Beware These 2 Pitfalls of Online-Only Banks

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Online banks offer higher APYs on savings accounts and user-friendly mobile apps. Find out what problems you might encounter if you open one, though. 

If you’ve been tuned into the personal finance space lately (perhaps by reading The Ascent?), you’ve no doubt heard a lot of buzz about online-only banks. These are banks that exist only in cyberspace rather than as brick-and-mortar buildings in your town. These two bank options have different perks and drawbacks, so it’s important to get the whole story if you’re looking to open a new bank account. Let’s take a look at two pitfalls that come specifically with online banks, and see how to cope.

1. Withdrawing cash

Since online banks are, well, online, they don’t do so well with physical currency. Namely, if you need to take cash out of your account (rather than accessing it by other means), you might need to jump through a few extra hoops. I have four bank accounts with two different banks, one of which is online. I specifically opened a checking account with that bank so I could have access to cash that’s in the linked savings account — that account didn’t come with an ATM or debit card, but the checking account did. So I transfer money from the savings to checking, and then I can take it out using the card.

I don’t need to withdraw cash super often, but I like keeping a little on hand in case of a random cash expense. Thankfully, my online bank has a pretty robust ATM network, so I have no problem taking out money when I need it.

If you do a lot of spending in cash, ensure the online bank you’re considering has fee-free ATMs in your area or offers ATM fee reimbursements. And you’re just not likely to find a savings account that comes with an ATM or debit card, unfortunately. But you can either transfer cash to a checking account with the same bank, like I do, or transfer it to an account at another bank that you can then withdraw cash from.

2. Depositing cash

On the other hand, if you receive cash payments often (perhaps you’re a small business owner or earn tips), you may have difficulty depositing it into an online bank account if your bank doesn’t have ATMs that take cash deposits. Again, there are workarounds for this, but they involve extra steps.

I can’t remember the last time I had cash to deposit, but with my banking situation, if I wanted to put cash into my online bank accounts, I’d have to deposit it with my brick-and-mortar bank. Then, I’d need to transfer it to the online bank. A transfer going this way is instant, thankfully, thanks to a payments app that works with both banks.

This system could work for you if you deal in cash frequently and want the benefits of an online-only bank (more on those below). But it is worth considering how convenient it will be to jump through extra hoops to get cash into your account.

The benefits may outweigh the drawbacks for many people

I’ve found that these two pitfalls don’t lessen my appreciation of my online bank, and the perks of keeping my money there far outweigh the problem with cash. For example, my savings account is currently earning an APY of 4.25%. As of this writing, the average APY on savings accounts is just 0.43%, so to be earning almost 10 times that is great. Some of the entries on The Ascent’s best savings accounts list earn even more. Online banks can pay higher APYs because they have fewer overhead costs — meaning no physical buildings to maintain.

And I’m very comfortable doing my banking through a website and a banking app, which is another area where online banks shine. Finally, online banks often charge a lot fewer fees on their accounts (and in some cases, no fees at all). All of these benefits are certainly reason enough to consider online banks — I highly recommend them.

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