Some banks have eliminated physical branches in favor of computers and mobile devices. Is such an option good for businesses?
- Though online-only banks can be traced back to 1989, the services we know today started in 1995.
- Online-only banks offer convenience, giving business owners the ability to access a bank account on a mobile device or computer. They also charge zero to low fees and have strong security measures.
- While online banks can be great solution for many small businesses, cash-heavy ventures may want to stick to traditional banks for the time being.
When it comes to banking, there are certain images and concepts that immediately come to mind. Account fees, long lines, filling out deposit or withdrawal forms, and having to drive to a physical location to access your hard-earned money. Such was the state of banking for generations, but recent years have ushered in a new kind of banking that leverages the internet, computers and the smartphones that have taken up residence in nearly everyone's pockets – online banking.
Not to be confused with the online versions that most legacy banks offer, online banks or digital-only banks eschew the traditional bank location for a financial institution that exists solely on the internet. Spurred on by the popularity of banking outfits like Simple, Ally and Chime, digital-only banking has branched out from individual checking accounts into other products like investments, savings accounts and loans.
Digital-only banking has grown so much in the last decade that the business world has also begun to adopt the technology. There are some things to consider as a small business owner before deciding whether now is the right time to open a business checking account that you can access 24 hours a day on your phone.
What is business online banking?
Online business banking offers many of the same services as traditional business banking, such as a business checking account, but the banks' operations are entirely online. You apply for an account on the banks' website and, once your account is approved, access it via web browser or mobile app.
What features does online banking provide?
The concept of online banking in nothing new. For years now, most traditional banks have offered an online component for users to easily access their account balances, transfer funds between accounts, accept direct deposit and pay bills online. But these features usually came with the expectation that you would step into a physical branch at some point. Regardless of the online functionality, the physical bank locations were still the top of a user's interaction with the bank, and bank officials usually saw those interactions as a time to upsell customers on items like additional lines of credit.
Digital-only banking doesn't come with that expectation. Since there are no physical branches, transactions can be conducted at the speed of the internet. Without the overhead of owning and operating a physical branch, online-only banking customers often don't have to deal with additional fees. In fact, many online-only banks have eliminated banking fees, including overdraft fees, monthly maintenance fees and transaction fees in some cases. Online business checking accounts are regularly provided with a business debit card without any hint of a monthly fee.
"There's a different value proposition when you're talking about the differences between someone who wants to interact face to face with a banker and needs explanations ... but I think that today the nature of small business is changing so much and entrepreneurs are younger and more tech savvy," said Bryan Crumpler, chief operating officer at online banking platform Azlo. "The education and rise of other digital platforms have made it a lot easier to describe to folks what banking really is, and because we are 100% free, there's really nothing to hide or have to explain."
Without needing to pass on a branch's costs to its customers, online-only banks' savings accounts also have higher interest rates. The highest rates in online-only banks reach 2% annual percentage yield (APY), which completely overshadows the national average APY of 0.10%. As for checking accounts, most online banks don't require a minimum balance to start one, though they usually require some sort of initial deposit.
Along with the convenience of online-only banking, most companies have deals with existing ATM networks, so physical cash is still easy to obtain. For example, Simple customers have access to approximately 40,000 free ATMs in the Allpoint network.
How safe is online-only banking?
One of the long-held notions about traditional banking is that it's one of the safest ways to manage your business and its payments. Banks immediately conjure up images of massive vaults of cash behind impregnable steel doors requiring multiple passcodes and combinations to gain entry. However, that's not really the case. Most regular banks only have enough cash on hand to supplement their daily operations. Most of the money goes to either a larger city bank or a federal reserve depository. Cash deposited to a physical bank is insured by the Federal Deposit Insurance Corporation (FDIC).
Online-only banks deal in digital transactions, so along with being insured by the FDIC in most cases, they have some of the toughest digital countermeasures available. When searching for a potential online bank, be sure to look for a company that utilizes encryption protocols and fraud monitoring.
"The type of security that's in place for an online-only bank is really the same for any other bank in which you can facilitate your transactions online," Crumpler said. "Other than cash deposits or cash withdrawals, most people are sending payments via ACH or some other wire transfer system, so for me, it's the exact same."
How does online-only banking work for entrepreneurs and SMB owners?
Within the last decade, online banking has become more accessible to entrepreneurs and small business owners looking to take their brands online. Online business banking can easily trace its steps back to the advent of eBay, which helped usher in the concept of the average person selling goods on the internet.
In recent years, companies like Square, Clover and PayPal have made it easier for online businesses to move their operations into the real world, especially with point-of-sale systems that can be used anywhere. Whether you do business solely online or in the public space, those companies can further digitize business transactions.
For Michelle Marcella-Morales, owner of Raw Opal, her personal use of digital-only banking combined with her need for something like the Square POS system has led her to take her business finances entirely online.
"I was already banking 100% online personally and had every confidence that I could easily handle all of my business finances in the same manner," she said. "I handle my business online, locally and in a remote-physical way as well. Square allows me to track all of my online sales and local business while also keeping it easy for me to handle private sales when I am at an event."
As a Square banking user, Marcella-Morales says her transactions are all quick to complete, and with the company's online features, she can easily track revenues and expenses, which is imperative during tax season.
That sort of easy trackability is by design, Crumpler said, since "banking has become so commoditized that everybody kind of gets it. For the businesses that are looking to segregate their finances between their consumer lives and small business lives for tax or bookkeeping purposes, we offer a seamless experience that's usually quick to get done. I don't think the high-touch, intensive explanation of retail banking is necessary anymore."
If your company deals in massive physical transactions or needs to deposit large amounts of cash, however, Crumpler admits that "you might be better off with a retail branch."
The downsides of online-only banking
While the simplification and easy use of an online-only bank can be alluring to an entrepreneur, those features tend to come with some major caveats that may not exist for your average personal banking user.
Perhaps the most obvious downside to online-only banking is the inability to speak with someone face to face. While that may be a positive thing for some, many business owners seek guidance from financial professionals at traditional banks. Speaking to the right expert can guide your business in a way that makes growth – and success – more attainable.
As a business owner, you also will likely need more from your bank than just a checking or savings account. There may come a time when you need a loan or line of credit to pay for more stock or some sort of upgrade. Unlike retail banks, which can handle that need easily if you meet their prerequisites, online-only banks don't usually offer loans.
"[Square's] business line of credit is [offered] with a responsible amount of interest, and they make short-term repayment a breeze [by] giving many options," Marcella-Morales said. "I could opt to take a business loan to bolster my on-hand inventory and then either pay it off in small sums, large payments or a mixture of either paired with 5% off every transaction. It makes paying a loan back quick and seamless."
As Crumpler mentioned, another major hurdle for online-only business banking crops up when a business deals in cash. While it's easy to deposit checks, and some online banks have processes in place to help deposit cash, it's rarely as simple as taking that cash to a physical bank. While small cash transactions may be doable, it's exponentially harder for an online-only bank to deal with high-volume cash deposits.
"I have to get slightly crafty with depositing large sums of cash," Marcella-Morales said. "If I do an event where many folks pay in cash, I do find that to be a bit of an annoyance. Most of the time folks pay with a card, but in the rare times I get cash, it can be a hassle."
Your business's future bank could be online
Whether you're a small business just starting out or a midsize operation looking to streamline your banking processes, online business banking could be a major boon to help with your success. With some careful consideration on your end, weighing your wants and needs, you can decide for yourself whether an online bank is right for you.