What is Online Banking?
Online banking refers to using a bank that has limited or no physical branch locations. Most of your banking would need to be done through the internet via a computer, or with a mobile app.
As time goes on, and people get more comfortable doing business online, this sector is seeing significant growth.
There are some excellent reasons some people are beginning to enjoy the benefits of online banking. One of those being much higher interest rates on both savings and checking accounts in most cases. The other being the flexibility these institutions offer when it comes to accessing account information.
What is Traditional Banking?
This is an easy one because all of us have been using traditional banks since the beginning of time. The critical difference here is that traditional banks offer physical locations where you can do business. Many people still feel more comfortable being able to walk into a bank and deposit checks and make other transactions.
It should be noted that almost all physical banks have some online capability. How advance those capabilities are different based on the bank, with some being quite good even compared to what we are calling an online bank.
Given this fact, as mentioned above, it’s often the interest rates that win over prospective customers for online banking.
Online Banking vs Traditional Banking Rates
Because it’s such a big part of the decision for many to make the switch, let’s take a look at some interest rates. Here’s a comparison of some of the best online bank accounts, along with some the best national banks out there.
We’ve taken a look at their savings account and CD rates.
You’ll see that especially when it comes to savings accounts, there’s a big difference in rates. Now that might be peanuts to someone who has a couple of hundred dollars in an account, but for those with thousands of dollars, it’s not something to ignore. You’ll see that some of these online savings accounts are giving better rates than traditional bank CD rates.
| Bank | Savings Rate | CD Rate - 12 Month |
|---|---|---|
| National Average | 0.1% | 0.88% |
| Synchrony Bank | 2.25% | 2.8% |
| Ally Bank | 2.20% | 2.75% |
| Barclays | 2.20% | 2.75% |
| Discover Bank | 2.10% | 2.65% |
| Alliant Credit Union | 2.10% | 2.70% |
| CIT Bank | 2.45% | 2.20% |
| Radius Bank | 2.05% | 1.55% |
| * Rates as of 3/18/19 National averages from Bankrate.com | ||
Features of Online Banking vs Traditional Banking
Let’s walk through some of the general features you would want to compare when looking at online banking vs traditional banking.
Checking Accounts
This is a big one since it can determine not only traditional vs online banking but also which online bank you might choose.
Traditional – Almost all traditional banks are going to have checking accounts. This is often the primary reason a person opens a bank account in the first place. Traditional banks typically offer the ability to purchase checks, deposit money, and give access to ATM’s. Most, however, do not earn you any interest on your money and are not designed for long term savings.
Online – Not all online banks have checking accounts, so this is an important distinguishing feature. There is however a wide range of online banks that do offer checking accounts. While they can be more challenging to do some things like make deposits and cash checks, they often do earn you some interest. The interest on many of these online checking accounts is more than a savings account at a traditional bank.
Savings Accounts
Traditional – Savings accounts at traditional banks are often a place where people keep more substantial amounts of money for a longer term. This is an account where funds can be accessed more easily than other conservative investments like CDs.
But the low-interest rates on these accounts mean you should only save what’s necessary, as you’re losing money when compared to most other investments. It’s also common for these accounts to have limits in terms of the number of transactions that can be done each month.
Online – These accounts have much the same function as a traditional banks savings account. Again, you will typically be limited in the number of transactions that can be processed. That however, is not why you put your money here, it’s for the interest rates. If you have a chunk of money, that you want relatively liquid and quick access to, then online savings accounts are great options.
Our Top Three Online Savings Accounts
Mobile Apps
Traditional – There are banks with all variations of online and mobile capability in the traditional sector. The larger national bank is going to have technologies that rival some of the best online banks. No company doesn’t realize the movement, and many of these companies have great tools.
That said, some of the smaller community banks, may not be as well equipped. Some of these banks may only have online access to see balances, etc. But they may not have more advanced tools like mobile apps, or the ability to deposit funds via these apps.
Online – Most online banks have put significant effort into developing these technologies. They realize the only way to win over customers with physical branches, is to ensure maximum convenience on devices. For this reason, most of these companies are going to give you exceptional access to your accounts via the web and mobile devices.
Funding your account
Traditional – Let’s not over-complicate this conversation. You typically fund your account by depositing cash or check at a physical location, ATM with deposit capability, direct deposit, or some type of money transfer.
Online – People are typically more concerned about funding an online bank account. You usually will transfer money from an existing bank account you have locally, deposit via a linked ATM, via money order, or through direct deposit.
Depositing Checks
Traditional – Here’s where traditional banks can potentially win out versus online banks. You have the ability to walk-in to your local branch and deposit checks. This is very convenient, and the most comfortable way for some people to do business. Not only do they have this advantage, but many also have mobile capabilities to allow customers to deposit checks via apps.
Accessibility
Traditional – If you put this question to a 70-year-old and a 22-year-old at the same time, you’d probably get a pretty heated discussion.
Traditional banks are accessible via their physical locations, ATM network, and online presence. ATM access can be a big sticking point, especially since some traditional banks charge fees for the use of ATMs outside their network.
You’ll need to determine the most important aspects of a banks accessibility to determine if it’s a good fit for you.
Online – The main point of access for an online bank is going to be through ATMs. Almost all of the top online banks are going to have access to a large network of ATMs. You’ll need to do some due diligence to ensure this network gives you the access you require in your area. Some online banks also offer refunds up to a certain amount every month for fees incurred using out-of-network ATMs.
Fees
Traditional – A long-standing issue with some banks has been the sometimes not-so-obvious fees. It’s not true of all traditional banks, but they can hit you with some fees that online banks do not. These include maintenance fees, ATM fees, teller fees, minimum balance fees, and there are others.
Not that you can’t find some traditional banks without these fees, but you do need to do your homework before opening an account.
Online – Fees are typically much lower at online banks across the board. It seems that a low fee structure is the second best selling point for online banks other than higher interest.
Again, you need to pay attention to the specifics, but a larger percentage charge no maintenance, minimum balance, or ATM fees.
Loans, Mortgages, etc.
This one is a toss-up since both online banks, and traditional banks can help you with mortgages, loans, and other basic financing issues. Again, the basic question comes down to whether you need to sit with someone in person.
Security
This one is another feature we deem to be the same across both traditional and online banks. Yes, some people with automatically think that online banks are riskier, but that’s not the case. Both types of banks are required to protect your information in the same way, and typically store the same types of information.
Insurance
Banks are not required to be insured by the FDIC, but most reputable banks are, and you should check before opening an account. There’s no difference here for online banking vs traditional banking. Go to the Bank Find page at the FDIC to ensure your bank is covered. Almost all banks will also have this advertised on their website or marketing materials.
Pros and Cons
We’ve just covered at a high level the core differences in features, and realize that a pro and con may differ depending on the reader. Here’s our best shot at classifying the pros and cons between online banking vs traditional banking.
Online Bank Pros and Cons
| Pros | Cons |
|---|---|
| Convenience | Depositing money |
| High interest rates | No branches |
| Low fees | |
| Mobile apps |
Traditional Bank Pros and Cons
| Pros | Cons |
|---|---|
| Local branches | Low interest rates |
| Customer service | Higher fees |
| Depositing funds | |
The Bottom Line
The world of technology is changing fast, and with it, the entire banking industry is changing too. The good news is that traditional banks aren’t going anywhere anytime soon, and online banks will continue to grow. That give us more options.
Because of the significantly higher interest rates offered by some of the online banks, we’d be fools not to look at moving money with long term savings goals into these accounts. These are great options for people with an ultra-conservative investment strategy that also want easy access to their cash.
On the other hand, if you are more aggressively invested in the market or elsewhere, without any larger stocks of cash, then traditional banking may fit you better. Except for the higher returns, most of the big banks can compete in the other categories we’ve discussed.
Because of the low fee structures of most online banks, it also can’t hurt to hold accounts both with traditional and online banks. That way you benefit from the convenience of local branches, but can keep cash in a place where it gets the maximum return.
Regardless, don’t just ignore the trend towards online banking. No matter how uncomfortable you may be in the beginning, it might be worth the while in the long run based on returns.