New digital banks are launching left and right, and there’s no shortage of online savings accounts to choose from.
But data shows that many savers aren’t taking advantage of what direct banks have to offer. Nearly 6 in 10 Americans (58 percent) say they either don’t have or have never had a money market or savings account with an online bank, according to a Bankrate Financial Security Index survey. from July 2018.
Though online banking has been around for years, there are misconceptions keeping some consumers from wanting to manage their savings through a digital-only channel.
Here are 10 common myths about online accounts that could be keeping you from boosting your savings.
1. Online savings accounts are only for millennials
Millennials and their parents (and grandparents) may have different ideas when it comes to managing and even talking about money. It’s assumed that younger Americans are more comfortable using digital banking channels. But that doesn’t mean online savings accounts are only a good fit for young adults in their 20s and 30s.
Bankrate found that Gen Xers (ages 38 to 53) are most likely to say they have or have had an online savings or money market account, according to the Financial Security Index survey. That’s a trend some banks even acknowledge.
“Our customer demographic does skew more to Gen X,” says Nicole Lorch, executive vice president and chief operating officer at First Internet Bank.
An online savings account could be worth having regardless of your age. Even brick-and-mortar banks are pushing customers toward their online platforms, says Michael Gerstman, CEO of the Dallas-based retirement planning firm Gerstman Financial Group.
2. Online savings accounts are for the tech-savvy
You don’t need to be a technological whiz to know how to open and maintain an online savings account. In fact, we’ve reached a point where banking and opening accounts online has become common.
“If there is a level of discomfort, that is going away real quickly as we pay our bills online and we do more and more things directly from our bank’s website,” Gerstman says.
Banks have put effort into making their websites easy to use. Depending on the institution you choose, it’s possible to open an online savings account in a matter of minutes. Chime, a neobank, boasts on its website that signing up for an account takes just two minutes.
3. There are no humans to talk to
For financial institutions, technical glitches and outages aren’t uncommon. Every now and then, bank customers find that they’re having problems with their online accounts.
While you may not be able to visit a physical branch, that doesn’t mean you’ll be forced to talk to a robot in order to get your concerns addressed.
“While a human face with a smile is awesome, the fact is that you can still get great customer service from many online-only banking companies. And if you need that smile, many will do a video chat,” says Catherine New, editor-in-chief at Varo Money, a company that offers mobile banking.
If you’re in the process of comparing savings accounts and you value relationship banking and quality customer service, find out how you’ll be able to get in touch with a representative if there’s an issue. Do your due diligence and look for a bank that’s accessible throughout the weekend as well as during the week. Start your research with Bankrate’s bank reviews and ranking of the best online banks.
4. Online savings accounts are less secure
Data breaches have affected millions of Americans, and bank executives like Jamie Dimon say it may be the “biggest threat” to the country’s financial services system.
Different banks have different security protocols in place, and online savings accounts aren’t automatically any less safe than an account you would open at a traditional bank.
“Online savings accounts — and mobile banking — is as safe, if not more, than old-school branch banking. (We say even more safe because there is less potential for human error, like leaving account documents on an open desk for example),” New says. “Many of the online savings accounts are offered by newer tech-based companies, which are built with the most modern security technology. That means security patches and updates can be deployed more quickly.”
While it’s on the banks to ensure that certain protections are in place, consumers must also play an active role in avoiding phishing attacks and scams. Be careful about where you are when you’re logging into your account, and set up two-factor authentication so that the bank can verify your identity and protect you from hackers and thieves. Whether you’re banking online, at a brick-and-mortar bank or just “looking at grandkids on Facebook, they should probably be mindful of their digital footprint,” says Lorch.
5. Accessing your money takes longer
From a mental standpoint, having an online savings account could be helpful. If you have a tendency to overspend, opening an account online (and being unable to visit a branch in person) may provide enough of a physical barrier to prevent you from making careless mistakes with your money.
But having a savings account online doesn’t necessarily mean that it will be harder to get access to your money. It all depends on your bank.
“With many of the newer online savings accounts, you can instantly tap your app to move money in and out of savings into a bank account so you can use it,” says New from Varo Money. “There is no waiting in line or completing a form.”
At Synchrony Bank, customers with high-yield savings accounts can quickly and easily withdraw funds using an ATM card. If this isn’t an option at your bank, there will be a bit of a wait before you can access your money after transferring it electronically to an external checking account or initiating a wire transfer.
6. Online savings accounts are offered by unstable banks
It’s natural to be skeptical about a new online savings account from a bank you’ve never heard of. That makes sense. It’s not smart to open a financial product without doing some background research. In many cases, you might be surprised to find that a digital bank is actually an extension of a traditional institution that’s been around for decades.
As long as your deposits are insured by the Federal Deposit Insurance Corp. (FDIC) or the National Credit Union Share Insurance Fund, you should be in the clear. In the event that a bank closes shop, you’ll be able to get most (if not all) of your money back.
“Look for FDIC insurance,” Lorch says. That’s the gold standard of knowing that their money is going to be safe.”
7. Rates aren’t much higher than what traditional banks offer
Few Americans pay close attention to the interest rate tied to their savings accounts. In a recent survey published by PurePoint Financial, more than half of the participants admitted that they didn’t know what their annual percentage yield, or APY was.
Many people bank with brick-and-mortar institutions paying less than 1 percent APY. If you don’t think you’ll be earning a significant amount of interest by moving your savings account over to an online bank, you could be leaving money on the table.
The best online savings accounts pay around 2.5 percent APY. That’s nearly 25 times higher than the national average, according to Bankrate data.
8. Online savings accounts only benefit serious savers
In order to have an adequate savings cushion set aside for emergencies, experts recommend having enough funds to cover at least six months of living expenses. But most Americans don’t have that much money saved.
If the amount of money in your savings account is small, you may assume that it doesn’t matter where you store your funds. But even a small amount of savings has the potential to grow with the power of compound interest.
Even if you have just $200 to set aside, there’s a difference between earning 0.01 percent APY and 2.5 percent APY. Do the math and find out how much interest you can potentially earn within a year.
9. Online savings accounts don’t have much to offer
All banks aren’t created equal. Some online savings accounts are truly bare-bones accounts. You can store your savings, but other than that, there’s not much to look forward to. But that’s not the case for every account offered by a digital-only bank.
New savings customers at banks like Discover Bank have an opportunity to earn a cash bonus for opening a savings account. CIT Bank offers a Savings Builder account that rewards account holders for consistently saving money or maintaining a high savings balance. Synchrony Bank reimburses ATM fees and offers rewards like travel and leisure discounts, as well as identity theft resolution services.
10. All online savings accounts offer a high yield
If you’re sick of earning less than 1 percent APY on your savings, there’s a good chance there’s an online bank offering a much more competitive yield. But even with online savings accounts, rates fall somewhere on a spectrum. To earn the top rate, you’ll have to shop around.
For example, USAA is an internet bank. The most you can earn from its most basic savings account is 0.15 percent APY. To earn more than 1 percent APY through its Performance First Savings account, you would need to deposit at least $100,000.
In contrast, Vio Bank’s online savings account pays 2.46 percent APY. You can earn that yield with a minimum deposit of just $100.
Bottom line: If you’re trying to grow your savings as quickly as possible, you’re better off going with an account that pays more interest and that has interest that’s compounded on a daily basis.