What Is Online Banking? Definition and How It Works

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1 Apr 2024

John Egan is an experienced personal finance journalist who has written extensively on mortgages and home equity, insurance, credit and credit monitoring, banking, and other personal finance topics. His work has been published by Bankrate, Forbes Advisor, U.S. News & World Report, The Balance and many others. He earned a bachelor's degree in journalism from the University of Kansas and a masters degree in marketing from Southern New Hampshire University.
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Updated March 03, 2024
Reviewed by SOMER ANDERSON
Fact checked by SUZANNE KVILHAUG
Investopedia / Daniel Fishel

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What Is Online Banking?

Online banking allows you to conduct financial transactions through the Internet. Online banking offers customers almost every service traditionally available through a local branch including deposits, transfers, and online bill payments.
Virtually every banking institution has some form of online banking you can access through a computer or app. Online banking is also known as internet banking or web banking.

KEY TAKEAWAYS

Online banking allows you to conduct financial transactions through a computer or smart phone using the internet.
With online banking, you don’t need to visit a branch to complete many transactions.
To take advantage of online banking, you’ll need an electronic device, an internet connection, and perhaps your debit card or account numbers.

How Online Banking Works

Online banking is a popular way of doing business with a bank. With online banking, you aren't required to visit a bank branch to complete most of your basic banking transactions. You can do all of this at your own convenience, wherever you want—at home, at work, or on the go. Online banking can be done using a browser or app. Mobile banking is online banking that is done on a phone or tablet.
Here are some of common ways you can use online banking.

Bank anytime

With online banking, you don’t need to visit a physical bank branch but you can do it wherever you want—at home, work, or on the go. In addition, you can typically do online banking 24/7. However, customer support might not be available at all hours.

Access accounts with browsers and apps

You can do online banking through a financial institution’s web portal using a web browser (such as Chrome or Safari) through a mobile app. This allows you to access services from many locations.1

Deposit Checks

You can usually deposit a check through a mobile app using a process known as remote deposit capture. Enter the check amount, then use the app to take a photo of the front and back of the check to complete the deposit.

Manage Finances

Many banks and credit unions offer tools to help you review and balance your budget built into apps or the website. You may also be able to track spending trends, or track savings toward a goal.

Perform Other Financial Services

Online banking transactions vary from one financial institution to another. Most banks generally provide essential services such as electronic transfers and bill payments. Some banks even let you set up new checking or CD accounts or apply for credit cards through web portals. Other online functions include ordering checks, stopping payments on checks, or reporting a change of address.
Online banking may provide fewer services than traditional banking does. For instance, you can’t exchange foreign currency.

Note

You may be unable to complete a credit application online, such as a mortgage application. Instead, some banking business must be carried out at a bank or credit union branch.

Online Banks

Online banks operate exclusively online, meaning they don’t operate branches where you can conduct business in person. The best online banks offer low-cost or free banking, plus above-average interest rates on savings accounts, certificates of deposit (CDs), and money market accounts.
These banks handle customer service by phone, email, or online chat rather than in person. Prominent online banks in the U.S. include Ally Bank, Discover Bank, and Synchrony Bank.
Online-only banks might not provide direct automatic teller machine (ATM) access but usually enable customers to use ATMs at other banks and retail stores. They might even reimburse some or all of the ATM fees other financial institutions charge. The savings gained by not maintaining physical branches typically allows online banks to deliver significant savings on banking fees.
While you can deposit or take out a certain amount of cash at an ATM or store, most online banks impose a dollar limit.

Note

As of October 2023, just 6% of U.S. adults with bank accounts reported their primary bank was an online bank.2

Pros and Cons of Online Banking

Pros

Convenient
Fast and efficient
Easy to monitor accounts

Cons

Customer service challenges
Tech and connectivity required
Hacking risk

Pros explained:

Convenience: Basic banking transactions can be done at any time of day or night, seven days a week. If your bank offers a payment network such as Zelle, you can use your online bank account to send money to a person or business. You can also open and close various accounts online, such as checking and savings accounts.
Fast and efficient: Funds can be transferred between accounts almost instantly, especially if the two accounts are held at the same institution. Plus, mobile check deposits can be made in just a few minutes.
Ease of monitoring accounts: You can closely monitor your accounts to spot suspicious activity. Around-the-clock access to banking information provides early fraud detection, serving as a guardrail against financial losses.

Cons of Online Banking

Customer service challenges: Sometimes, you might need to visit a branch to handle certain transactions, such as buying a cashier’s check. In other cases, you might not even have access to a branch. Furthermore, you may prefer depositing checks, withdrawing money or discussing your financial needs face-to-face.
Tech and connectivity required: Some customers may need to be more comfortable with the tech-heavy aspects of online banking. For example, they may need help with some online tasks, such as setting up automatic payments. In addition, online banking depends on a reliable internet connection. Connectivity issues make it difficult to process transactions when you want to.
Hacking risk: Although security continually improves, online accounts remain vulnerable. Customers should use their wireless plans rather than public WiFi networks when logging into an online bank account. This can help prevent unauthorized account access.

What Do You Need for Online Banking?

To take advantage of online banking you’ll need an internet connection and an electronic device like a computer or mobile phone. After setting up your account, you’ll keep handy a debit or other bank card, and access to your account numbers.
Setting up your online banking account can also be reasonably straightforward. But you’ll need a few things to set up an online checking account or savings account, just like a brick-and-mortar bank account. The bank will spell out exactly what you need on its website, but it typically requires:

Your name, date of birth, address, and other information
Social Security number
Government-issued ID with a photo, such as a driver’s license or passport
A way to fund your account

How Can You Safely Use Online Banking?

To shield your money and your personal information from cyber crooks, you should take these safety precautions:1

Set a strong, unique password, and change it regularly. The federal Cybersecurity & Infrastructure Security Agency recommends a password with at least 16 characters. The password should contain a random string of uppercase letters, lowercase letters, numbers, and symbols.3
Rely on a password manager to help discreetly set and remember passwords.
Enable two-factor authentication or multi-factor authentication if it’s available. This involves using at least two forms of identification, such as a password and a fingerprint, to access an online account.
Never provide your online banking details to other people.
Avoid online banking when using public WiFi, such as at a coffee shop or restaurant.
Check your accounts regularly for suspicious activity and report suspected fraud immediately.

Can You Use Online Banking to Pay Bills?

You can use online banking to pay bills by logging into your online banking account to arrange bill payments electronically or by check. Online bill pay is a simple way to take care of your bills and help ensure you're always on time with payment by setting up automatic payments. It works especially well for bills with regular, set amounts, such as a mortgage payment, insurance premium, or car payment.

What Is the Best Online Bank?

The best online bank for you will depend on your banking service needs and priorities. Investopedia's choice for best online bank overall is Ally bank. Our top choice for savings is Synchrony Bank and our top choice for checking is Discover.

The Bottom Line

Online banking is a fast, inexpensive, and convenient way to handle many of your everyday financial needs. You can probably access online banking if you already do business with a bank or credit union. All you need to do is sign up for online banking services. And while you can use online banking features from a traditional bank, picking an online-only bank for your banking needs might boost the interest you earn on savings and help reduce fees.
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