With a vast variety of financial institutions at their fingertips, many consumers are choosing online-only banks or credit unions. Social distancing during the coronavirus (COVID-19) pandemic has only heightened the appeal of an online-only bank. It is important for consumers to do thorough research and weigh the pros and cons before opening an account with any financial institution, especially one that operates only online.
Online-only financial institutions offer account services and money management strictly online, often primarily through a mobile app. They do not have brick-and-mortar branches, though most participate in large ATM networks. While these more streamlined operations, with their lower overhead, often allow these institutions to charge fewer fees and offer higher annual percentage yields on savings accounts, this leaves consumers unable to visit a brick-and-mortar branch to handle account issues in person.
Another key concern is deposit insurance. The vast majority of banks are members of the Federal Deposit Insurance Corporation (FDIC), while credit unions are regulated and insured by the National Credit Union Administration (NCUA). These agencies protect consumers against bank failure, insuring deposit accounts up to $250,000. However, not all banks belong to the FDIC, and not all credit unions are NCUA-insured -- and the same caveats apply to online-only institutions.
Banks and credit unions that operate exclusively online offer great benefits with a lot of convenience, but they come with trade-offs. Consumers shouldn’t make hasty decisions about moving their money between financial institutions, but should do their homework carefully first.
In 2020, BBB received more than 28,000 complaints about banks, credit unions and financial services businesses -- both brick-and-mortar and online-only. Many complaints about online-only banks involve unresponsive customer service and long hold times when customers call in for assistance. A Belleville, Illinois, woman told BBB in January 2021 that a major online bank where she had an account did not respond to numerous phone or chat messages after her funds were transferred without her authorization and her debit card was stolen, leaving her unable to get the money back or access the money still in her account.
Tips to consider when choosing a financial institution:
- Shop around. Research the bank or credit union thoroughly, rather than making a rash decision based on an account opening incentive. Ask family and friends where they bank. Check out any bank or credit union at bbb.org.
- Consider how much you will use online services vs. branch services. If you only need online banking, online bill payment and ATM access, an online-only bank may be right for you. If you anticipate needing to ask about account or loan issues in person, or if you simply prefer to do so, you may be better off with an institution that has brick-and-mortar branches.
- Ask about account options, fees and interest. Most financial institutions offer a range of products, with different fees and interest (or annual percentage yield) rates applying to each. Some come with a minimum balance requirement, so be sure you understand that in order to avoid incurring a fee or even having your account closed.
- Make sure the bank or credit union is insured. If a bank does not belong to the FDIC or a credit union is not NCUA-insured, you have no recourse if your bank or credit union fails for whatever reason.