How Online Banks Work

Online Banking Services and Features

Online banks offer many of the same services provided by traditional banks -- and sometimes a few more.

One of the first questions that consumers have about online-only banks is how to deposit a physical check. The preferred method for most online banks is to scan the check on both sides and upload the check image to the bank's Web site. Some online banks even let you snap a pic of your check with a smartphone app and make a deposit on the go. Depending on your online bank, the funds will be available in your account the same day or the next business day. If you don't have a scanner or a fancy smartphone, most online banks also provide customers with free pre-paid envelopes to mail in checks for deposit.

Online banks also offer direct deposit and free incoming wire transfers to make deposits electronically.

Checking accounts and savings accounts are standard at online banks. Even better, most offer free checking with no minimum balance. A number of online banks offer interest-bearing checking accounts, something that isn't standard at brick-and-mortar banks or is reserved for customers with high balances. As of November 2011, the best interest rate for a traditional checking account is 0.10 percent with a $500 minimum balance, while rates on some online checking accounts are as high as 0.85 percent with a $1 minimum balance [source: Google Advisor]. Debit cards are also standard for online checking accounts.

It's free and easy to transfer money between separate online banking accounts, and free to send money to other customers of the same online bank. Some banks even offer free person-to-person money transfers, even if the recipient isn't an online bank customer. All you need is the person's name, their email address, the bank name and the last four digits of their bank account number [source: ING Direct].

A few online banks offer loans, mortgages and automobile financing. Ally Bank, one of the largest US-based online banks, used to be GMAC, and is still one of the most popular backers of auto loans for US carmakers. Several online banks also offer investment services. The most common are certificates of deposit (CDs), money market accounts, and Roth IRAs and IRA CDs.

Now let's look at a few of the top advantages for choosing an online bank over a brick-and-mortar institution.