How Online Savings Accounts Work

Online savings accounts combine versatility with higher earning potential, but they still face their own problems and challenges.
10/21/19 | By Matt Miczulski
Man using a tablet computer outside

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Banking habits continue to evolve as consumers are given more and more choices of where and how they bank. While traditional banking still has its loyal fanbase, it’s hard to compete with the convenience of being able to manage your accounts from a computer or smartphone anywhere with an internet connection.

In fact, according to a 2017 survey by the American Bankers Association, 40% of those surveyed said they used the a computer to manage their bank accounts, with mobile devices coming in second at 26% and visiting a bank branch in person at 18%.

The appreciation for face-to-face human interaction that comes with traditional banking may never go away, but the reputation for charging high fees and paying low interest rates might leave you wondering how exactly you’re benefiting from keeping your money there.

If you consider that the 2018 rate of inflation in the U.S. was 2.4%, you would need to have earned at least 2.4% on your savings that year just to keep up. While you might not find a savings account that keeps perfect pace with the rate of inflation, you should be able to find one that gets you close.

When compared with traditional brick-and-mortar banks, online savings accounts often offer better rates, giving your savings a chance to grow. Learn more about these types of accounts and how you could benefit from one.

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What is an online savings account?

An online savings account is a savings account with a bank that usually doesn’t have any brick-and-mortar branches and operates fully online. Even though they’re completely digital, online savings accounts must follow the same banking regulations as traditional banks, such as Regulation D of the Federal Reserve limiting the number of withdrawals each month to six.

Since all of your interactions with your account take place digitally, you have the freedom to manage your savings when and wherever you like, without the hassle of having to add another stop to your schedule or having to wait for the bank to open. The websites and apps for online banks are essentially storefronts, so online banks often devote lots of resources to make sure they’re optimized and easy-to-navigate. This allows you to skip the lines at the bank and seamlessly move your money around with just a few clicks.

The absence of physical locations also means online banks don’t have to pay the typically associated costs, such as maintenance or real estate costs. These savings are often passed on to online bank customers in the form of higher interest rates, lower fees, and no minimum account balances, giving customers more flexibility and freedom to do what they want with their money.

Online savings accounts do have their drawbacks when compared to a traditional brick-and-mortar bank, however. If you regularly deal with cash, for instance, you might find yourself without any means of depositing into your account. This might require a separate checking account just to handle these sorts of transactions. For those who don’t want accounts spread across multiple institutions, this could be an inconvenience.

How do deposits and withdrawals work in an online savings account?

Most online banks offer several ways to make deposits and withdrawals, though they might vary from bank to bank. Here are the most common ways to fund and get money out of an online savings account:

Depositing funds into your account

  • Transfer funds from a linked account, also known as an ACH (Automated Clearing House) Transfer (usually takes one to three business days)
  • A check, either by mail or mobile deposit
  • Direct deposit from your employer
  • Wire transfer

Withdrawing money from your account

  • Transfer funds to a linked account
  • Request a check
  • Outgoing wire transfer
  • ATMs, if your savings account is linked to a debit card

Things get a bit more complicated when it comes to depositing cash because of the lack of physical branches. While there are some online banks that have a few retail locations, like Capital One cafes, these are few and far between. If you find yourself needing to deposit cash, you can try one of these options:

Cash deposits

  • Deposit locally into an account with a physical branch and transfer the funds electronically
  • Buy a money order and deposit it like you would a check
  • Load cash onto a reloadable prepaid debit card, such as the American Express Bluebird card, and transfer the funds electronically to your online savings account
  • Deposit into a ATM that accepts cash deposits (if available)

How to open an online savings account

The process for opening an online savings account is pretty straightforward. It should only take a few minutes and usually involves completing these steps:

  1. Fill out the application

    Here you’ll submit your personal identifying and contact information, including your name, date of birth, address, phone number, email, and tax identification number (such as a Social Security number).

  2. Choose your account type

    You’ll need to decide whether you want to be the sole account owner or if you want a joint account. If you choose to have a co-owner, you’ll need to enter the personal information of each account holder.

  3. Designate beneficiaries

    In this section, you can choose who will receive the money from your account in the event you pass away.

  4. Fund the account

    How much you must deposit depends on the bank — many require just $1, but others may require a larger minimum to open the account. Once you decide on the amount, the most common methods to fund the account are by bank transfer, sending or depositing a check, or using a wire transfer.

  5. Set up your login information

    Since access to your savings account is online, you’ll need to set up a username and password to complete the setup of your account.

Frequently asked questions

What kind of interest rates can I expect?

Higher interest rates are one of the major benefits of online savings accounts, though they vary from bank to bank.

An account with Capital One 360, for instance, will give you an interest rate of 1%, while CIT Bank offers a savings account with a generous 2.4% annual percentage yield (APY) if you deposit at least $100 a month.

Compare these with a traditional savings account, such as the Bank of America Rewards Savings account that offers a standard interest rate of 0.03%.

How can online banks offer such good interest rates?

Because online-only banks don’t need to pay the employee wages, maintenance, and real estate costs associated with brick-and-mortar branches, they can charge fewer fees, require no minimum balance, and usually offer better interest rates.

What is the typical minimum balance for an online savings account?

The minimum balance requirement for an online savings account is usually structured one of three ways:

  • No minimum balance, which is typical for many online banks
  • A minimum balance to keep the account open, which could be as little as $1 or as much as several thousand dollars
  • A minimum balance to earn the advertised high interest rate, with anything less earning a lower APY

Is online banking safe? Is my money insured?

In an industry where consumers expect their money to be protected, banks that are not FDIC-insured will have a much harder time competing with those that are.

The FDIC, or Federal Deposit Insurance Corporation, is an independent agency of the United States government. If you deposit money at an FDIC-insured bank and the bank later fails, your money is protected (typically a maximum of $250,000 is covered).

However, banks are not mandated to be FDIC-insured, so it’s always important to make sure the bank you’re considering is. To see if a bank is FDIC-insured, you can go to the FDIC BankFind page.

Even if the account is insured by the FDIC, you want to make sure the bank you choose uses robust technology to protect your money because the FDIC does not reimburse banks for fraud perpetrated against accounts.

Most banks offer some type of security guarantee and limited liability protection for its customers. Ally Bank, for example, offers a security guarantee, which states “that you will not be liable for any unauthorized Online or Mobile Banking transaction as long as you report the unauthorized transaction...within 60 days from when your statement is made available.” Ally also offers a range of security measures, from account monitoring to free anti-virus software that can protect up to three devices.

There are also measures you can take yourself to help protect your account from such events, such as setting up multi-factor authentication and text alerts, using difficult passwords, avoiding public Wi-Fi when accessing your bank information, and installing anti-virus software, to name a few.

Is your money stuck in an online savings account?

No. Just like a traditional savings account, your money is accessible to you when you need it. With just a few clicks, you can move money in and out of your savings and into another account.

Transfers to an account within the same bank are usually instant, while transferring to an account with a different bank might take a few business days before the funds are made available.

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