well as using the website or mobile app of a brick-and-mortar bank.

Is online banking safe?

Bob Neuhaus, senior director of financial services at J.D. Power, says the banking industry has a very good safety record. But even still, there is always a risk.

"When we talk about adoption, that's the primary thing that is holding people back from moving to mobile faster is the feeling of, 'Is my information secure? Or are my accounts fully secure?' And that trust level is growing as adoption has increased - it's increasing rapidly," Neuhaus says.

Online banking takes certain precautions to make sure that your experience is as safe as possible. Some methods used to protect you are:

  • Encryption: Banks tend to use 128-bit encryption or higher to protect your information. Encryption scrambles the data, making it more secure. When you're online, look for https:// before the web address before typing in your username and password.
  • Fraud monitoring: Your bank may reach out to you via text, email or telephone if it notices a purchase that it deems suspicious.
  • Two-step authentication: This is where you receive a text message with a code to log in. This method ensures that it's actually you conducting transactions or logging in to your account.
  • Security questions: While two-step authentication is the latest trend, some banks may use security questions. Make sure the answers to these are not commonly known or easy for others to guess.
  • Login alerts: Your bank may alert you whenever someone logs in to your account, in case it wasn't you.

Be sure to use these important safety tips to protect your account online.

Differences between web-based banking and online-only banking

Web-based banking can be done at either a traditional bank that has branches or at an online-only bank, also referred to as a direct bank or virtual bank, that doesn't have a physical presence.

The difference is that online-only banks don't have brick-and-mortar locations, so they can be accessed only via the internet, a mobile app or the telephone. Online banking at a brick-and-mortar bank means using the website or the bank's app to view your account and conduct banking transactions. You also have the option to visit this bank's physical location or call them.

"When we look at direct banks, which are branch-less banks, we see that the satisfaction for that group of banks is higher than traditional banks overall,"Neuhaus says.

While the line between online banks and their brick-and-mortar competitors is beginning to blur, online-only institutions still offer some unique advantages - particularly on their yields.

Direct banks typically offer much higher yields on their deposit products than banks with physical locations. That's because online banks don't carry the same overhead costs compared with physical branches, and as a result can pass on those savings to customers.

Some direct banks currently offer yields above 2 percent on savings accounts and money market accounts. Meanwhile, a recent Bankrate survey found that only 6 percent of Americans are earning more than 2 percent on their short-term savings.

The pros of online banking

With online banking, stopping by a branch to make a deposit or complete an application is something you can permanently remove from your to-do list. Here are four benefits of online banking.

1. On-demand access to your account

Online banking is always available — it doesn't have business hours. This means you're not going to ever have to rush to get to the bank after work or on a weekend.

2. No need to switch banks when you move

If you have an online bank, no matter where you move your bank moves with you. This can provide flexibility to those who move often. It can also help those who travel often to areas where their bank might not have a presence. If the direct bank, or any bank, waives ATM fees, location may no longer be a factor.

3. You may earn a higher yield

Some online banks are offering yields that are nearly keeping up with inflation. Earning more interest on your savings is definitely a reason to consider the switch.

4. A secure way to communicate with your bank

Sending a secure message through online banking should be more secure than sending a standard email to your bank. This is especially the case if these messages are encrypted. Secure messages are sent from within the bank's website or potentially from the bank's app.

"And there is sensitivity around anything that is personal information going through email today," Neuhaus says. "And while consumers like to get emails that are personalized to them, there's a real concern on the bank's part about using that communication channel with any kind of sensitive information."

The cons of online banking

Online banking — particularly online-only banking — may not be for everyone. Here are some downsides to consider.

1. You prefer face-to-face interaction

Banking products and terminology can be complex. This is why some still value the in-branch experience.

"Literacy around banking terms ... is not a given," Neuhaus says. "And that's where the personal connection to explain things to people or to kind of read the body language in a conversation, you can't do that effectively — at this point — through digital means."

2. An outage can leave you in the dark

If the online banking service is not working, you might not be able to view your accounts and pay bills. Therefore, it might be a good idea to print out a statement, if you think you might need it, just in case of an outage or upgrade.

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