What is An Online Savings Account & How Does It Work?

The world is becoming increasingly digital, and banking is no different. Online savings accounts have become popular in recent years with traditional and digital banks alike offering online-only options to customers.

Online savings accounts offer a host of benefits that set them apart from other bank accounts. Because they are free from the overhead costs of brick-and-mortar banks, online accounts can offer higher interest rates than traditional savings accounts. Plus, they are convenient and efficient to manage since they’re entirely online.

Curious to learn more about online savings accounts to see if they’re right for you? We’ve broken down everything you need to know about them below.

What is an Online Savings Account?

An online savings account is, as the name suggests, a savings account that is not affiliated with a brick-and-mortar bank location and is operated entirely online. These accounts are typically associated with online banks, but many traditional banks have established online savings options over the years to keep up with the competition.

Because all your account management happens through a mobile app or online portal, online savings accounts are extraordinarily convenient to own. You don’t have to visit a branch location to deposit funds or make changes to your account. Instead, you can log on with the touch of a button and grow your savings with ease.

The efficiency of online management has more benefits than just saving you trips to the bank. It also is the reason why most online savings accounts are able to offer dramatically higher interest rates than other financial institutions.

For example, according to the FDIC, the national average for interest on savings accounts offered in the US is 0.30 annual percentage yield (APY.) When we compare that to an online savings account like Ally’s, their interest rate sits at a pretty 2.00% APY. This is a no-brainer when it comes to where you can grow your savings.

How Does an Online Savings Account Work?

If you’ve only ever opened or managed a bank account at a branch, you may be wondering how an online savings account even works.

Luckily, online-only banks put a lot of time and effort into making their customer experience as seamless as possible.

Here are the most common ways to get money into your account and start saving.

Depositing Money into Your Account

Because online banks don’t have any physical locations, you won’t be able to stop by a branch to open your account or deposit money. Instead, you will need to transfer money into your account in another way.

Most online banks let you transfer money from an external account, known as Automated Clearing House (ACH), for an initial deposit.

You will need to review the terms of the account to learn about minimum deposit requirements. You can also move money into your account through mobile check depositing, direct deposit from your employer, or a wire transfer.

Withdrawing Money from Your Account

Withdrawing money from your online savings account works much the same way as depositing money into your account.

The only difference is that you have access to a debit/ATM card to allow you to access your account.

Besides check writing and external wire transfers, many online banks allow you to access your online savings account through ATMs.

You will typically receive a debit card that is linked to your account and lets you withdraw money from your account. Keep in mind that all online banks are still beholden to the rule that limits you to six withdrawals per month from your savings account.

Making Cash Deposits or Withdrawals

If you deal with cash a lot, you might find an online savings account to be a difficult experience.

Many online accounts rely on mobile deposits, wire transfers, or direct deposits from employers for funding. In fact, some online banks may not accept cash deposits, period.

But don’t worry. There are a few workarounds you can use to get your cash into your account.

If your online bank allows cash deposits at ATMs, you’ve got it easy. Otherwise, you may have to move the cash into a separate account and transfer the money via ACH.

You can also buy a money order and deposit it into your account like you would with a check. Withdrawing cash would work the same way but in reverse: transfer your money into a separate account and withdraw at an ATM.

Online Savings Account vs Traditional Savings Account

When talking about the difference between online savings accounts and traditional savings accounts, there are three main considerations: annual percentage rates, customer service, and range of products.

1. Annual Percentage Rates

Many people choose online savings accounts over traditional ones for the simple reason that their APRs are much higher.

Because they don’t have any real estate or branch management costs, they are able to pass those savings on to their customers in the form of better interest rates and fewer fees.

The difference in interest rates can be dramatic, with online accounts offering as much as 10 times the national average.

2. Customer Service

From a service perspective, you will need to consider if you are ok with forgoing face-to-face customer service in exchange for higher rates.

Because online banks don’t have any physical branches, there is no opportunity for customers to get help from a teller on their account.

Instead, they will need to go through a customer service line, email submission system, or online chatbot.

3. Range of Products

Finally, those looking for a wide range of products will be better off going the traditional banking route than saving through an online bank.

Online-only banks tend to offer only a handful of accounts, usually different versions of an online savings account.

Traditional banks, on the other hand, offer a wide range of products and services for customers to choose from.

You have the option to open several types of accounts alongside your savings accounts, such as checking accounts and money-market accounts.

Pros and Cons of Online Savings Accounts


Online savings accounts have a lot working in their favor. Here are some reasons why we think opening an online savings account is a great idea.

High-Interest Rates

The top thing to consider when opening a high-yield online savings account is the higher interest rate. A bank will pay you interest (known as annual percentage yield or APY) on your account balance. Online banks are known for paying higher interest rates than traditional banks because they have lower fees and costs associated with their business structure.

Before you open a bank account with an online bank, you will need to shop around for interest rates. Many people think that the higher the number, the better, but compound interest is also a factor to consider. Interest that compounds continuously will earn interest throughout the year, which can mean that you can reach your savings goals even more quickly than with a high APY alone.

Access Your Account from Anywhere

The world of personal finance is moving online because people have less time to visit credit unions and bank branches. One of the benefits of an online savings account is being able to manage your savings from anywhere in the world at any time. With mobile banking, you can check your balance, make mobile deposits, and transfer money between your checking and savings accounts without ever leaving the comfort of your home. This is the reason why many people elect to have an online savings account as their emergency fund.

Fewer Monthly Fees

There’s nothing more frustrating than budgeting monthly fees into the cost of having a savings account. Plus, with bank interest rates as low as they are, these fees can eat up the meager compound interest that your account earns. Luckily, most online savings accounts don’t charge any monthly maintenance fees, ATM fees, or overdraft fees. This means that your money can stay right where it belongs – in your account.


All the points above are excellent reasons to open an online account to reach your financial goals. But online savings accounts are all they’re cracked up to be. Here are some points to consider before opening your account.

No Face-to-Face Interactions

If you enjoy going to your local branch and chatting with tellers, you might struggle with the lack of human interaction of an online bank. Online banks don’t have any physical locations, so you won’t be able to visit your local branch if you have an issue with your account. Instead, you will need to make use of the online resources available to solve your issue. People who are less tech-savvy will struggle with this aspect of online banking.

Limited Service Options

It’s not uncommon for account holders to have all their separate accounts housed under one roof at the same bank. For online banking, this can be difficult as many online banks have limited products and services to offer.

Online banks tend to offer a few products – anywhere from three to five – to their customers whereas traditional banks can offer dozens of products to choose from. If you are interested in your bank being the home for all your checking accounts, savings accounts, credit cards, and more, an online bank may not be the right choice for you.

Few Options for Cash

People who deal with cash in their day-to-day lives may find an online savings account to be frustrating. Online banks save money by skipping the brick-and-mortar locations and dealing with funds online. This means that your options for depositing or withdrawing cash can be limited. Some online banks will allow you to deposit or withdraw from ATMs, but other online banks may not deal with cash at all. If you are someone who consistently has cash on hand, you may prefer a traditional bank to an online one.

Frequently Asked Questions

Is my money safe in an online bank?

Yes, most online banks are member FDIC and have deposit insurance on all accounts. Because they have FDIC insurance on their account, their money will be protected by up to $250,000.

What is the minimum balance for an online savings account?

Minimum balance requirements vary from institution to institution. Some banks will require that you have an initial deposit of a certain amount in order to open or maintain a savings account. Others will not have any such requirement. Check your online bank’s website for more information on opening deposits and minimum balances.

How can online banks offer such high-interest rates?

Because online banks don’t have any in-person bank branches or significant overhead costs, they are able to pass their savings along to you. You will enjoy higher interest rates, lower monthly maintenance fees, and more when you save money with an online bank.

Final Words

Online savings accounts are a great tool to create an emergency fund or reach your savings goals while taking advantage of the best interest rates. If you enjoy managing your money online, you will find this account to be a great fit.

Comments are closed here.