Online Banking

- Banks and personal finance

Online Banking

When was the last time you walked into a branch office of your bank? The low interest and high fees on your account are partially due to the bank's need to pay rent on that building and keep tellers behind those windows. If you're not using those services, why are you paying for them? You should consider opening an account online. Online banking is growing in popularity, as it offers another level of convenience for managing your finances.

There are three ways to access an online banking account (in order of increasing popularity): through a personal finance software package like Intuit's Quicken or Microsoft Money, through the bank's proprietary software, or through the bank's internet web site. If you already use Quicken or Microsoft Money, you'll probably want to bank through this software, but if not, you'll probably be better off using a bank's web site.

Online banks can be divided into two types: traditional banks which also offer online banking, and online-only banks. Below, we consider the pros and cons of each. Here are some of the advantages of online banking through traditional banks:

Most plans allow customers to perform all routine transactions, such as account transfers, balance inquiries, bill payments, and stop-payment requests... everything but withdrawing cash (at least for now). Some even let you apply for a loan or a credit card online.

It's very easy to set up an account. With most plans, you can do this totally online, avoiding all paperwork.

You can access your account information anytime, day or night, and you can do it from anywhere. A few online banks update information in real-time, while others do it daily.

Once information has been entered, it doesn't need to be re-entered for similar subsequent checks, and you can even schedule future payments to occur automatically.

Many banks allow for file transfer between their program and popular accounting software packages, making record-keeping a breeze.

The fees tend to be about the same as with a typical checking account, but it works out to be cheaper since you don't have to pay for the stamps. As online banking continues to gain in popularity, the fees should diminish , since the banks will be able to pass to their customers the money they'd otherwise be spending on real estate and tellers. For online-only banks, all of the advantages above still apply, and in addition...

The costs can be even lower for online-only banks than for online banking with traditional banks. Here are some of the disadvantages of online banking through traditional banks:

It does take some time to set up and get used to (although all in all it's quite easy).

Some banks only offer online banking in a limited area.

When you pay online, you may have to put in a check request as much as two weeks before your payment is due. However, the bank may withdraw the money from your account the day that request is received, meaning you've lost up to two weeks of interest on that payment. (Be sure to ask about precisely when the money is withdrawn from your account.) For online-only banks, all of the disadvantages above still apply, and in addition...

Online-only banks don't have branches (by definition), so there's no teller to help you if you have questions (although nearly all do offer phone support), and you have to mail in your deposits (other than direct deposits).

Traditional banks tend to have more extensive ATM networks than online-only banks.

Some services that traditional banks offer are difficult or impossible for online-only banks to offer, such as traveler's checks and cashier's checks. But is online banking safe? In a word, yes. Although no online system is completely safe, banks have a vested interest in making their customers feel comfortable about online banking, and employ firewalls, high-end data encryption, and other measures to maintain a high level of security. In fact, the least secure step in the process is usually the account holders' password and PIN number, if they don't take the necessary steps to keep them secret. Any bank you're considering should have detailed information on its site explaining the steps they take to keep your account secure. Regardless, the government's Regulation E states that if you notify your bank within 2 business days after discovering any fraudulent activity on your account, your liability is limited to $50.

So who is online banking appropriate for? Those who are already online, who pay more than 10 bills per month to pay, and/or who already use a personal finance software program like Intuit's Quicken or Microsoft Money will benefit the most from online banking.

If you've decided to go the online banking route and you're ready to choose an online bank, be sure to perform the same type of evaluation that we recommend in our choosing a bank section ( Choosing a Bank).

Online Bill Paying Although we discussed online bill paying briefly above, the topic is important enough to warrant some additional discussion. There are numerous benefits to paying bills online:

You save money on checks and postage.

You save time, since regular monthly payments are a breeze once they've been entered.

You can schedule payments in advance.

Electronic payments can be processed in as little as 1 day, vs. the 5-10 days it takes for your paper check to make it through the mail and be posted to your account.

Record keeping is easier. If you use a personal finance software package like Intuit's Quicken or Microsoft Money, it's easy to integrate all of your financial activities. There are three levels of service: online bill paying, online bill presentment, and full-service online bill presentment.

Online bill paying: You'll still receive your bills by postal mail, but you'll pay all or some of them by logging into your online account. Your bank will either transfer the funds electronically or will mail a check on your behalf. Many online bank accounts enable you to do this.

Online bill presentment: In addition to paying your bills online, you'll also receive some or all of them online rather than by postal mail. If the recipient doesn't accept electronic payments, the service will send a paper check. CheckFree, Quicken, Yahoo, Bills.com, and Citibank offer such services.

Full-service online bill presentment: Under this type of service, you change your billing address to a company that receives your bills in the mail, scans them and posts images of them on its Web site. You then pay those bills online. If the recipient doesn't accept electronic payments, the service will send a paper check. Paytrust.com and StatusFactory offer this service. This is especially useful for frequent travelers. Choose a financially solid company, so you don't have to deal with the hassle of switching your billing address for all your bills if the company goes bankrupt.

Account Aggregation Most people have complex financial situations. They bank, pay bills, borrow, buy insurance, save, and invest. Each account has its own ID number, login password or PIN. It can be difficult to manage all these activities in a cohesive way. A new generation of online services are trying to offer solutions to handle this complexity. Such services are called "account aggregators", and they make it easier to manage a large number of financial accounts from a central location. Web portals offer such services, as well as smaller providers such as Yodlee and Corillian. While some individuals are concerned about security and privacy issues, these providers understand the importance of this and work hard to make their systems as safe as possible.