As Savings Rates Rise, Should You Switch to Online Banking?


Digital banks are having a moment. With many offers savings rate up to 2% – and others well above – it may be time to leave your traditional bank.

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The Federal Reserve has raised interest rates several times this year in response to skyrocketing inflation, a decision that has increased the borrowing rate but also increased the amount you can earn on your savings. Although online savings rates of around 2% do not compensate for inflation, they can help you grow your savings faster than traditional savings accounts, which are closer to 0.01%.

If you can’t remember the last time you set foot in your bank, it might be financially beneficial to switch to an online or “neobank” bank with no fees and better interest rates.

What are neobanks?

Neobanks – like Chime, Ally, Current, Varo and Revolut – are digital-only banks or fintech companies that operate exclusively online. They have no physical branches and your account can be managed entirely through your mobile phone.

With lower operating and overhead costs, neobanks can offer their customers lower fees and above-average savings returns. And, many of these banks offer innovative features like early access to your paycheck.

Neobanks are especially popular among younger generations — 57% of millennials and 64% of Gen Zers have an account at non-traditional financial institutions like neobanks or other fintech options, according to Bankrate. (Bankrate is owned by the same parent company as CNET.)

But before you make the jump to a digital-only experience, here are some tips to keep in mind to make sure the decision is worth it in the long run.

First, make sure you’re switching to a real bank

While many neobanks offer savings and checking accounts, debit cards and other standard banking features, they are not always nationally chartered banks – with the exception of Varo – with all the appropriate licenses. . Instead, they are “fintech companies” that offer a more limited range of banking-like services.

This is a potential red flag since neobanks are not regulated in the same way as licensed banks. For consumers, it is particularly important to know whether there is a real bank or banking partner that supports the neobank. At a minimum, you want to make sure it provides FDIC insurance, which means the federal government will insure your individual account for up to $250,000 in the event the neobank goes bankrupt. You can usually find the mention “We are not a bank”, as well as one of the neobank’s legal banking partners on the “About us” pages.

Plan ahead for digital issues

Chime has recently made headlines due to its relatively high rate of customer complaints. Researchers found that Chime had experienced outages in the past that would have left customers financially stranded, according to a ProPublica report in July. It has also received 920 complaints filed with the Consumer Protection Bureau since April 2020, all related to “closed accounts”. At the time, Chime had approximately 12 million customers.

In contrast, Wells Fargo, which has had its share of scandalsreceived only one-third the number of complaints about similar “closed account” issues, but six times as many customers.

No matter where we park our money, we have to be prepared for things to go wrong. This makes it all the more important that your financial institution has 24-hour customer service and, ideally, workarounds to help you access your money when you need it. You can find a neobank associated with a specific ATM network. But in general, neobanks are not always as equipped as traditional banks to respond to these issues. If my bank’s app is down, for example, and I need to transfer money, I can always go to any ATM or send a check.

It can be helpful to create your own backup plan, such as storing emergency money in another bank account in case of unexpected disruptions.

“If moving to a non-brick-and-mortar business makes you anxious, only move some of your money if you want to check it out,” says Erin Lowry, author of The Broke Millennial.

Know how to reach customer support

Although neobanks do not have branches, they may have customer support powered by real people. This is an important characteristic and to be favored in your search for a well-suited neobank. In the event of a technical problem or breakdown, you want to know that you can get help as soon as possible. Before signing up, take customer service for a test drive, to make sure help with a live person is easy to access, Lowry says.

Make sure the bank offers all the financial services you need

Does a neobank offer loans, credit cards, investment accounts, and other services? It’s important to think about your long-term financial goals and how this digital-only financial account may or may not support you on your journey.

A more established bank with a robust digital branch can serve you better in the long run, especially if it offers a more comprehensive range of products and services like mortgages and retirement accounts.

Don’t feel obligated to choose

I’m particularly happy with my bank’s digital experience, which for years has allowed me to deposit checks through the mobile app and send money seamlessly and securely to others. These are features that my bank was among the first to deliver, almost 10 years ago, so it’s had time to iron out some bugs and wonky user experience issues.

And while I know many may not have visited a bank branch since pre-pandemic times, my bank’s local presence brings me comfort. I walked in to get a certified check for a car purchase at the time. And I felt better about depositing a big check in person last year after we sold our apartment.

If you’re torn between a bank you like and interest rates you’d like to have, that’s not a decision to make. You can keep the same primary bank account and divert your savings to a high-yield digital bank account. This way you still have access to the convenient features of your main bank, while maintaining a separate savings account that earns you more money.

I see no clear and present danger in opening an account with a neobank – as long as your money is FDIC insured and you are aware of its limitations. If it offers live customer support, even better. But having a backup bank with an ATM and a local branch, a bank where you keep your savings on rainy days, might not be a bad way to further guarantee liquidity and access to cash in case technological disruptions.

The reality is that many of us, if we are not already, will become polybankers. We will have accounts spread across various financial institutions because the likelihood of one bank (or neobank) optimally meeting all of our banking needs is unlikely.

My mortgage is with a different bank where I found the best interest rate. I also have several credit cards from different issuers. So, just like with retirement, it often pays to take a diversified approach to banking to get the best returns.


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