The Pros And Cons Of Online Banking And Bill Paying

Does being able to manage all of your banking needs in one place appeal to you? How about making your mortgage payment while you're on vacation? These and similar capabilities are available to online banking and online bill paying customers. The following information, courtesy of the California Society of CPAs, provides an overview of online banking and bill paying, including some pros and cons of each.

Online access and services
Generally, there are three different ways banks give customers access to online banking:

1. By enabling you to access account information on your bank's Web site using a standard Web browser;
2. By providing a proprietary software program that connects you to the bank's system, usually via a private data network; and
3. By supporting connections through personal financial software, such as Quicken or Microsoft Money, which enables you to exchange information with your bank and then download it back into your software package.

The available online banking services vary from bank to bank. Most online banking systems allow you to check your balance and transfer funds between accounts. More sophisticated systems enable you to apply for a loan, order checks, verify which checks have cleared, buy certificates of deposit and even make investment trades.

Pros and cons of online banking and bill paying
Online banking enables you to more closely monitor your account activities. In doing so, you may be able to avoid overdraft fees and minimize service charges by keeping tabs on minimum balance requirements. Online access also makes it easy to verify ATM cash withdrawals, debit card purchases, and other transactions you may forget to enter into your checking account register. What's more, online banking systems that allow you to download transaction information to your personal finance software can help you in your money management efforts.

There may be additional advantages if you sign up for online bill paying, an enhancement many banks offer along with online banking. With online bill payment, you key your bill payment requests into the computer and transmit it to the bank. The bank will then debit your account for the amount designated, and simply pay the bill. You can schedule payments in advance or arrange to have regular, fixed amount bills, like your mortgage or car lease payments, paid automatically each month. That means fewer checks to write, fewer stamps to buy, and fewer trips to the post office.

Be aware, however, that setting up your bill payment account can require a significant up-front effort. You'll need to provide your account numbers and the correct remittance address for each of the vendors you plan to pay.

Keep in mind, too, that while electronic bill paying may be easier and more convenient, it isn't always faster or cheaper. In fact, for those payees who aren't set up to accept electronic payments, it may take considerably longer than if you were to send a check yourself. Because the check the bank sends to the payee on your behalf is not accompanied by your remittance slip, the payee typically treats the payment as an exception item, which can require several extra days to post. That means you need to plan your payments well in advance to avoid late fees. Additionally, there may be fees that possibly could make online banking more expensive than regular banking.

Despite the conveniences of online banking, there are two important banking transactions you cannot perform online. You cannot make deposits (although you can arrange for direct deposit of your payroll, government or other recurring-type checks) and you cannot get cold, hard cash. You'll need to rely on an ATM or bank teller for those transactions.

Buyer beware
If you are thinking of signing up for online banking, shop around first. As you comparison-shop, don't be lured by limited-time offers of free online banking and bill paying. Focus instead on the bank's long-term fee structure as well as the online system's features and the bank's reputation for customer service.

You'll also want to ask about the bank's online security. CPAs point out most banks use sophisticated firewalls, 128-bit data encryption (the safest method for securing information transmitted via the Internet), customer-selected passwords, and Personal Identification Numbers (PINs).

In accordance with IRS Circular 230, the information on this website is not intended or written to be used, and cannot be used as or considered a "covered opinion" or other written tax advice and should not be relied upon for the purpose of avoiding tax-related penalties under the Internal Revenue Code; promoting, marketing, or recommending to another party any transaction or tax-related matter(s) addressed herein; for IRS audit, tax dispute or other purposes.