What are Internet Banks?
There are two types of internet banks; standalone and cyberbranch
Standalone banks operate almost exclusively on the internet, with no high street branch as back up. Accounts are opened and transactions are conducted online and non-internet communication with the bank is kept to a minimum. Telephone support is usually provided but if you ask for information which is available via the internet, you are likely to be charged and in some cases, this charge can be quite a lot. Because these banks have dramatically reduced their overheads by operating online, their interest rates are often better than those offered by high street banks.
The services offered by these banks can vary. Some offer a whole range of banking services, from current and savings accounts to loans. Others have a more limited product range. Examples of 'standalone' operations are Egg, Smile, Cahoot, Intelligent Finance and First-E.
Cyberbranches are the online operations of existing high street banks and building societies. The services offered supplement, rather than replace, branch and telephone access. As such, the products, rates and charges mirror those available through the traditional branch operation. If you are an existing customer and your bank has an online operation, access should be as simple as registering for the internet service and then being issued with an ID and password which you can use to log onto your account. The online service offered by the high street banks varies substantially, however most have the facility to carry out simple banking transactions online.
How does it work?
Websites differ slightly from bank to bank but managing your finances online should be as simple as logging on to the bank's website and entering your user ID and password. The site will then guide you through the transactions you want to carry out, whether a balance enquiry or transferring funds.
Which type of internet bank is best?
Debate is rife as to which type of internet bank is meant to offer the best value and both types can offer plenty of reasons in favour of their operations and plenty more reasons against using their rivals.
The high street banks which offer online banking as a supplementary service, claim that standalone operations are functioning at loss-creating rates. According to high street operations, as more and more customers join these banks to take advantage of the higher interest rates, such rates will become increasingly difficult to sustain and the banks will end up paying out more than they expected.
Standard advice when buying any financial product is to research the financial history of the providers. By looking at the long-term performance of the banks before choosing, you can often get a more sound idea of how your money is likely to be handled. Granted, because of their relatively new status as businesses, many standalone banks will not have long term performance figures and they may appear discredited as a result. However, many of them are usually backed by more traditional companies and as such, an investigation of this financial history may suffice.
Things to look out for
Deposit Protection Guarantee
Ensure that your bank adheres to the UK's Deposit Protection Scheme, or the national equivalent if your bank's parent company is not UK-based. Established under the 1987 Banking Act, the scheme protects your money if the bank runs into problems.
Where is the bank registered?
If your bank or the bank's parent company is based abroad, as is the case with French-owned First-E, consider what you will do or where you will go if something goes wrong or you need to make a complaint. Hopefully, you won’t have reason to do so but it is always best to make sure that you have contact details available to you, should you require them.
Technology
Check that your computer is compatible with the system your bank uses to run its internet operation. The technology required to run an internet bank account can vary from bank to bank and most will list the required hardware and software on their websites. One note of caution is that some of the banks' websites are not compatible with Apple Mackintosh computers.
The pros and cons debate
The most obvious advantage of internet banking is the convenience of being able to do your banking when you want, 24 hours a day, 7 days a week, and so saving time and effort.
Internet banking should also help you keep more up to date with your finances because transactions are usually updated in real time. For example, if you pay in a cheque, the cleared funds will show on your computer at the same time as it shows on your bank’s computer, usually within 3 or 4 days. If you have paid in money at your branch, this should be recorded online instantly.
With many banks, bills can also be paid online, although you may need to let the bank know the details of bill payments you will usually be making from the account. Once done, however, by simply logging on to your account, selecting the correct supplier and entering the amount you wish to pay, you can ensure that your bills are paid on time.
As plentiful as the rewards may appear, there are also drawbacks to online banking.
Security is by far the biggest concern affecting today's generation of online-bankers with consumers worried that hackers will be able to penetrate their account and spend their money. Banks are adamant that their sites are secure and whilst there have been no cases of large-scale theft, there have been plenty of cases of unwitting surfers stumbling across other people’s financial details. One of the consequences of the Internet security crisis is identity fraud, and this shall be discussed subsequently.
SOURCE: http://money.guardian.co.uk/factsheets/
Internet Banking