Have you thought about switching banks lately?
If so, you're not alone. A 2012 survey by Javelin Strategy & Research found that 11% of Americans plan to switch banking institutions this year. And online banks are becoming an increasingly popular choice. From 2010 to 2012, deposits at such banks rose 32% to $364 billion--a figure that has quadrupled since 2004.
Many people are fed up with rising and sneaky bank fees. Others no longer trust the large traditional banks, who've been hit with scandal after scandal, including manipulating interest rates and robo-signing mortgages.
In fact, there are alternatives out there that may offer higher interest rates, better apps and even—in the case of at least one new "mobile" bank—the ease of managing nearly all of your financial transactions from your phone.
But are these 21st-century banks really a good option for storing and spending your money? After all, online-only banks hold just 4.2% of all bank deposits. We'll help you explore the risks and benefits of four new cutting-edge alterna-banks, so you can make the best decision of who to trust with your hard-earned cash.
1. Online Bank Accounts
Online banks like Ally, Capital One 360 (formerly ING Direct) and Charles Schwab offer almost all of the same services as their brick-and-mortar counterparts, just without the paperwork. Because they save on overhead by not having physical locations, they can pass on the savings to you in the form of higher interest rates around 1%, when the average savings account interest rate in March of 2012 was just 0.5%. (You can look up and compare current rates here.) If the bank was built from the ground up on the internet, you'll find the online experience intuitive, unlike some traditional banks who layered online banking on top of their other services in an ungainly way. Some new online banks, like Simple, even help you reach your financial goals with budgeting tools similar to LearnVest's Money Center.
The downsides: For those who have always banked in person and are comforted by the in-person interactions, it might be difficult to switch entirely online. National, online banks do not offer the level of personal service that your local credit union might. And even for those who relish the transition, every once in a while you just need a bank branch to complete a transaction, like if you lose your debit/checking card and need to get cash out. In those times, you'll find the week or more wait for a new card painful. Additionally, not all online banks offer home or business loans. While many online banks let you take money out of your checking account anywhere and refund you the ATM fee, not all do, so make sure to look into the ATM fee structure.
Who it's good for: If you rarely visit your bank branch and put a lot of importance on an easy-to-use web interface, compare your current brick-and-mortar bank's rates and services to an online option.
2. Prepaid Cards
Prepaid cards are like credit cards, letting you shop online and swipe for purchases. But instead, you put your cash right onto the card, and you're limited to spending just that amount.
As the field has gotten more crowded, prepaid card providers have lowered their fees and added features to attract customers. A category leader is Green Dot, which is behind Visa and MasterCard prepaid cards, but more well-known financial service providers have started offering prepaid cards. Chase now offers Liquid, and American Express has teamed up with Wal-Mart to offer Bluebird. You can remotely deposit checks to either card by taking a picture with your phone, pay bills online and use in-network ATMs for free. Liquid waives its $4.95 monthly fee if you link it to a Chase checking account, and Bluebird has no fee at all.
The downside: Prepaid cards aren't well regulated yet. The Consumer Financial Protection Bureau plans to review them, but for now you have to be ultra-diligent about double-checking the fine print to make sure you're getting a good deal. When a co-branded MasterCard was released with the Kardashians' name on it a couple years ago, it was quickly denounced by consumer advocates as predatory, and was removed from the market. That was a high-profile example that was noticed because of its celebrity affiliation, but with the loose regulations, there's no guarantee that other, similarly predatory cards aren't out there still. As recently as January 2013, several prepaid cards settled with the Florida Attorney General for deceptive practices.
Keep a look out for a monthly charge, plus fees for withdrawing money from an ATM, making a purchase and loading money onto the bank card. Also look for less common fees, like for calling customer service, checking balances and inactivity, according to Bankrate.
Finally, prepaid cards won't build your credit history—you need a normal credit card to do that.
Who it's good for: If you have trouble staying on budget with a regular credit card, this can keep you from spending what you don't have. You might find it useful as a parent too, for loading up your kid's allowance right on the card. For example, a company called BillMyParents will notify you every time your kid swipes the card. But just like with cards targeted to grownups, watch out for fees for teen-targeted cards too!
3. High-Interest Prepaid Cards
High-interest prepaid cards are tied to a savings account with the same institution, and can pay an interest rate for that savings account of up to 5%, which is five times higher than a typical online bank. It can also function as an alternative to a checking account. Mango, a prepaid card by MasterCard, offers the highest interest rate in the category of 6% for up to $5,000, a waive on the $5 monthly fee with a direct deposit of $500 or more monthly plus a $20 bonus for signing up for direct deposit.
The downside: While the higher interest rate is enticing, it comes with some caveats, as well as fees. For some cards, you must set up a monthly direct deposit to get the high interest rate. And there are fees for usage and just having the account that—depending on how you use the card—can add up to hundreds every year. (NerdWallet lets you search for cards and see a handy breakdown of how much the fees might add up to.) Also, not all of the savings accounts connected to the card are covered by the FDIC in case of failure by the institution, so read the fine print.
Who it's good for: Again, if you have trouble staying on budget, this might be right for you. But read all the fine print of the card you apply to, and consider whether you'll be able to play by the rules and avoid a pile-up of fees. For example, some cards charge a fee for withdrawing cash, so only sign up for that card if you don't plan on frequently withdrawing from the account.
Mobile Bank Account
A mobile bank account differs from other online options in that it's designed to be used entirely on your smartphone. The only offering in this class is new online banking option GoBank, launched in January. (It does still, by the way, have a web presence, so customers are not entirely limited to their phones.)
GoBank has the feel of a modern (yet FDIC-covered) experiment in banking. Right now it lets you set the monthly fee at whatever you think is fair—from $0 to $9—in the hope that you'll appreciate the service enough to opt to pay for it. (This pay-what-you-want model has previously only been used for things like sandwich shops, music downloads and yoga.) Other fees are few and low, including $2.50 for using out-of-network ATMs if you can't find one of the bank's 40,000 in-network ATMs, getting a customized card with an image of your choice and a foreign transaction fee. You don't get a checkbook when you sign up, but GoBank will mail a paper check to anyone you want for free. You can also send money via text message or Facebook.
The downside: If you want to deposit cash into your account, you either have to go to Wal-Mart to swipe your card, or be charged $5 to deposit via a Green Dot MoneyPak (a product specifically used to put more money on your card), which can be purchased at retailers such as Wal-Mart and CVS. Green Dot plans to roll out swipe depositing to more retailers soon. Also, it's in Beta (read: still working out remaining kinks in the user interface) and it's possible that the consumer-friendly fee structure might eventually go away as it establishes a foothold in the market.
Who it's good for: If you feel comfortable using a brand-new banking option and relish the idea of doing all your banking from a mobile device, this could be an option for you. However, given the restrictions on depositing money, if you often have to deposit cash (as opposed to an electronic deposit) and you are not convenient to a Wal-Mart, you might find this more frustrating than easy.