Pros and Cons of Online Checking Accounts

Online checking has quickly matured. After a wobbly start, banking online now offers a treasure trove of tools. And some online-only banks even spice up their offerings with higher yields and lower fees for online checking accounts than many brick-and-mortar banks provide.

The upshot: Online checking accounts can save you money and fetch higher rates, if you know where to look.

The biggest draw is convenience. Services are available 24/7, and transactions are speedy. You also can tap into other accounts, such as certificates of deposit or individual retirement accounts, with just a few clicks. Consumers can log into their accounts through the Internet via computer or mobile devices. And they can be easily set up online just by filling out an application.

Even big banks like Bank of America and Citibank are rapidly climbing the online banking technology curve.

"Large banks are doing a better job with comprehensive online offerings," says Hank Israel, a director at New York-based financial services consulting firm Novantas LLC. "It's the 'iPodification' of banking."

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Israel says 65% of consumers use some online banking features; only 20% still need face-to-face contact.

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Online checking accounts come in two versions: via the online arm of a brick-and-mortar bank or through online-only banks with no physical branches. Online-only banks usually have fewer fees. But they also have a downside. They have more basic, and fewer, checking account offerings.

"Virtual banks are designed to be simple," says Stessa Cohen, research director at Gartner, based in Stamford, Conn.

The result is you could miss out on high-yield checking accounts offered by online branches of brick-and-mortar banks. According to Bankrate.com, high-yield accounts now pay an average of 2.56%. Online-only banks' top rate was recently 0.9%.

Either way, online checking accounts have many perks. View your account transactions online, transfer money between accounts, pay bills online and even manage your spending. You also can get text alerts for certain transactions or note when your balance slips.

New online tools are empowering consumers too. Many big banks now offer free money management charts and graphs to track spending or saving. And remote check deposits are making banking online easier. For example, Chase now allows electronic check deposits, in which you use a smartphone application to scan a check and deposit it.

"And there's anytime, anywhere access," Cohen says.

Here's a rundown of more online checking advantages and disadvantages to consider.

Advantages

Fewer fees than traditional banks. As free checking disappears, online-only banks are gaining popularity. Why? They have fewer expenses, so they also have fewer fees, Israel says. And some virtual banks such as ING reimburse you for ATM fees nationwide.

Consumer Reports gives ING high scores for its low fees and high yields. There are no fees for low balances, and there are no minimum deposit amounts. There's also free bill pay and ATM access. HSBC Direct and Citibank also racked up high scores.

Still, online checking fees vary widely, says Robert Laura, president of Synergos Financial Group in Howell, Mich. "There's a laundry list of things to look for," he says. "Some banks are imposing fees for low account balances for the first time."

Abundant personal finance tools. Many online banks offer complex functionality that connects spending to budgets, Cohen says. "Consumers should expect this since even small banks are doing it," she says.

Take Citibank, whose personal budgeting tool tracks spending by category. Then, it matches it against a set budget. Wells Fargo and Bank of America also offer versions, some with charts that also track savings and even net worth.

"With these tools, you can receive data about expenses, bills paid and even set alerts based on certain criteria," Cohen says.

Comparison shopping nationwide. Using online banking widens your banking net. Laura checks out online banks via Bankrate's checking account search tool, hunting for high yield and safety. "Most online checking accounts pay high rates though they've come down dramatically," he says.

Disadvantages

Harder to resolve problems or answer questions. Face-to-face contact helps when resolving problems. But in cyberspace, getting good customer service can be difficult. "Can you call someone at 3 a.m.?" Cohen says. "And will the site dock you if you use the call center?" Find banks that are convenient for your needs, she says.

Security can vary. Online banks do a good job with security, says Marc DeCastro, research director at IDC Financial in Framingham, Mass. They're getting the customer more involved with transactions by notifying them if anything is awry. "It's an extra layer of security," he says.

Still, consumers are the weak link. Hacking into bank sites is difficult. So cyberthieves are targeting consumers with weak security instead. The newest twist is "man in the browser" attacks. It is a type of malware that infects a Web browser and is commonly used for financial fraud by intercepting a bank's customer logins and passwords. But by using effective password systems and encrypted bank data, banks and consumers can help to prevent them, DeCastro says.