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How Online Savings Accounts Work

Around 40 percent of families have at least $1,000 in savings. The majority rely on traditional savings accounts, making around 0.5 percent annually thanks to a modest interest rates. However, widespread internet access has created new alternatives to get better returns from savings. Online savings accounts are one potential alternative, offering customers up to 5 percent in annual interest.

Online savings accounts are operated by virtual financial institutions known as direct banks. Online savings accounts provide a much higher return on investment on par with money market accounts. However, they operate under different rules compared to traditional brick and mortar banks. In this article, we discuss how online savings accounts work, and what to keep in mind when choosing the best online bank to store your money.

Online and Traditional savings accounts have some similarities, but the nature of the banks create some unique differences

There are some key differences between standard savings accounts and their online counterparts. Traditional savings accounts have all of the standard benefits offered by brick and mortar institutions. For example, customers can visit a local office to deposit or withdraw money directly from their savings account or make use of the extensive ATM network without expensive fees. Holders of traditional savings accounts have access to online banking systems, but don’t have to worry about passwords to check statements.

However, these benefits come at the cost of a low annual percentage yield (APY) of about 0.5%. Most customers don’t rely on savings accounts to handle investments due to the low APY, preferring other financial products instead. Holders of traditional savings accounts also have to worry about the monthly fee banks charge if savings fall below $500.

Online savings accounts don’t have the same features as their standard counterparts, such as free access to the ATM network and withdrawals from physical offices. Instead, customers have to transfer money from standard savings accounts to online accounts, or mail the bank a check. Some online banks partner with standard ones in order to offer customers ATM access, though they often come with a withdrawal fee.

The main benefit of online savings accounts is the high annual percentage yield (APY). Most online banks offer customers up to 5% on their savings accounts. This APY is on par with that offered by money market accounts, making online banks an attractive option for long-term investments. Online banks are able to offer higher returns and fewer fees because they don’t have to spend money on maintaining infrastructure and personnel like traditional banks.
Online bank customers have the option to access the bank whenever they need it. The bank’s operations are not limited by the working hours of an office, providing permanent customer support to account holders. Statements and other financial data can be viewed online from anywhere through a computer or smartphone. Online savings account holders don’t have to wait for statements to arrive via mail.
Additionally, products such as debit and credit cards can be requested through the website without visiting an office and submitting physical papers. However, some online banks do require customers to mail documents to their central office, though sometimes they can be scanned and uploaded instead. One potential downside of online savings accounts is their reliance on an internet connection. Customers who find themselves without internet may lose access to the platform.

Opening an online savings account only takes several easy steps

Opening an online savings account is easier than applying for a traditional one. Banks like HSBC, Virtual Bank and ING Direct operate a similar and straightforward process for customers to open an online savings account. However, some may require customers to scan and upload some documents, or send them by mail to the bank’s central offices.

To open an online savings account, customers have to visit the bank’s website. Most banks’ websites have the option to open an account at the landing page, along with information about the financial products they offer. After the open account option has been chosen, customers will then have to fill up an online application with their personal information. Some online banks like HSBC allow customers to send the required documentation via mail and let the personnel handle the rest.
In, general online banks need the following documentation to open a savings account: address, phone number, date of birth, Social Security Number or Tax Identification Number, and a government-issued identification document like a driver’s license. Online banks also ask customers to create a user account during the application process. This includes selecting a username and password. For additional protection, banks often include additional verification processes such as two-step verification or security questions.
Online banks will ask customers to link their newly created savings account to a traditional savings or checking account. This step gives customers the ability to transfer of money between their accounts. Some banks such as ING Direct perform a security check during this process to make sure the customer has access or control over the traditional account being linked. This security check usually involves a small deposit made by the online bank to the savings account. The deposit amount is not revealed to the customer until they verify the account transactions and provide it back to the bank.
One the verification process is complete, the online savings account becomes operational and ready to use. Unlike traditional financial institutions, online banks only ask for a very small minimum deposit to open a savings account, and there are no maintenance fees regardless of how much money is stored.

There are some things customers have to consider before opening an online savings account

Customers who are interested in opening an online savings account should keep several things in mind. First, not all online banks offer the same benefits to potential customers. For example, one online bank may advertise an annual percentage yield of about 5%, which is good for long-term investment. However, this APY might only be an introductory rate, falling to a less attractive 2% after a couple months. Customers should consult the fine print to understand how much money they will actually make by depositing their savings with a specific online bank.
Another important factor is whether the bank has a customer service department people can talk to when necessary. Not all online financial institutions operate call centers. Some online banks are small, and prefer to address customer concerns via email. Although most online banks have eliminated fees and service charges, customers should always make sure they are aware of any potential costs before choosing an online bank. In general, online banks only inform customers about ATM withdrawal fees.

Online banks are a growing industry with only a few years in existence. As a result, online banking remains unregulated in some areas. Customers have to keep that in mind when opening an online savings account, as not all online banks are legitimate businesses. To safeguard their money, people should look only for banks that are insured by the Federal Deposit Insurance Commission, or FDIC. If they are, their money will be protected by the government.

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