Internet Only Banks

Concept of Internet Only Banks

With the advent of internet banking, a large part of the services that are offered by banks can be provided online as well. Therefore, a lot of entrepreneurs were of the opinion that brick and mortar banks have become obsolete in retail banking just as brick and mortar stores have become obsolete in retail sector. As a result, a lot of internet only banks came into existence.

Internet only banks do not have any physical infrastructure. Instead, they invest in high end computer infrastructure that allows them to serve their customers in better and faster ways. Many internet only banks have been granted charters in the United States in the 2000’s. They are a new breed of banks and customers are still experimenting with them.

Internet branches have their own advantages as well as disadvantages. Some of them have been listed as follows:

Advantages of Internet Only Banks

  • Lower Fees: Internet banks do not have human staff or expensive locations to maintain on Main Street. Instead they only exist in the virtual world. This obviously saves them a lot of money as they are simply able to avoid all the overheads that brick and mortar banks have to bear in order to conduct business. As a result, internet only banks can pass these savings on to their customers. Hence, customers of internet only banks find that all the services offered are much cheaper in these banks. In fact some of these banks do not charge any fee for maintaining a checking account and customers can use their infrastructure to transact for free as long as they have some other type of relationship with the bank.

  • Higher Interest: The cost savings that occur as a result of the lower operating costs do not only result in lower fees. They also result in these banks offering higher interest rates to their customers. Internet only banks are known to provide higher interest irrespective of the type of savings product that is being chosen. This is the reason why many customers prefer to park their funds with these banks even though they seem like amateur novice banks who are competing against banks that have hundreds of years of legacy.

  • Services: Lastly, the services offered by the internet only banks are extremely high quality in some respects. For instance, these banks tie up with personal finance software makers and allow your spending data to be transferred to the personal finance app for analysis. The app then suggests budgeting tips and forecasts your finances for you. They may also allow you to create alerts that would help avoiding late fee charges.

Disadvantages of Internet Only Banks

  • ATM Charges: Internet only banks do not have a physical infrastructure of their own. Instead, they borrow the infrastructure that other brick and mortar banks have already created. Therefore, in a way they cannot exist independent of brick and mortar banks but rather compliment them. Since internet only banks do not have any ATM of their own, every time their customers need to deposit or withdraw cash, they are charged a fee. This partially offsets the benefits of lower fees derived from internet only banks if the customer is a frequent ATM user. Customers usually find internet only banks useful only if they have no necessity to use the ATM’s frequently.

  • Non Electronic Banking: Banking as a business has relied on personal touch. There is very little in terms of services or interest rates that segregate one bank from the other. Banks usually develop a deep relationship with their client. They do so by providing services which are not offered to regular clients. Also, complicated banking transactions cannot be completely undertaken online. Therefore, a certain amount of human touch is required as well as preferable. This is where online banks miss out. In theory they seem to provide a good value proposition. However, in reality, they cannot compete against brick and mortar banks even though they offer lower fees and higher interest rates. This is the reason why internet only banks are still only a niche in the vast banking industry.

  • Security: There are significant advantages to having your information stored online. However, there are also significant disadvantages. It is not uncommon for hackers to forcibly access bank details of other people. Internet only banks have a large amount of data online and are susceptible to such attacks.

    Security analysts have always been one step behind hackers. New and more complex techniques are routinely being developed to hack into other people’s bank accounts. As such, internet only banks do face a larger security threat.

  • Trust: Internet only banks are invisible to the naked eye. Only people who are tech savvy understand the concept. However, money is a very emotional subject and it is more about feeling than about thinking. Not many people feel comfortable keeping their money with a bank that has no presence in the real world. Such banks can easily shut shop in a matter of hours and disappear with their money.

    People prefer to give money to people that they trust, people they can visit when required and be assured that their money is safe. Since internet only banks cannot provide this facility, they are lagging behind brick and mortar banks at this stage.


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