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Friday, July 7, 2017

Online Banks Are the Future

Whether you know it or not, you probably can get away with not having an account at a normal brick-and-mortar bank like Wells Fargo, Chase, or Bank of America.  Cut the cord with them just like you did with cable TV, and switch to either an online bank or a credit union.

Brick and Mortar Banks Suck

Credit unions offer better customer service. At Bank of America, you're just a number. A credit union serves the local community, and often will give you better rates on house, car and personal loans.

Money orders are almost universally as acceptable as cashier's checks.  If you're giving the title company a down payment on a house, you'll know it in advance and can make arrangements. If you're paying the security deposit on a new lease, though, you can get money orders at Wal-mart for less than a buck.

Notarizing documents is a service available elsewhere, like at the UPS Store.  The most common need for a notary public is for legal documents, anyway, and many attorney's offices have one on staff for that reason.

Online Banks Raise the Bar

Online banks offer better ATM access. Schwab Investor Checking (available free with the opening of a second brokerage account which you don't have to fund) will refund all fees you are charged at ATMs anywhere in the world.  That's right, the ATM charges you a $7 fee and within a few days Schwab gives you a refund for that $7.  On top of that, Schwab also charges no foreign transaction fees, which is a lifesaver when traveling abroad.

Online banks offer check deposits on mobile devices.  However, there is always a maximum amount per check or per day they'll accept.  The limit varies, but it's normally in the four-figure range so if you get checks you need to deposit of $5000 or more (that you can't arrange direct deposit for), you might be one of the few people that needs a brick and mortar bank.

Online banks are more innovative. Capital One 360 used to be known as ING Direct.  Fortunately, when they were bought out, Capital One kept all the innovation they had pioneered, like the ability to have an unlimited number of savings accounts, and getting a small pack of checks (if you need them) for only $5.  Although they haven't innovated as much since then, they still have a lot of features that nobody else has caught up to. In general, online banks in general are more likely to be early adopters of new technology.

Online banks are actually free.  Yes, if you meet the requirements of having direct deposit and making a certain number of debit transactions every month, you can avoid the monthly fees at a brick and mortar bank.  But those requirements are there because banks can't afford to offer everyone free accounts, no questions asked, like they did a decade ago.  This is largely because legislation has curtailed their ability to extract profit from free customers through exorbitant fees.  However, they have to pay for the overhead of physical locations and all the staff and anciliary costs that come with it.  Online banks don't. In the case of online banking, free really means free — no conditions.

The Verdict

First of all, an honorable mentions goes to USAA, because they deserve it.  USAA is really more like a national credit union than a bank.  They offer excellent services for their members, including great discounts on combining insurance products like home, car or renter's insurance.  Unfortunately, they have a requirement that you or a family member is or was in the US Armed Forces, so they're unavailable to most of us.  If you're eligible, though, they're definitely worth a look.

Finally, the winner. In this humble author's opinion, the innovative features offered by Capital One 360 slightly edge out a victory over Charles Schwab, especially if you don't mind looking for an Capital One ATM or any AllPoint ATM (there is almost always one near you, and you can use the app to find them) and don't often travel often outside the US.

Capital One 360 has has an especially cool way of handling overdrafts.  Overdrafting is off by default (so charges are simply declined if they would bring your balance below zero), but you can request to have it turned on at which point you are given a limit of $500 or $1000.  You're required to bring your balance above zero by the end of the next month, and they only charge you interest for the number of days you were overdrafted.  So if you go under by a couple hundred bucks, and it takes you a couple weeks to get it above zero, you are charged something like 47 cents in interest.  Way better than a $35 overdraft fee, that's for sure.  Add on the low cost for a book of checks, great support for transferring funds to your accounts at other banks, and unlimited savings accounts that you can create at the click of a button, and you'll wonder why you didn't switch to an online bank long ago.

If online banks aren't for you, for whatever reason, credit unions are still a great alternative to traditional banks.  They'll treat you more like a person than a number, can usually give you better interest rates on loans, and will be reasonable and work with you if you fall on hard times.  Whatever you decide, don't stay with the traditional megabanks out of inertia, because there really are some great options available these days.  Don't be scared to try something new!