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Online Banks vs. Traditional Banks

Finding a good deal on a checking or savings account is becoming more difficult with banks charging higher fees. Over the last few years, online banking has become a popular alternative to brick-and-mortar banks, but it’s not right for everyone. If you’re thinking about moving your accounts, there are a few things you need to keep in mind. Here’s a breakdown of the pros and cons of trading in your traditional bank for a virtual banking experience. Consider working with a financial advisor as you sort through all your options for banking. 

What Is a Bank?

A bank is a financial institution licensed to accept deposits, lend money and offer various related services, including savings and checking accounts, currency exchanging, wire transfers, money orders and cashier’s checks. The loans made can be for the purchase of a home or vehicle or for a business-related matter such as buying or growing a company. Some banks also offer credit and debit cards, financial advice, wealth management and trust services.

One way to categorize banks is by whether or not they have a physical presence for customers. Those that do are known as traditional banks. Other banks have no physical presence for customers and are called online or virtual banks. A number of banks, especially large financial institutions like Chase Bank and Bank of America, offer both an online and a brick-and-mortar presence for customers.

What Are the Benefits of Online Banks?

The rise of virtual banking stems from a convergence of factors. Here are four of those factors.

Higher Interest Rates

One of the biggest advantages you’ll get with online banking is a slight bump in interest rates for both checking and savings accounts. While most traditional banks are currently offering rates ranging from around 0.10% to 0.50%, you can find online checking and savings that feature slightly higher rates of 0.9% to 1%. While it doesn’t seem like much, the rates offered by some of the best savings accounts can add up in the long run, especially if you’re keeping a lot of cash in your account.

Fewer Fees

Another benefit of doing your banking online is that you may be able to save more on fees. With a traditional bank, you may be on the hook for a wide range of fees. Because online banks tend to have lower operating costs, you typically won’t have to shell out as much for all these little charges. Some online banks will also cover ATM fees, regardless of where you make withdrawals. Just be sure to read the fine print since you may only get credit for a certain number of transactions each month.

Convenience

Online Banks vs. Traditional Banks

The great thing about online banks is that they’re always open which means you can access your accounts any time, anywhere. You can set up automatic transfers, schedule bill payments or check your balance using mobile banking apps. Some online banks even allow you to set up mobile text alerts to help you keep track of payments or notify you if your balance is getting low. While many traditional banks offer these same services, they’re not available everywhere which can be a hassle if you need to be able to bank on the go.

Security

A common myth about virtual banking is that it isn’t as safe as traditional banking. In reality, banking online doesn’t necessarily increase the risk of your personal information or your money being stolen. Online banks take the same security measures as other banks to protect your data, including using encrypted websites and requiring you to enter a personalized code to access your information. As long as you choose a bank that’s insured by the FDIC, you’re covered for losses up to $250,000.

What Are the Downsides of Online Banks?

While the advantages of virtual banking are compelling, there are several reasons to be cautious before you make a switch. Here are three of those reasons.

Deposits Can Be a Hassle

Without a physical location, adding money to your account can be a challenge. Depending on which bank you choose, you may be able to mail deposits in, make wire transfers or make electronic deposits with a smartphone. A so-called “eDeposit” is when you just take a picture of the check and upload it to your account using a smartphone app. It seems simple enough, but if you prefer handing your check over to an actual person for deposit, online banking may not be the best choice.

Less Personalized Service

Online Banks vs. Traditional Banks

One of the good things about traditional banking is that it gives you the opportunity to build a personal relationship with the person who handles your cash. With an online bank, customer service is typically handled over the phone or online which means you don’t get that face-to-face interaction. If you prefer to handle problems with your account with someone who knows your financial background and banking history, you may be better off sticking with your local bank.

Technological Challenges

Online banks design their websites to make navigation as easy as possible for their customers but it can take some time to adjust if you’re not used to virtual banking. If your bank decides to upgrade their site or redesign the format, you may find yourself back at square one the next time you log in. Online banking offers some definite advantages over traditional banking but it really comes down to how comfortable you are with what it entails. If you know your way around a computer and you won’t miss being able to pop into your local branch then it may be time to make the switch.

Cash deposits

While online banks typically allow customers to digitally deposit checks, such customers cannot deposit or withdraw cash without access to an ATM. Traditional banks, on the other hand, accept and dispense cash.

What Are Traditional Banks

The term “traditional banks” is used to describe a range of financial institutions, including commercial banks, investment banks, cooperative banks as well as the familiar retail, brick-and-mortar bank. Distinctions among these types of banks are somewhat fluid as banks can offer various services, some focused on retail customers while others are focused on commercial customers like professional investment companies or corporations. Sometimes the term traditional bank is also used to describe savings and loan associations and credit unions, though these two are not actually banks.

What Are the Benefits of Traditional Banks

There several benefits to traditional banks, including the following four.

Simplicity

You don’t have to be tech savvy. Whereas an online bank requires customers to have some kind of digital device like a smart phone or personal computer and the ability to use it properly and safely, a traditional bank does not. A traditional bank customer can simply walk into a storefront and speak with a banker about what is needed.

Personal Service

Traditional bank customers can easily discuss their goals or problems with an actual human. That’s attractive to customers who find the chat feature of online banking confusing or irritating. Such customers may find it reassuring to know specific bankers by name and appreciate being known by their first name. Such aspects of a traditional bank experience can reduce the stress that often accompanies financial transactions.

No-cost Access to ATMs

Traditional banks, especially the large ones, can offer free use of ATMs in their network. The extent to which traditional bank customers benefit from this depends on how large their bank’s ATM network is. But whether large or not, many customers appreciate not having to pay a fee – sometimes 2% or 3% of the amount withdrawn – every time they need small amounts of cash.

Community Ties

Traditional banks often have ties to the area they operate in. They typically support local nonprofits and schools and their officers can often be found on the boards of area charities. Further, traditional banks sometimes share a history, occasionally stretching back to the 19th century, with the communities they serve. That enhances their we-do-well-when-you-do-well image.

What Are the Downsides of Traditional Banks

The above-mentioned benefits come at a cost, including the following three benefits.

Low interest rates

Whether you’re shopping for a savings account or a certificate of deposit, traditional banks generally don’t offer rates that are as competitive as those of an online bank. At time of writing it was not uncommon to find online savings accounts offering close to a 0.9% annual percentage yield (APY) while traditional banks were offering far less, with rates around 0.05% not uncommon.

More fees

Given the expenses entailed in running a brick-and-mortar business, the benefits of traditional banks come at the cost of more fees and higher fees. Traditional banks often levy minimum balance fees, direct deposit fees, late fees, over-limit fees, check fees and debit card fees. As with their low interest rates, these fees stem from the higher operating costs traditional banks incur.

Lack of convenience

Whereas online bank customers can handle their financial affairs from any location with an internet signal and even when riding in a train or plane, customers of traditional banks – without an online presence – have to get to a specific physical address to conduct business.

Bottom Line

There are various ways to distinguish banks, including retail, central, commercial, shadow and investment banks. Virtual or online banking is another such way, and it offers a less expensive, lower cost and more convenient alternative to traditional, brick-and-mortar banking. On the other hand, service is hardly personal, a certain level of digital proficiency is required and there are concerns about the security of personal financial information.

Tips on Finances

  • A financial advisor can provide valuable insight and guidance as you decide which kind of bank best suits your needs and goals. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Use our simple savings calculator to see how quickly your savings will grow in a bank savings account.

Photo credits: ©iStock.com/ultramarine5, ©iStock.com/shapecharge, ©iStock.com/simonkr

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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