The rise of online banks has changed the banking landscape in the United States and worldwide. Online banks are attracting new customers because they generally offer greater convenience, savings account with a higher interest rate, and lower fees. However, a traditional brick-and-mortar bank still provides services that some customers find invaluable.
If you’re deciding between using an online bank or a brick-and-mortar bank, here’s a breakdown of the benefits and drawbacks of each option to help you make the best decision.
Online Banks – What are Benefits & Drawbacks
Higher Interest Rates
One of the most attractive benefits of online banks is the higher interest rates they offer on savings accounts, money market accounts, and a certificate of deposit (CD). Online banks generally have less overhead than traditional banks. One of the greatest costs for most traditional banks is maintaining physical branches with employees.
Because an online bank does not maintain these physical locations, they can pass those cost savings on to their customers through higher interest rates. Higher interest rates on savings account will yield a greater return on investment (ROI) for its customers.
For example, Ally Financial Bank is one of the most prominent online banks in the United States. According to the FAQ’s on the bank’s website:
“We’re an online bank and don’t have physical bank branches or the expenses that come with operating them. It’s one way we’re able to keep our rates competitive.”
Because these online banks have eliminated many overhead costs that burden traditional banks, the bank uses the cost savings to offer higher interest rates on savings accounts and CDs.
No Physical Branches
The most significant downside to online banks is the lack of physical locations. Online banks may not be ideal if you prefer in-person service or need to handle cash deposits frequently. Many online banks have partnerships with ATMs for withdrawals and depositing cash; however, using these services can be more challenging than simply walking into a physical branch location and dealing face-to-face with a bank employee.
While online banks offer 24/7 customer service via online chat, phone, or email, these options lack the face-to-face service you’d get at a branch. For complex banking needs, like discussing loan options or resolving account disputes or irregularities, some customers prefer the in-person assistance available at a traditional bank.
Brick-And-Mortar Banks – What are Benefits & Drawbacks
In-Person Service
Brick-and-mortar banks offer a personal touch that online banks may have difficulty replicating. Traditional banks provide in-branch assistance for customers who value face-to-face interaction rather than speaking with someone over the phone.
For example, assume you are looking to purchase a home and need to apply for a mortgage. Online banks may offer financing options, but you’ll have to learn about these services through their website or by speaking with someone over the telephone.
If you prefer to meet with someone in person, the brick-and-mortar physical branch locations allow a face-to-face discussion. The representative can provide you with written materials on the process, and they can answer any questions you have about the bank’s products and services.
Easier Cash Deposits and Withdrawals
If you frequently handle cash, a brick-and-mortar bank is not only more convenient, but it may be your only option. Many online banks will not accept any cash deposits. So, you cannot mail cash to the bank for deposit, nor can you visit an automated teller machine (ATM) location to make cash deposits.
For these reasons, a traditional bank may be your best bet. With a traditional bank, you can walk into a branch to deposit or withdraw cash.
For example, assume you operate a food truck business in downtown Miami, FL. Many of your customers pay for their food using cash. To deposit the money, your company needs to have a bank account with a traditional bank so you can visit the branch and make those cash deposits.
Those cash deposits would not be possible if your business relied solely on online banks. Many companies use a combination of banking products. The business can use an online bank account to receive credit card payments from customers and a traditional account for those cash deposits.
Lower Interest Rates & Higher Banking Fees
Traditional banks tend to offer lower interest rates on savings accounts, money market accounts, and CDs compared to online banks. Traditional banks generally have higher overhead costs, so they have fewer funds available to offer higher interest rates for their customers.
For example, many brick-and-mortar banks offer interest rates on savings accounts as low as 0.01% per year, which is practically zero. In contrast, many online banks offer a high-yield savings account (HYSA) with interest rates between 3% to 5%.
Brick-and-mortar banks typically have higher banking fees, including monthly maintenance fees, overdraft fees, wire transfer fees, and ATM fees. Many traditional banks require you to maintain a minimum balance or have direct deposits to waive these fees.
For example, a traditional bank may charge you a $15 monthly fee for a checking account if you fail to maintain a minimum monthly balance of $1,500. Most online banks do not have minimum balance requirements to open an account, nor do they have monthly minimum requirements.
So Which Do You Choose?
Online banks and brick-and-mortar banks each offer distinct advantages and drawbacks. If you prefer digital convenience and better returns on savings, an online bank may be your best bet. If in-person support is a higher priority, a traditional bank may be the way to go.