A recent chart in American Banker magazine highlighted that free checking at larger banks is getting scarcer. As recently as 2009, 96 percent of banks with more than $50 billion in assets offered free checking; now, that number has dropped to 34.6 percent.
The shift has many people considering a switch to a smaller bank or credit union, where deposit accounts tend to have fewer fees. But another option that shouldn’t be overlooked is an online bank. Yes, it might seem strange to bank with an institution that exists only in virtual space, but if you already do much of your banking on your computer or a mobile device, the shift might not be as much of a shock as you expect.
There are definitely some aspects of online banking you need to keep in mind if you’re considering a switch; among other things, some online banks don’t offer branch-bank staples like branded ATMs or paper checks. Plus, there are other factors you ought to consider whenever you switch financial institutions, online or not, such as security and convenience.
Here are 10 steps to take before leaping into an online banking relationship:
1. Make sure the bank is FDIC insured? It seems like an obvious question and something you might take for granted if you walk into a branch to open a new account, but you want to make sure your money is protected if the bank fails. Even if the site has the FDIC logo, go to the agency’s website and verify its compliance. “Name recognition shouldn’t be a factor as long as the bank is FDIC insured,” says Richard Barrington, personal finance analyst for Money Rates. ”After all, some of the biggest names in banking had the biggest problems in 2008.”
2. Check the institution’s stability. Even if you are protected by FDIC insurance, you don’t want the headache of watching your bank fail. Find out how large the bank’s asset base is and how long they’ve been in business. If the bank is publicly traded, you can check its stock price and read its financial reports. While these attributes aren’t foolproof measures of financial stability, a very small or new institution can be more vulnerable to economic turbulence.
3. Look for a bank that either has an ATM network or reimburses out-of-network fees. Some online banks have a network of ATMs customers can use, fee-free; if they don’t, make sure that you’ll be reimbursed for fees you incur when using other banks’ machines. Make sure there is either a very high cap or none at all. With some banks charging as much as $5 to non-account-holders, you want to make sure you’re not going to be saddled with those kinds of charges. Put together a checklist of other fees you’re currently being charged by your financial institution for things like debit card use, monthly maintenance and so on, then compare that to what the online bank is offering. Online banks have lower overhead, so they can sometimes offer for free the kind of services that brick-and-mortar banks are increasingly charging for.
4. Check the bank’s security record. If you’re going to be doing all your banking online, you’ll want a bank that has a high standard for customer passwords. The bank should prompt you for back-up authentication if you’re logging in from a different computer. Ideally, you’ll also want to have the ability to receive alerts when transactions over a certain dollar amount or outside a particular geographic range are made, says Philip Blank, managing director for security, risk and fraud at Javelin Strategy & Research.
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5. Find out what it takes to reach a live customer service rep. Since you can’t just walk into a branch and talk to a teller, find out how quickly you can speak to someone if you have a question, lose your debit card or have a problem with your account. The gold standard is live service 24/7.
6. Ask yourself if you need paper checks. ING Direct recently began offering paper checkbooks to customers, catching up with Ally Bank. Previously, customers would have to order checks one at a time that were already made out and wait to receive them via snail mail. If you have to make regular payments by check to a merchant, service provider or landlord, it’s probably in your best interest to stick with online banks that offer checkbooks.
7. If you’ll be receiving funds via paper checks rather than direct deposit, find out how the bank accepts these. Several online banks now let customers deposit checks by remote capture; i.e. you either take a picture of the check with your smartphone or scan it into your computer and the money is added to your account. Both are quicker and much more convenient than having to forward a paper check via snail mail and waiting for it to clear.
8. Compare the rate you’ll get on your deposits. Because the have relatively low overhead, online banks often offer higher interest rates on deposits. But beware of teaser rates as well as rates that apply only to part of your balance or if you keep a large balance, warns Barrington.
9. Make a wish list of other perks. Do you want to be able to make person-to-person payments? Do you want to do most of your banking via mobile app? Just like their traditional counterparts, online banks’ offerings vary widely, so you’ll want to figure out which are important to you before signing up.
10. Take inventory of the bank’s other products. Do they offer CDs? Money market accounts? Loans or credit cards? Unlike full-service brick-and-mortar institutions, the online banking category isn’t as comprehensive, but a growing number are expanding into more areas and offering a wider array of financial services.