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Online banks vs. traditional banks: Pros & cons in 2024

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If you’ve followed the news lately, you’ve no doubt seen the headlines that, along with inflation, interest rates are rising. Many people think that as the fed raises interest rates, so will the banks for the money you’re keeping in your interest-bearing checking and savings accounts. But, unfortunately, that’s not always the case.

Greg McBride, Bankrate’s chief financial analyst, said, “With the Federal Reserve raising interest rates to get inflation under control, the outlook for savers is improving, but where you have your cash parked really matters. The top-yielding savings accounts and certificates of deposit remain the place to be as those are the banks that are raising their payouts in an effort to remain competitive for savers’ money. But many banks, and especially large banks, are being very stingy about passing along higher rates to savers.”

Because of this stinginess, many people are fleeing big banks in favor of online banks paying higher interest rates on savings accounts and CDs. But is chasing rates and leaving brick-and-mortar banks really in their best interest?

Let’s look at the pros and cons of online and traditional banks to give you a clear picture of your options that may make your life easier and make you some money as interest rates continue to climb for the remainder of 2022 and into 2023.

Pros & cons of traditional banks

It’s understandable why some people stick with a traditional bank. They’ve built relationships at the bank over the years as they’ve reached milestones like getting their first mortgage, opening a joint checking account when they got married, or taking their children to the bank to open their own savings accounts.

They may also like the personal touch of interacting with a bank teller and talking in person with someone who can access their account and answer questions. For some, this feels more reassuring than doing their banking virtually.

Perhaps the biggest drawback of traditional banks is their fees, which derive from the higher overhead costs they experience than online banks. Bankrate’s 2021 checking account and ATM fee study revealed that the average fee for an interest checking account is $16.35 per month, and the average balance needed to avoid a fee is $9,897. When you add in overdraft fees, ATM fees for using other banks’ machines, paper statement fees, and other charges, you can see how it eats into any interest you may be being paid by the bank.

Here is a comprehensive list of brick-and-mortar banks' pros and cons:

Pros of brick-and-mortar banks:

  • The convenience of personal service and support.
  • Access to an extensive ATM network and a wide variety of products and services, such as home and auto loans, credit cards, and safe deposit boxes.
  • In addition to personal banking, some offer commercial banking and investment management services with branch-based business bankers or financial advisors.
  • Many big, traditional banks offer safe, sophisticated online and mobile banking.
  • You can deposit cash.
  • Federally insured banks protect your deposits up to $250,000 per depositor, per FDIC-insured bank, per ownership category.

Cons of brick-and-mortar banks:

  • They charge higher fees and have a wide variety of them.
  • Loans and other products may cost more.
  • They pay lower yields on savings and other deposit products.
  • Visiting a branch takes longer than banking online.

Pros & cons of online banks

Some people are leery of conducting financial transactions online, including banking. They fear having their money or identity stolen. However, they’re often unaware that the Federal Deposit Insurance Corp. (FDIC) and the National Credit Union Administration (NCUA) Share Insurance Fund provide the same depositor protection for online banks as they do for traditional banks.

And like most traditional banks that offer online banking services, most online banks use strong encryption and multifactor authentication, and require strong passwords to protect their customer’s personal information.

Online banks also typically pay higher interest rates on deposits than traditional banks because they don’t have branch offices to build and maintain, and they have lower staffing costs.

In addition to paying higher interest rates, online banks generally have lower loan costs. Some online banks are currently offering personal loans for under 6 percent, while the average rate for a personal loan at a traditional bank is over 10 percent. Online bank Marcus by Goldman Sachs charges no fees on its personal loans.

The major drawback to online banks is impersonal service. Most customer service is provided electronically by FAQs on the bank’s website, email, chatbots, and sometimes by phone. This can prove frustrating for customers needing immediate assistance.

Here are all of the pros and cons of online banks:

Pros of online banks:

  • They generally charge lower fees or no fees for their products and services.
  • They typically pay higher interest on deposits.
  • Online banking is a big time-saver that lets you avoid trips to the bank and waiting in drive-thru lanes or lobby lines.
  • Most have safe, sophisticated websites that make it easy to open an account, pay bills, and track and manage your money from anywhere.
  • Federally insured online banks protect your deposits up to $250,000 per depositor, per FDIC-insured bank, per ownership category.

Cons of online banks:

  • There may be no one to talk to. Customer service can be virtual and impersonal. It’s hard even to find a phone number on some bank websites.
  • You are more likely to incur ATM fees if the online bank has no ATM network or is part of a small network.
  • You can’t deposit cash unless the bank is linked to ATMs that accept cash.
  • They aren’t a good fit for everyone. People who rarely use computers or don’t have a reliable internet connection are not good candidates for online banking.

Which do you prefer?

The information in this article is perhaps more relevant than ever since the advent of online banking. Rampant inflation, rising interest rates on credit, home, and auto loans, and the possibility of a recession make it essential that you earn as much interest on your savings as possible and keep your fees to a minimum.

Consider enjoying the best of both worlds by keeping your checking account and ATM usage with your local, traditional bank and opening a high-yield savings account or CD with an online bank. Before opening a new account, compare fees, rates, and other features at three to four banks.

The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.

— Published September 23, 2022
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