Online banks offer higher savings rates. What to consider before changing

This story is part 12 days of advicehelping you get the most out of your tech, your home and your health this holiday season.

All the Federal Reserve interest rate hikes in 2022 resulted in a significant increase in rates on deposit accounts like savings, CD and money market accountsbut especially with online banks.

While some digital-only financial services offer rates of 4% and above on high yield savings accounts, brick-and-mortar banks like Wells Fargo and Bank of America still offer insignificant yields of 0.01% to 0.25%. For cautious investors who like to receive a modest but steady return on savings, it’s hard to ignore those high rates from online-only banks, which can also offer innovative features like early access to your paycheck and very little or no charges.

If you can’t remember the last time you set foot in your bank, it might be financially beneficial to switch to an online bank with no fees and better interest rates. But before you take the plunge, think about these five questions first.

1. Switch to a real bank?

While many neobanks offer savings and checking accounts, debit cards and other standard banking features, they are not always nationally chartered banks – with the exception of Varo – with all the appropriate licenses. . Instead, they are “fintech companies” that offer a more limited range of banking-like services.

This is a potential red flag since neobanks are not regulated in the same way as licensed banks. For consumers, it is particularly important to know whether there is a real bank or banking partner that supports the neobank. At a minimum, you want to make sure it’s covered by the Federal Deposit Insurance Corporation, which means the federal government will insure your individual account for up to $250,000 in the event the neobank fails. You can usually find the mention “We are not a bank”, as well as one of the neobank’s legal banking partners on the “About us” pages.

2. What will you do in the event of a digital glitch?

Chime made headlines earlier this year due to its relatively high rate of customer complaints. Researchers found that Chime had experienced outages in the past that would have left customers financially stranded, according to a ProPublica report in July. It has also received 920 complaints filed with the Consumer Protection Bureau since April 2020, all related to “closed accounts”. At the time, Chime had approximately 12 million customers.

In contrast, Wells Fargo, which has had its share of scandalsreceived only one-third the number of complaints about similar “closed account” issues, but six times as many customers.

No matter where we park our money, we have to be prepared for things to go wrong. This makes it all the more important that your financial institution has 24-hour customer service and, ideally, workarounds to help you access your money when you need it. You can find a neobank associated with a specific ATM network. But in general, neobanks are not always as equipped as traditional banks to respond to these issues. If my bank’s app is down, for example, and I need to transfer money, I can always go to any ATM or send a check.

It can be helpful to create your own backup plan, such as storing emergency money in another bank account in case of unexpected disruptions.

“If moving to a non-brick-and-mortar business makes you anxious, only move some of your money if you want to check it out,” says Erin Lowry, author of The Broke Millennial.

3. How will you contact customer support in the event of a problem?

Although neobanks do not have branches, they may have customer support powered by real people. This is an important characteristic and to be favored in your search for a well-suited neobank. In the event of a technical problem or breakdown, you want to know that you can get help as soon as possible. Before signing up, take customer service for a test drive, to make sure help with a live person is easy to access, Lowry says.

4. Does online banking offer all the financial services you need?

Does a neobank offer loans, credit cards, investment accounts, and other services? It’s important to think about your long-term financial goals and how this digital-only financial account may or may not support you on your journey.

A more established bank with a robust digital branch can serve you better in the long run, especially if it offers a more comprehensive range of products and services like mortgages and retirement accounts.

5. Should I choose between a traditional bank and an online bank?

I’m particularly happy with my bank’s digital experience, which for years has allowed me to deposit checks through the mobile app and send money seamlessly and securely to others. These are features that my bank was among the first to deliver, almost 10 years ago, so it’s had time to iron out some bugs and wonky user experience issues.

And while I know many may not have visited a bank branch since pre-pandemic times, my bank’s local presence brings me comfort. I walked in to get a certified check for a car purchase at the time. And I felt better about depositing a big check in person last year after we sold our apartment.

If you’re torn between a bank you like and interest rates you’d like to have, that’s not a decision to make. You can keep the same primary bank account and divert your savings to a high-yield digital bank account. This way you still have access to the convenient features of your main bank, while maintaining a separate savings account that earns you more money.

I see no clear and present danger in opening an account with a neobank – as long as your money is FDIC insured and you are aware of its limitations. If it offers live customer support, even better. But having a backup bank with an ATM and a local branch, a bank where you keep your savings on rainy days, might not be a bad way to further guarantee liquidity and access to cash in case technological disruptions.

The reality is that many of us, if we are not already, will become polybankers. We will have accounts spread across various financial institutions because the likelihood of one bank (or neobank) optimally meeting all of our banking needs is unlikely.

My mortgage is with a different bank where I found the best interest rate. I also have several credit cards from different issuers. So, just like with retirement, it often pays to take a diversified approach to banking to get the best returns.