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What is Internet banking? Advantages and Disadvantages

  • Ishita Bhatt
  • Feb 14, 2022
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What is Internet Banking?


Do you prefer walking to a bank with its own Automated teller machine or an alternative, pure online or mobile banking experience? Direct banks, both traditional as well as online, offer you access to your account and the potential of transferring money by a single tap on your phone. 


They're both governed by the same rules and regulations; online-only accounts, like those held at traditional banks, are insured by the Federal Deposit Insurance Corporation (FDIC). Overall, all forms of security are the same, with encryption used to protect your funds and identity in both circumstances.


Even while both types have become close cousins in certain ways, they still have major distinctions. Because of their lower expenses, direct banks can provide greater interest rates and, in many cases, fewer fees. 


When it comes to deposits and other transactions, these institutions offer a convenient choice of options, including the option of receiving face-to-face service at a bank branch if necessary. Traditional brick-and-mortar banks began exploring ways to provide online services to their customers as the internet's commercialization progressed in the early 1990s. 


Though initially limited, the success of these early initiatives spurred many banks to update their websites, which now allow customers to create new accounts, download forms, and process loan applications.


As a result, internet-only banks arose and flourished. Without a network of branch offices, these institutions provide internet banking and other financial services. The Security First Network Bank, which began operations on Oct. 18, 1995, was the first fully functional direct bank insured by the FDIC. 


Customers' interest in internet banking expanded as the number of virtual banks increased. According to the FDIC's most recent research on banking activity, more than 60% of account holders perform at least some of their banking online.


This article may be useful if you're on the fence about internet banks. It explains the major advantages and disadvantages of this branch of the banking sector.


Also Read | A guide to cloud banking


Advantages of Internet Banking


According to Investopedia, Online competitors offer a lot of advantages to their customers despite the availability of virtual traditional banks.


  1. Reasonable rates and lower fees


Direct banks can pay higher interest rates or annual percentage yields (APYs) on savings since they lack considerable infrastructure and overhead costs. The most generous of them pay as much as 1% to 2% more than typical bank accounts, a difference that can quickly mount up if you have a large sum. 


While some direct banks with very generous APYs simply offer savings accounts, the majority of them also offer high-yield savings accounts, certificates of deposit (CDs), and CDs with no early withdrawal penalties. 


At a direct bank, you're less likely to be hit with a variety of fees, such as those connected with keeping a low-balance account open, making direct deposits, or paying by check, debit or credit card. Direct bank accounts are more likely to have no service fees or minimum balance requirements.


  1. Online Experiences That Are Better


Traditional banks are making significant investments in their virtual presence and service, including the launch of applications and website upgrades. However, when it comes to online banking, direct banks appear to have the upper hand. 


Traditional banks behind direct banks in the areas that mattered most to clients, such as the quality of the banking experience and the speed and ease of transactions, according to a 2018 Bain and Company survey of retail banking customers.


  1. Convenient


Online banking substantially decreases the amount of paper you use by getting all of your banking correspondence via email or text. With a USB stick or by preserving data virtually in the "cloud," storing and keeping track of information is straightforward. 


Also, if you need to make documents for tax purposes, you may quickly obtain this information. So, when it comes to doing your part to help the environment, you can feel good about banking online.


  1. Accessibility


Traditional banking hours aren't always convenient, but with online banking, you can access your bank accounts and services from anywhere there's an internet connection – on your computer or mobile device — at any time. You may also contact customer care by phone, which is often available 24 hours a day, seven days a week.


Also Read | Ethical Banking



Disadvantages of Internet Banking


Well, Internet Bank along with its advantages also have some of its drawbacks to share-


  1. There are no personal relationships


A traditional bank allows you to get to know the employees at your local location. This can be beneficial if you require additional financial services, such as a loan, or if you need to change your banking arrangements. 


A bank manager usually has some freedom in changing the terms of your account or reversing a mandatory fee or service charge if your personal circumstances change. 


  1. Transactions have less flexibility


When you meet with a banker in person, it's not just about getting to know you and your money. Going to a bank branch can be extremely useful for certain transactions and issues. Consider the most fundamental of banking transactions: depositing funds. 


A direct bank can deposit a check by capturing both the front and back of the check using its banking app. Many internet banks, on the other hand, make depositing funds extremely difficult. 


It's worth reviewing the bank's policy if this is something you'll be doing regularly. International transactions may be made more difficult, if not impossible, by some direct banks.


  1. No ATM services of their own


Since online bankers don't have their own ATMs, online banking relies on clients to use one or more ATM networks, such as AllPoint and Cirrus. 


While these systems provide access to tens of thousands of machines around the country—and even the world—it's worth looking into the devices that are available near your home or workplace. 


Check for any ATM fees you may have racked up. While many direct banks offer free network ATM access or will reimburse any monthly expenses you spend, the number of free ATM transactions you can conduct each month may be limited.


  1. Services are becoming more limited


Some direct banks may not provide all of the typical banks' financial services, such as insurance and brokerage accounts. Traditional banks may provide unique benefits to loyal customers, such as preferential rates and free financial advice. 


Furthermore, common services like notarization and bank signature assurance are not available online. Many financial and legal transactions necessitate the use of these services.


Also Read | Introduction to investment banking



What are Neobanks, for example?


Neobanks are financial technology firms that provide banking services. Deposits are frequently FDIC-insured through partner banks with these providers, and accounts often have the cheap monthly fees and competitive rates that many online banks provide. 


Traditional banking capabilities, such as access to personal or cashier's checks and wire transfers, may be unavailable in neobanks. If you prefer online-only banking, they can be a good choice, but keep these points in mind before making a decision.


An online bank may be worth considering if you want higher rates and lower fees but don't need frequent branch banking services. Keep in mind that you don't have to give up your current local account to start an online account.





Both traditional and online-only banks have benefits. Essentially, you must evaluate if the amenities and personal touch of a brick-and-mortar institution are worth the typically higher expenses of banking there, in terms of lower interest rates and extra fees. 


It's also worth contemplating splitting your company across the two. True, this setup might not be feasible for you, and the expenses associated with having numerous accounts could be a problem. 


Having accounts at both a traditional bank and an internet bank, on the other hand, can give you the best of both worlds—higher interest rates and in-person assistance with transactions and difficulties when you need it.

Next Read | Improving digital customer experience in banking

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