Online banks have no brick-and-mortar branches and when you make a deposit, it doesn’t go into a vault – it sits in cyberspace. Many people worry that their money isn’t safe in a web-only bank, but that's not necessarily the case.
When the tech bubble burst, a lot of web banks collapsed. To make matters worst, Netbank – previously the largest web bank – went under last year. But it’s important to remember that many businesses beside banks failed after the tech bubble and Netbank failed because of subprime mortgage woes, the same contagion that took down traditional banks like IndyMac as well.
If you’re bank shopping, the most important factor is not whether the branch is on the corner or on the web, it's that your money is insured through the FDIC – and most online banks are.
There are some real advantages to using online banks. Because it is such a competitive industry, the customer service is typically better than that of the brick-and-mortar banks. And since there’s low overhead, the online banks tend to offer better rates than their traditional counterparts. (Online bank Everbank offers a 4.65 intro APY on the high-yield savings account compared to 1.35 APY at Washington Mutual.) In many cases, you can even link your online account to other investment options. Again, Everbank allows customers to add gold, silver and foreign exchanges to their portfolios. Even E*Trade is getting into checking.
But, of course, online banks aren't for everyone. If you have direct deposit, it might make sense to take advantage of the better rates. But if you’re paid by multiple paper checks every month, the process will almost definitely be slower, so take that into account.