Online bank
A bank that operates mainly or entirely through websites and apps instead of physical branches, often paying higher rates with fewer fees.
What it means
Online banks offer checking, savings, CDs and sometimes loans without a branch network. Because they skip the cost of buildings and tellers, many pass the savings along through higher yields on savings and lower or no monthly fees. Ownership is usually the same as a commercial bank, with shareholders, though a few credit unions also operate mostly online.
An online bank with its own charter is FDIC-insured on the same terms as any bank. Some finance apps are not banks at all and instead hold customer money at partner banks; in that case, deposit insurance generally applies only if the app’s records and the partner bank’s setup meet FDIC requirements, so it is worth checking which bank actually holds the funds.
Example
Suppose one savings account pays 4% APY and another pays 0.5% APY. On a $10,000 balance kept for a year, the first earns about $400 and the second about $50, a difference of $350.
How it’s used
- Earning more on an emergency fund
- Avoiding monthly maintenance fees
- Managing money entirely from a phone
Strengths and weaknesses
Strengths
- Often higher savings yields than traditional banks
- Low or no monthly fees and minimums
- Convenient digital tools and 24/7 access
Weaknesses
- No branches for in-person help
- Depositing cash can be awkward or impossible
- Some apps are not banks, so insurance depends on a partner bank
Good to know
- Look up whether the provider is itself an FDIC-insured bank or works through a partner bank.
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.