What is an online savings account?
Quick insights
- Online savings accounts operate digitally without physical branch locations.
- They sometimes offer higher interest rates and lower fees than traditional savings accounts.
- You can typically manage your funds through mobile apps, websites and partner ATM networks.
Whether you want to build an emergency fund or save for future goals, finding the right savings account is often the first step when you decide to set money aside. There are various types of savings accounts available, including digital-only options. As you explore your choices, you might consider online savings accounts. Let's dive into the digital banking world and see how online savings accounts work.
The basics of online savings accounts
As its name suggests, an online savings account is a deposit account offered by a bank or financial institution that operates on the internet. Unlike traditional banks, these specific institutions don't have physical brick-and-mortar branches for you to visit. Instead, you manage your money completely through a website or mobile app.
Because online banks might be able to save on the overhead costs of running physical locations, they sometimes pass those savings on to their customers. This typically means they may offer a higher annual percentage yield (APY) and charge fewer fees than traditional savings accounts.
How does an online savings account work?
If you're used to visiting a teller, you might be curious about how an online savings account works. In practice, it functions very similarly to a traditional account, just without the face-to-face interaction.
Money can be deposited into an online savings account by transferring funds from an existing checking account, setting up direct deposit with your employer or using mobile check deposit on your phone. When you need to access your cash, you can transfer it back to your checking account or use an ATM if your online bank provides an ATM card.
Potential pros and cons of online savings accounts
Before moving your money to a digital bank, it might be helpful to weigh the potential benefits and downsides.
Pros
- Higher interest rates: Online accounts sometimes provide a higher APY, which may help your money grow faster over time.
- Lower fees: Without the cost of maintaining physical branches, online banks may offer accounts with no monthly service fee or lower minimum balance requirements.
- Streamlined access: You can check your balance, transfer funds and deposit checks from anywhere using a mobile app.
- Broad ATM fee reimbursements: Since online banks usually lack their own proprietary ATM networks, many offer generous or unlimited reimbursements for fees incurred when using third-party ATMs.
Cons
- No in-person support: If you prefer speaking with a branch teller to resolve urgent or complex issues, an online-only experience might be less ideal.
- Cash deposit limitations: Depositing physical cash can be harder with some online banks, as they lack traditional branch locations, while some online banks participate in ATM networks that may accept deposits.
- Transfer delays and fund accessibility: If you have a checking account with a traditional bank and an online savings account, you will typically experience processing delays when you transfer funds, which may be inconvenient.
- Security concerns: With an online-only bank, there’s usually no in-person escalation path if you’re unable to resolve security concerns like unauthorized transfers, account takeovers or locked accounts over the phone.
Ways to open an online savings account
If you decide a digital account is a fit for your needs, the setup process is fairly similar to opening a traditional savings account:
- You might consider researching your options and comparing different online banks, looking at their APY, fee structures and customer reviews.
- Gather your information, as you'll typically need your Social Security number (SSN), a valid U.S. address and a government-issued ID.
- Submit an application by filling out the required forms on the bank's website or mobile app.
- Fund the account by transferring your opening deposit from an existing bank account to activate your new savings.
Are online savings accounts FDIC-insured?
Fortunately, reputable online banks often offer the same level of protection as traditional brick-and-mortar institutions.
Many online savings accounts are insured by the Federal Deposit Insurance Corporation (FDIC). This means your deposits are typically protected up to $250,000 per depositor, per insured bank, for each account ownership category. You might consider verifying a bank's FDIC status on their website before opening an account to ensure your funds are safeguarded.
In summary
An online savings account can be an efficient tool for growing your money, often featuring rates and fees that are different from those at traditional banks. While you won't have access to a physical branch and may face some limitations with accessing your funds, the digital convenience offers a modern approach to managing your funds. You might consider comparing different online options to find an account that aligns with your financial goals.
