What Is an Online Savings Account?

Online banks, which offer online savings accounts and checking accounts, have become increasingly popular. While they have the same rules and products as in-person banking there is one key difference. These banks have no physical branches and you can’t access your account in person, but, because of their reduced overhead they can offer better interest rates than a traditional account. This makes online savings accounts one of the best vehicles for securing and growing your money.

If you have money you need to save or invest, consider working with a financial advisor who can help you create an asset allocation plan.

What Is an Online Savings Account?

An online savings account is a savings account where you conduct all of your transactions via the bank’s website and apps. This is slightly different than using an app or website for a traditional brick-and-mortar bank with branch locations. With an online savings account, you cannot conduct business in person; however, online banks typically offer access to cash through an ATM in the same way as any other institution. Allpoint and MoneyPass are two of the most popular ATM networks for online banks and have tens of thousands of locations nationwide.

Pros and Cons of Online Banking

Since online banks have fewer costs than brick-and-mortar institutions, they typically offer lower fees and better interest rates, and the difference can be substantial. At the time of writing the average savings account offered an interest rate of 0.42%, according to the FDIC’s monthly report. By contrast, many online savings accounts offer interest rates as high as 3% or 4%. For every $100 you deposit, this is the difference between getting $4 of interest or $0.42.

The tradeoff for using an online bank is access to services. You cannot seek in-person customer service, which for some customers can be a significant pain point. You may end up paying higher ATM fees if your bank does not have the same network as a retail institution, although this is a risk with all smaller banks, not just online institutions. Finally, you may not have access to the same range of products. For example, many online banks don’t offer lending and mortgage services, money orders, or financial management.

Finally, handling cash can become more difficult. While most consumers can deposit checks relatively easily through mobile apps, depositing cash will require a trip to the ATM. If you work in high-cash industries, like service or retail, this may be a very real issue.

How big of a problem all this is depends entirely on your banking needs. Some consumers seek a best-of-both-worlds solution by opening accounts with both a traditional bank and an online bank, moving their money in between the two. This is not necessarily a bad choice, but be careful that you don’t erode all of your gains through potentially high wire transfer fees between institutions as you move your money between checking and savings.

Are Online Banks Legitimate?

A woman setting up an online savings account.

There is nothing inherently suspect about online banks or online savings accounts. However, it’s important to do your homework before trusting anyone with your money. Because an online bank has no physical presence, it’s easier for scammers to operate in this sector so it’s important to verify banks through the FDIC before opening an account.

You can check on this through the FDIC’s BankFind service. Do not put funds on deposit with any bank that is not registered on BankFind. Even if they are simply foreign institutions, banks do go out of business. If your bank goes under and it is insured by the FDIC, you probably won’t even notice it. If it is not, you can easily lose everything on the deposit.

How to Choose the Right Online Savings Account

Choosing the right online savings account starts with comparing interest rates. Look for accounts that offer a competitive annual percentage yield (APY), which tells you how much interest you’ll earn over time. Some online banks advertise high rates, but they may only apply to balances over a certain amount. Make sure the rate is available for the balance you expect to maintain, and check if it’s variable or fixed.

Next, review the account terms and any fees. Many online savings accounts are advertised as “no-fee,” but it’s important to confirm there are no hidden costs for things like inactivity, excessive withdrawals, or paper statements. Also consider how easy it is to transfer money in and out of the account. Some banks allow quick transfers to linked checking accounts, while others may take a few days.

Finally, evaluate the bank’s features and accessibility. A good online savings account should offer a secure, easy-to-use mobile app and website. Make sure the bank is FDIC-insured so your deposits are protected. You should also check customer service availability in case you have questions or run into issues. These factors can make managing your savings more convenient and help you stay on track with your financial goals.

Bottom Line

A man checking his online savings account.

Online savings accounts are bank accounts that you manage and access entirely online. While some traditional banks offer online services such as an online savings account, most of the time they are offered by online-only banks, which have no physical locations at all. These accounts can offer higher APY, making you more off of the money you’re saving. However, if you handle a lot of cash that needs to be deposited then this might not be the best option for you.

Tips for Saving

Don’t worry if you’re unclear on how much you should be saving or where you need to put your money. You can enlist the help of a financial advisor who can provide you with the necessary information and tools to be successful. SmartAsset’s free tool matches you with financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Online savings accounts are, mostly, a feature of online banks. These institutions can offer you better interest rates, but at the cost of some features and products. Traditional banks also have their benefits and actually might offer more stability if you have larger amounts of cash to put away. Find out which one is right for you.