First we must draw a distinction between online banking and online banks. Online banking is a term that most brick and mortar banks use to describe their online banking department. This article is primarily about "online banks" or, virtual banks.
Online banking, banks that conduct all of their business online, has grown by leaps and bounds over the last ten years. Banks have figured out that they can offer better savings to their customers while earning better profits for themselves by simply doing away with the cost of operating physical branches.
Nowadays, online virtual banks like PerkStreet Financial, Ally Bank, Discover Bank, Ing Direct and many others are offering money market checking accounts that actually pay interest instead of traditional checking accounts.
Origins of Online Banking
Online banks were born from regular brick and mortar banks. Regular banks handle millions of daily transactions. In order to be able to handle this many transactions almost all of their daily tasks were automated and computerized. As the internet opened up for more and more people, banks figured out that they could save a lot of time and money by allowing their customers to handle their own transactions online.
By the end of the 90's, regular brick and mortar banks were investing tens of millions of dollars into the online banking business model. They were very safety conscious and built elaborately secure websites in hopes of luring baby boomers and other would-be leery customers to use their online banking services.
And it worked, as time passed, more and more of their core customers began using, and actually preferred, the online banking over traditional banking services. However, this gave birth to an entirely new business model that would eventually compete with the larger banks for their internet savvy customers ... the virtual bank.
What are Virtual Banks?
First off, there is nothing virtual about "virtual banks". The name has a negative connotation, I mean really, why would I want to put my money into anything that's "virtual". Make no mistakes, today's virtual banks are ran by real bankers, with real CEO's, they handle real money and do everything, and sometimes more, than regular banks do. There's nothing virtual about "Virtual Banks" any more, except for the name.
Virtual banks basically took the regular bank's idea one step further. However, instead of trying to lighten their labor cost by moving some of their customer to online banking, they took the business model to the next level by making all transactions available online or by phone.
These banks were designed without a traditional banking infrastructure, a cost-saving feature that allowed many of them to offer savings accounts with higher interest rates and loans with lower interest rates than most traditional banks. Many analyst contend that by the end of this decade these banking models will service over 90% of banking transactions.
Advantages of Online Banking
Convenience: Unlike regular banks, the web never closes. This allows you to bank around the clock 24 hours a day, seven days a week. Most online banks also offer phone service for regular banking hours, some actually offer phone services 24 hours a day as well. Note: if you do decide to use a virtual bank, make sure you check out their phone service hours and pay special attention to the time zones.
Omnipresence: Regardless of where you are, over-seas, on a cruise ... virtually anywhere you can find an internet connection you can complete all of your banking transactions.
Transaction speed: Virtual banks generally execute and confirm transactions at or quicker than ATM processing speeds, and most definitely faster than human response times.
Efficiency: Not only can you manage your checking and savings accounts online, you usually have a lot more options that you can manage online like: IRAs, CDs, even securities, from one secure site.
Pricing and Effectiveness: Most virtual banks pay higher rates on common accounts like checking, savings, IRA's and CD's. Not to mention, a lot of virtual banks now offer financial tools, including account aggregation, stock quotes, rate alerts and portfolio managing programs to help you manage all of your assets more effectively. These tools are usually compatible with money management programs such as Quicken and Microsoft Money.
Disadvantages of Online Banking
Signature Transactions: Some banking transactions still require signatures. It is foreseeable that in order to make account changes, add and remove options that you will need to visit a branch, if they have one, if not, you may need to mail the form in.
Learning curve: If you're not internet savvy, and even if you are, these virtual banking websites will take a while to get used to. Due to the fact that they offer so many services online that traditional banks do not offer the website is a bit busy. Also factor in the fact that they have so many different tools to choose from, even the most experienced computer user can expect some type of learning curve.
Bank site changes: Dovetailing the last bullet point, all banks feel the need to move everything around every so often. When virtual banks do this, you will have YET another learning curve.
The trust thing: Studies show that virtual banking is every bit as safe, and even more so in some respects, as regular banks. If you enjoy meeting your banker, shaking hands over a mortgage, online banking is not for you.
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