This article discusses a matter that we at the Financial Consulate recommend for nearly all of our clients. The subject matter will differ from what we have discussed in previous articles, in that as the author, I am going to describe my own recent experiences with transitioning from doing business with a brick-and-mortar bank to instead working with an online bank.
Online banks typically have fewer (and lower) fees and better rates than brick-and-mortar banks do. Think about it: although online banks have their own business-related expenses, they do not have the same types of overhead (e.g., the costs of real estate and labor, etc.) typically associated with maintaining and running a local brick-and-mortar bank branch. As a result, online banks, at least in theory, are able to pass these savings on to their customers.
If you decide to open an online bank account, you will retain the benefit of being able to access network ATMs without a fee, just like customers of brick-and-mortar banks. You can also make deposits through the mail if you choose, although many online bank customers choose to take advantage of their bank’s mobile deposit apps, which make the process easier.
Selecting an Online Bank
I chose to open new checking and money market accounts through the Capital One 360 product. (Please note that The Financial Consulate does not endorse any banks. You should do your own research at www.bankrate.com before choosing a bank.) I used Bankrate to search online money market accounts and sorted them by which bank provided the best annual percentage rate (APR). Capital One did not have the highest APR, but their APR rates are competitive among other banks.
It is not wise to switch banks based solely on APRs, which can be like switching lanes in a traffic jam: the lane that you are sitting in that isn’t moving can often become the lane that picks up speed. Chasing investment performance works in much the same way.
There are other criteria to consider besides a strong APR when deciding how to choose a new bank. For me, the ability to name subaccounts was the main reason I decided to open my new accounts with Capital One (subaccounts make my “essential budgeting” method much easier for me). In addition, when choosing a bank, you will want to ensure that you are not signing up for a teaser rate and that you can meet any minimum balance requirement.
After the process of choosing an online bank, it is time for you to open an account. For security purposes, it is best to set up an account that requires a dual-factor authentication access. Customers should also establish what sort of alert notifications, if any, they would like to associate with the account. Both dual-factor authentication and security alerts will help protect customers against potential fraud—they are the digital equivalent of locking your door when you are at home. A new customer will typically open a checking and a money market account, but it is possible to open only one type of account and to add a joint account holder at this time.
Setting Up Your Online Account
Now comes the tricky part: if you’re like me, you have a few automatic payments set up. Opening a new account requires you to change your credit card, debit card, and mortgage automatic payment processing information.
This may be a good time to begin using a credit card for your everyday spending. Credit cards typically offer better fraud protection and more perks. Using a credit card for daily purchases, however, is NOT advisable if you struggle with debt or have in the past.
It is wise to have your former bank account open with funds in it at the same time you are funding and setting up your new account. It is also wise to ensure that all automatic payments have switched to your new account. You will also want to update any direct deposits that you may have.
In my case, I went through my last four months of bank statements to determine what automatic deposits/payments I had, because many of my payments are quarterly. I also double-checked with my life insurance companies to confirm that these payments were not on auto-debit. Other annual expenses to consider include auto, home, and umbrella insurance.
I also updated my Paypal and Venmo accounts. Once I updated these accounts, I kept a small sum in my old bank account for a few months to cover me in case there was an automatic payment account that I forgot to switch over to my new bank account. After a few months, I transferred the remaining sums from my former bank account to my new account and closed the old one. It is important to be mindful about balance requirements associated with your old account so that you do not start incurring fees.
In summary, there are still good reasons to remain with traditional brick-and-mortar banks, but the cons are beginning to outweigh the pros. Contact your advisor at the Financial Consulate to learn more about setting up an account with an online bank if you have not already done so.