Long gone are the days when there was but a single bank in town where everyone went to store their valuables. When it comes to banking, the modern man or woman has a slew of options to choose from, besides just plunking down their cash at the nearest branch.
And many people are choosing to do away with the very idea of “going to the bank” at all, at least in the physical sense. Over the last few years, alternatives to the traditional brick-and-mortar bank branch have been opening across the world, or more accurately, across the digital world, in the form of so-called “online banks.”
Possessing just a handful of branches and operating almost entirely in the digital space, online banks have some very distinct advantages over traditional banks. To be sure, they have their drawbacks as well, but those haven’t stopped a bevy of depositors from making the switch to online banking.
When picking between traditional or online banking, it helps to know the differences — customer service, features, and interest rates offered — so you can make the right choice with your money.
Traditional retail banks like Bank of America®, Wells Fargo, JP Morgan Chase, and Citigroup are the largest options by far, and it’s their size that is their biggest perceived advantage. If you bank with Bank of America®, for instance, you have approximately 5,260 branches and 16,250 ATMs to service you.
Online banks usually lack physical ATMs, which, on the surface, seems like it can be a problem. Taking this into account though, a lot of online banks have responded by offering to cover ATM fees imposed by other banks, making their own lack of infrastructure a moot point.
For instance, Nationwide Bank allows customers with checking accounts to make up to six ATM withdrawals a cycle before charging a fee. However, rival online bank Ally has no such surcharge, and allows customers to make withdrawals from any ATM, while reimbursing for fees.
Covering the surcharges at non-Nationwide and Ally ATMs bring their “network” of ATMs to a whopping 76,000. That’s a very clear advantage.
When deciding between traditional or online banking, perhaps the single biggest reason to move your money into an online bank is the interest. Internet banks often pay several times higher interest than their traditional counterparts. Since online banks don’t have a physical infrastructure to support, they save a lot of money, money that’s passed down to the customers in the form of interest rates several times higher than their brick-and-mortar competitors.
For instance, Nationwide Bank pays 0.35 percent on its savings accounts if you maintain at least $300 or choose direct deposit, and a five-year CD pays 1.95 percent. Bank of America®, on the other hand, pays out a miniscule 0.01 percent on savings accounts (while charging $5 a month unless you maintain a balance of at least $2,500), and a measly 0.15 percent on a five-year CD.
If you’re looking to park your money in a savings account or CD, an online bank is the clear choice.
Compared to other options, traditional retail banks pay out insultingly low interest rates on your money because they can. People don’t sign up with a Big Four bank because they were pulled in by that near-zero interest rate — they do so because it’s easy. But when you consider that comparable online banks pay out exponentially higher interest on your money, traditional checking and savings accounts start to look a little less like a good idea.
Some people are perfectly fine never going to talk to a representative in person about concerns over their account. However, for people who like to be able to talk face-to-face with an actual person, an online bank’s lack of physical branches is going to rule this out.
The fact that traditional banks still maintain physical branches gives them another distinct advantage over their online brethren: in-person customer service. This is especially true of smaller, regional bank chains which tend to have more personalized service than the aforementioned Big Four banks.
Online banks save a lot of money by excising the overhead associated with maintaining physical branches, but that doesn’t come without a price when it comes to service.
A lot of brick and mortars have the interest of their stockholders in mind, rather than the interests of their customers. One of the unfortunate ways this tends to play out is with the sometimes exorbitant fees traditional banks tend to charge their users, especially the customers who carry the lowest balances.
For example, Bank of America® charges up to $35 in overdraft fees per item, up to four items a day. For someone whose bank account is already hovering near zero, a sudden onslaught of costly overdraft fees can be incredibly distressing.
Ally, on the other hand, only charges $9 for overdraft, which can really help customers from digging too big a hole.
Cash and Check Depositing
The lack of native ATMs for online banks, coupled with a lack of physical branches can make depositing checks a little more difficult than with traditional banks. Many, like Ally, don’t take cash deposits either.
To be sure, direct depositing works the same as with a brick and mortar. But otherwise, depositing a check can require mailing it in and waiting for it to be received, processed, and clear. For people who need to have immediate access to their non-direct deposited funds, this can be an unwelcome roadblock.
However, many banks are combating this by allowing customers to deposit checks with their phones, as Ally does. While this is not always the case, it certainly helps mitigate that issue. The lack of the ability to make cash deposits does give traditional banks a slight edge here.
So Who’s Better: Traditional or Online Banking?
When taking the advantages and disadvantages into account, online banking tends to make more sense. Not being able to make cash deposits can be an issue, but if it’s not too big a concern, online banks are a better choice, thanks to ATM variety, higher interest, and lower fees.