Online Banks vs. Traditional Banks - What's the Difference?
In recent years, online banks have become a major player in the world of banking and finance. Not too long ago, if you needed a loan or a new checking account, your options were pretty limited. You would most likely walk into the nearest bank branch and speak with a banker. But these days, there’s SO many more options to choose from. You can take your pick from traditional banks, online banks, credit unions, and more.
Online banks and financial institutions are relatively new. Therefore, many people might not fully understand exactly how an online bank works. They also might not understand the pros and cons of an online bank. Lastly, and most important, they might not understand if an online bank is best for them. So today we’re going to review how an online bank operates…and we’re also going to discuss the pros and cons. Of course, we’ll also discuss why YOU might prefer an online bank over a traditional bank…and vice versa.
Online Banks vs. Traditional Banks
The first thing we want to define is “traditional bank”. Traditional banks are institutions likes Chase, Wells Fargo, and Bank of America. They also include regional banks like US Bank and PNC Bank. Smaller community banks that you might see in your area are also considered traditional banks. Basically, a traditional bank has physical branch locations with bankers, tellers, and branch managers.
So how does an online bank differ from a traditional bank? First, an online bank is only available online. They do not have any physical branch locations. So, you cannot physically walk into a branch and sit down with a banker. Examples of online banks are SoFi, Chime, and Varo.
The differences between a traditional bank and an online bank can be drastic. So understanding these differences is key in deciding which is best for you.
3 Major Differences Between Online and Traditional Banks
1. Lower Fees and Higher Interest Rates
First…online banks typically charge less fees. This includes not charging overdraft fees or monthly fees. Online banks also pay higher interest rates than traditional banks. So online banks can help you to save money, by charging less fees…and they can also help you earn money, by paying higher interest rates.
The reason why online banks do this is pretty simple. Generally, online banks have much lower expenses than traditional banks. This is because online banks don’t have to pay for things like physical branches, bankers, or rent. It simply costs much less to operate an online bank. Therefore, online banks will usually pass those savings onto their customers…and they do this by charging less fees and by paying higher interest rates.
We want to emphasize that online banks usually pay MUCH higher interest rates than traditional banks. This includes checking, savings, and CD accounts. Most savings accounts at traditional banks are currently paying under 1% APY. However, many of our Best High Interest Savings Accounts 2023 pay 3%, 4%, or even 5% APY.
2. No Physical Branches
Second…not having physical branches definitely has its benefits, as we just discussed. However, this can also have some disadvantages as well. For example, not having branches can potentially compromise customer service. If you have an issue with a traditional bank, you can physically walk into a bank branch and speak with a banker. But again, online banks don’t have physical branch locations. So, you’ll have to rely on calling, e-mailing, or Chat in order to resolve your situation. Some people might be ok with this…and others might prefer the ability to walk into a bank branch. Every consumer is different…and for this reason, we hope to cover something for everyone.
3. Accessibility
Before opening an account with an online bank you’ll want to consider accessibility to your money and banking services. For example, if you will only use a debit card, credit card, Apply Pay, and direct deposit…then an online bank might work for you. But what if you want to make deposits inside a bank branch? Well, this probably won’t be possible with an online bank.
Cash Deposits
If you’re someone who makes frequent cash deposits, then you may want to think twice about opening an account with an online bank. Many online banks do not allow you to deposit cash at the ATMs within their network. This means that cash deposits are often done at 3rd party retailers, such as Walgreens or CVS. In addition, there’s usually there’s a fee for processing the transaction as well. Also, depositing cash at a retail store might not be the smoothest or the most secure option. Therefore, if you’re someone who needs to makes cash deposits, then a traditional bank might be best for you.
ATM Network
You will also want to consider the size of the online bank’s ATM network. How many ATMs do they offer within their network? These are usually the ATMs that you can access without a fee. You’ll want to make sure there’s options close to where you live, work, etc. Some online banks don’t have any ATM network at all. This means that you can use any ATM…but it also means that you’ll be charged for the transaction. However, online banks without their own ATM networks will often reverse all, or most, of your ATM fees to compensate.
Banking Services
One more thing to consider is how often you will require additional banking services. For example; cashier’s checks, outgoing wire transfers, or money orders. If the answer is never, then an online bank might work for you. But if the answer is often, then you might want to consider a traditional bank. Or at least be aware of how your online bank handles these situations. Because each online bank has different policies and procedures in regards to additional banking services.
Summary
Online banks come with a ton of benefits. They can help you save money by not charging overdraft fees, monthly fees, and more. They can also help you save money by offering higher interest rates. However, you’ll first have to decide if an online bank fits what you’re looking for. Some people are huge fans of online banks; while other people would never open an account online. It’s no surprise that younger demographics tend to be more open to an online bank. These are people who have grown up with technology. Also, these are people who have lived during a time where many people aren’t big fans of traditional banks, for a variety of reasons.
As usual, there’s no right or wrong answer…and no bank is going to be perfect. The best thing we can do is understand the pros and cons of each option. That way YOU can make the best decision on which type of account is best for you.
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