What's All the Fuss About Online-Only Banks?
Online-only banks have been getting a lot of buzz as of late, but have actually been available to Canadians for 20 years.
As the name implies, online-only banks’ operations are digital, meaning that there are no physical branches to step into. Instead, customers access their accounts online or via a dedicated app. There is, however, customer service support available by phone, so you still have the option to speak to someone if assistance is needed.
What makes online banks so appealing is that account holders don’t pay any fees to have an account. Traditional banks can charge up to $30 a month for certain account types, which some find (justifiably) outrageous. With online banks, you get many of the same services at no charge, which ultimately means more money stays in your pocket. And because online banks don’t have high overhead costs to keep branches staffed, they can pass those savings onto consumers in the form of higher interest rates (the good kind) on bank accounts.
Essentially, online banks pay you more to bank with them.
Types of bank accounts offered by online banks in Canada
You could use an online bank exclusively, but most Canadians prefer to use them as a complement to a traditional bank with brick-and-mortar branches. The reason many people choose to use both types of banks is that they can take advantage of higher interest rates with online banks, while simultaneously enjoying counter service and person-to-person interaction with their traditional bank.
Every online bank offers different features, but below are the account types that are generally available.
High interest savings account – When people think of online banks, they usually associate them with a high interest savings account (HISA). These accounts typically offer much higher interest rates compared to savings accounts at traditional banks. HISAs are great if you’re saving for the short term, since you’ll get a decent interest rate without exposing your money to riskier investments.
Chequing account – Online chequing accounts operate in a similar manner to chequing accounts at traditional banks. What makes online-only chequing more appealing is the fact that you get unlimited transactions, there are no monthly fees, no minimum balance requirements, and you get a little bit of interest on your money (though lower than a HISA). You can also make direct deposits into this type of account from your employer.
Hybrid account – EQ Bank currently offers a hybrid of the two above accounts with their Savings Plus Account. They’ve combined the features of a high interest savings account and chequing account so that customers don’t need to have multiple accounts. The only downside is that they currently do not offer a debit card.
The major online banks in Canada
Tangerine – Formerly known as ING Bank, Scotiabank acquired the business a while back and rebranded the bank as Tangerine. Over the years, they’ve started to introduce more products, and now offer guaranteed investment certificates (GIC), investment funds, and a credit card. Many of their products can also be held within your Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA). As a Canadian, this is beneficial since an RRSP and TFSA have various tax advantages. Which one is better suited for you depends on your personal situation, so it’s worthwhile speaking to an expert before you decide.
If you bank with Tangerine, you’re provided with a debit card that can be used to withdraw money for free from Scotiabank’s 3,500 Automated Banking Machines across Canada. You can still use unaffiliated ABMs, but there is a one-time charge to do so.
EQ Bank – As stated above, EQ Bank has a hybrid account, which is the best of both worlds. In addition, EQ Bank consistently has the highest everyday (non-promotional) interest rate—currently 2.3%—so you’re getting the best bang for your buck here. Although not many people may have heard of them, EQ Bank is owned by Equitable Bank, which was founded in 1970, so they have a well-established presence in the Canadian market and are quite stable and trustworthy.
Simplii Financial – Simplii may appear new, but they’re actually the rebranded name from when PC Financial customers were transferred over to CIBC. Simplii offers a no-fee daily banking account which includes unlimited free Interac e-Transfers and a high interest savings account. Since Simplii is owned by CIBC, account holders can use their provided debit card to withdraw money for free from their network of 4,000 automated banking machines across Canada. You can access other ABMs, but one-time fees would apply.
What you don’t get from online banks
No counter service – Since online banks don’t have any physical branches, you won’t be able to walk-in to get assistance from a person face-to-face. If you have a customer service issue, quite often dealing with someone in-person helps resolve your issue quicker.
Safety deposit boxes – Again, due to a lack of physical branches, you won’t be able to get a safety deposit box.
No access to in-person advice – Banks employ various financial experts with different areas of expertise including mortgage brokers and investment advisors. Although some online banks offer mortgages and investments, you won’t be able to speak to someone in person about those products, which can be oddly unsettling when you’re making major decisions about your money.
The safety of online banks in Canada
All of the banks listed are credible financial institutions and are well established in Canada. The odds of them failing are extremely unlikely, but in the event that they do, you’re covered up to $100,000 thanks to the Canada Deposit Insurance Corporation (CDIC).
This insurance applies to eligible deposits in your own name, joint accounts, trust accounts, TFSAs, RRSPs, and more. However, it does not cover your investment products such as stocks, bonds and mutual funds.
As for the safety of your online account, security breaches are rare. Nonetheless you should take steps to protect your information, which includes ensuring your password and PIN are not easy to guess.
Who should use an online-only bank?
Since there are no fees to have an account with online-only banks in Canada, I believe that all Canadians should try them out, at least in combination with a traditional bank.
The higher interest rate offered from an online bank account makes it the perfect place to park your money for the short term. Another byproduct of having low overhead costs is that online banks invest a lot of money in regularly developing new products for their customers.
Despite the fact that online banks seem to be disrupting traditional banks, you won’t see brick-and-mortar locations disappearing anytime soon. Competition from online banks has actually forced the big traditional banks to adapt to customer needs and offer better services. Their branches now serve as showrooms of the products that they offer.
There have never been more banking options available in Canada. So instead of just settling for a banking brand that you’re familiar with, give it some thought/research and figure out if an alternative account type might help you save more money.