All you need to know about online bank accounts

• How do online bank accounts work?
• Why should I consider an online bank?
• Are online banks safe?
• What if my online bank provider goes bust?
• Do online banks offer better rates?
• What are the disadvantages of online banks?
• How do I choose an online-only bank account that's right for me?

Over the last few years, online bank accounts have exploded in popularity. This has been driven largely by the convenience of managing your finances from anywhere in the world, at any time, and without even getting out of your pyjamas.

You may know them as mobile banks or digital banks. Other people call them challenger banks. Whatever the differences in naming, we can all agree this online revolution in personal bank accounts isn’t just a flash in the pan. It’s here to stay, and that’s exactly why we’ve compiled this handy guide to help you understand it…

How do online bank accounts work?

Online banks work very similarly to traditional banks, except all banking facilities are provided online. As you would expect with larger traditional banks, online banks must still comply with all UK banking rules and regulations. The big difference is that online-only banks do not have a high street presence and work solely through app platforms on phones and tablets.

That’s not to say traditional banking features are thrown out the window. Customers can still, for example, use bank cards and access the ATM network to withdraw cash (although check for associated fees). You’ll have a sort code and account number so you can still spend and request payments as normal. You can receive your salary in an online account, set up direct debits or standing orders, and potentially have an overdraft facility as well.

There’s reliable customer service too – just not as you know it. Instead of face-to-face contact in a branch, you’ll likely be resorting to in-app chat instead.

Why should I consider an online bank?

Many online banks offer better interest rates on savings and charge lower or no fees for some of their services. Another potential online bank account benefit is the application process. There is no need to present yourself with an ID at a bank branch; that can all be done online via a banking app.

When it comes to embracing technology, digital banks tend to be ahead of larger, more established banks - a factor that can encourage switching to challenger banks. The bank app's features include real-time spending notifications direct to your phone, encouraging conscious spending and giving you a better idea of where your cash goes. There are also budgeting benefits, for example in the opportunity to create specific savings pots or set spending limits on certain purchases.

If you travel frequently, good rates on foreign exchange and free international currency withdrawal might catch your eye. Meanwhile, the ability to freeze and unfreeze your cards or instantly change your PIN could be music to the ears of anyone who’s been placed on hold for a lengthy amount of time waiting for someone in customer services to do these tasks for them in the past.

And then there are the things you never knew you needed until you had them. A case in point: bill splitting. If your mental arithmetic isn’t the sharpest after a boozy meal out, or you’re just fed up of friends forgetting to pay you back, many online-only accounts will let you cover the whole cost of a dinner or taxi ride, and then request money from the other people you shared with (either an even split or an edited amount). What’s more, you’ll be notified as soon as they’ve paid you back.

Of course, not all providers offer the same perks, so check carefully before applying for an online bank account. And bear in mind, too that ‘traditional’ banks are increasingly catching up with their digital counterparts, with new online services added all the time. However, there are still benefits over high street banking groups if you do your homework first, and you’re likely to remain at the vanguard of future banking innovations.

Are online banks safe?

Digital accounts actually boast surprisingly rigorous safety procedures, including at sign-up. Additionally, most bank apps have sophisticated in-app authentication, including facial recognition and fingerprint scanning. Others, like Monzo, use magic links instead.

They’re links that are sent to your email inbox that let you log into the app in one click. Not only does it make logging in quicker, it’s also safer because there’s no risk of having a traditional password stolen. For extra protection, once you’ve opened the Monzo app, customers are asked to input a PIN whenever they want to move money.

Having real-time payment notifications also ramps up the online security of digital banking. By receiving an alert every time there is some activity on your account, you’re not only keeping track of your spending, but can also immediately spot if someone else is using your account fraudulently. 

Unfortunately, with so many types of online scams and phone hacking methods, it's good to be cautious and not just assume you're covered. It's a real problem; according to UK Finance, in 2022, more than £1.2 billion was stolen through fraud, with 78% of the cases starting online. If your phone is lost or stolen with a banking app installed, it's important to act quickly:

1. Contact your mobile phone provider immediately
2. Contact your bank
3. Cancel any cards linked to Apple Pay or Google Pay
4. Change important passwords on apps
5. Report the theft to the Police

What if my online bank provider goes bust?

Start-ups and new financial services companies can be at a greater risk of failing than the established, bigger banks we’re familiar with from the high street. Before opening a bank account, make sure:

• The account provider is authorised and regulated by the Financial Conduct Authority (FCA)  and the Prudential Regulation Authority (PRA).
• The account is covered by the Financial Services Compensation Scheme (FSCS). This scheme protects customers of financial services firms (including banks, credit unions and building societies) that have failed and covers up to £85,000 (or up to £170,000 for joint accounts).

Do online banks offer better rates?

Generally, yes. It makes sense that where banks don’t have to spend massively on infrastructure and other overheads, as in the case of online-only providers, they can pass on savings to customers. Additionally, many new banks may offer better rates to attract more customers and get a foothold in the market.

You can often expect higher interest rates on savings, too. For example, Chase Bank offers a 4.1 AER variable rate to current account holders, and Starling Bank offers an interest rate of 3.25% AER variable for personal and joint current account balances up to £5,000.

What are the disadvantages of online banks?

You may not get the additional range of services such as mortgages, credit cards and loans you’re used to. For example, Monzo Bank does not currently offer mortgages. That’s not to say they won’t be added in future, but typically an online only bank will focus on just a handful of financial products.

Perhaps it's a thing of the past, but another disadvantage is you won't have a personal relationship as would with your local branch manager or clerk. Online-only banks do not have face-to-face customer service. And without branches, doing things like depositing a cheque may be a challenge.

Finally, and rather obviously, mobile banking depends on customers having internet access in the first place to manage their money. Whether that’s Wi-Fi or mobile data, bear in mind that things can go wrong, and you may find yourself in temporary difficulty if a network goes down.

How do I choose an online-only bank account that’s right for me?

You can compare online bank accounts on MustCompare, using the filters to personalise your results. When comparing, check what the bank account offers and if it suits your needs. Also, as we mentioned earlier, be aware that not all online-only accounts are protected by the Financial Services Compensation Scheme, which means that if they collapse, you could lose your money.

You can also compare business bank accounts on MustCompare.

Concluding

Deciding whether a bank account is right for you will often depend on your current situation, needs and plans. For example, if you have just turned 16 and you want some financial independence early on, there are bank accounts for 16-year-olds you can look at. Once you're 18, some can be turned into regular current accounts. Or you may be looking for a bank with a branch nearby where you can have face-to-face contact - although many banks are closing local branches these days.

Similarly, if you prefer the digital landscape, don't think you're necessarily losing out by sticking with brick-and-mortar banks. In recent years, big UK banks have made a real effort to bring their apps up to scratch, so user experience is often comparable. Perhaps more importantly, the bank fees and interest rates on savings may be more competitive with the newer banks.

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