The pros and cons of online banking

Online banks have been around for two decades in Canada so it’s a bit surprising that some people still aren’t familiar with them. As their name implies, online banks operate digitally. That means there are no physical locations, so all of your banking needs to be done via a computer or mobile device.

This concept of online banking may not appeal to some people, while others might be concerned about how reliable digital banks are. As someone who’s been using online banks for close to twenty years, I can tell you that they’re a great option for many people. Of course, it’s important to know how online banks work and if you can trust them before you open an account.

Are online banks safe?

The biggest concern for many people is the safety of online banks. Some people are worried that their money could get “lost” if they use an online bank. There are also some concerns that online banks aren’t as reliable as traditional banks, so there’s a greater chance that they could fail.

Here’s the thing: As long as the online bank you’re using is a member of the Canada Deposit Insurance Corporation (CDIC), then your funds are protected up to $100,000 which includes principal and interest. CDIC covers 7 different categories, so you could actually have much more than $100,000 covered. Keep in mind that some online banks are owned by bigger banks so it’s the parent company that would appear on the CDIC member list.

Why you should use an online bank

There are usually two main reasons why you would want to use an online bank. First off, you’re going to get a decent interest rate on your deposits. A few digital banks offer 2%+ interest while some offer just over 1%. That may not sound like a lot, but have you looked at how much your traditional bank pays in interest? The odds are it’s 0%. Canadians work hard for their money and they want their money to work for them.

The other reason you’d want to consider an online bank is that they usually don’t charge any banking fees. Generally speaking, online banks don’t charge any fees for having an account, there are no monthly transaction limits, no minimum balance requirement, and no fees for Interac e-transfers. This is quite a different business model compared to brick-and-mortar banks that seem to increase their fees every year.

Because online banks don’t have any physical locations, their overhead costs are much lower compared to regular banks. That savings is passed onto the consumer. Keep in mind that all online banks are different so you’ll want to research all their features before signing up.

What online banks lack

Although online banks are convenient, some people still prefer the in-person experience. It may seem trivial, but not everyone is tech-savvy so they may require the assistance of a staff member to help them with their banking needs.

There are also some services that physical banks offer that digital banks don’t, such as currency exchange, cheques, wire transfers, bank drafts, safety deposit boxes and investment management. Yes, some of those services can be done online via other companies, but some people prefer to have everything in one spot.

Oddly enough, depositing physical cash into an online bank can be tricky since they don’t have physical locations or automated banking machines. That said, you can connect digital banks to a regular bank account so you could deposit your money at a physical location and then transfer any funds to your digital bank.

Should you open an online bank account?

The answer is yes, having an online bank is a great way to eliminate some of your daily banking fees while earning interest on your deposits.

If you do end up opening an online bank account, you want to try and minimize the fees you pay at your traditional bank. The easiest way to do that is to see if they offer any low fee accounts or if they’ll waive fees completely as long as you maintain a minimum balance.

There’s no need to pick an online bank over a regular bank, having both is ideal since they can complement each other. Just take advantage of the services you need wherever they’re offered.

Barry Choi is a Toronto-based personal finance and travel expert who frequently makes media appearances. His blog Money We Have is one of Canada’s most trusted sources when it comes to money and travel. As a completely self-taught, do-it-yourself investor with no formal training, he makes money easy to understand for all Canadians. His specialties include personal finance, budget travel, millennial money, credit cards, and trending destinations.

Barry Choi is a paid spokesperson of Sonnet Insurance.
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