online banks vs. traditional banksDespite currently offering rock-bottom interest rates, the products and services banking institutions offer remain the cornerstone of good financial planning. As such, deciding where to bank is a fairly important decision for anyone trying to advance their financial goals. In this post, we’ll go into detail about two types of banks out there – online banks and traditional banks – and explain how you can decide which one you should choose.

Do online banks and traditional banks have anything in common?

Given that all banks ultimately serve the same function (to offer a place to safely store money) it’d probably be best to begin a discussion about online banks vs. traditional banks by mentioning similarities between both of these. To start, all legitimate banks, including online banks, have FDIC insurance as a protection against depositor losses in the event of a bank collapse. The FDIC currently insures up to $250,000 dollars per depositor per bank, meaning that only the initial $250,000 you save at a given bank – regardless of how many accounts it’s in – will be insured. You should also be aware that while you’re insured for $250,000 at each of your banks, a number of banks are actually subsidiaries of other banks. If you end up saving at one bank and opening another account at a different bank owned by the same parent company, this still counts as a single bank from the FDIC’s perspective.

In addition to FDIC insurance, nearly all banks offer the same basic products – checking accounts, savings accounts, certificate of deposit (CDs), loans (like mortgages) and credit cards. Additionally, in this day and age, most banks have a website or phone number where you can remotely access your account information and details. While traditional banks offer brick-and-mortar locations for you to do business, online banks specialize in providing an optimized remote access experience.

How do online banks and traditional banks differ?

In order to make an informed decision, you’ll want to understand what these banks offer, as it can help you determine which will fit better with your lifestyle.

Online banks

Despite the myriad of similarities between both types of banks, online banks do some things better than traditional banks:

Your earnings are usually much higher online. Higher earnings are the killer feature that online banks as a whole offer. With both fewer fees and higher APYs, banking online means you can make more money and keep more of it. If you’re wondering how this is possible, it’s because online banks simply don’t have to deal with the costs associated with maintaining a bunch of brick-and-mortar locations, and they choose to pass on these savings to the consumer.

You don’t have to “wait” for help at online banks. The whole premise of online banks is that you can access your accounts when you want to. While a lot of banks have websites, online banks often provide technical support and various other types of assistance for longer hours than their brick-and-mortar counterparts. Some online banks even offer 24/7 support, which means your urgent questions can be answered as soon as they arise.

Online banking is more flexible and accessible. In addition to fees, traditional banks pile on a lot of requirements for managing your accounts. Chief among these are initial deposits and account minimums which require you to have a specific amount of money to both open and maintain accounts. Online banks usually don’t have these, with many banks allowing you to open an account with little more than a few pennies. This has lowered the barrier of entry to banking, allowing people who historically couldn’t bank to start their savings.

Online banks promote an independent and hassle-free experience. Because of the way banks are structured, sometimes when you go into a brick-and-mortar bank, or even request support from one remotely, you are upsold. Upselling happens everywhere, but given that the entire experience with online banks is remote and mostly self-managed your chances of being upsold are smaller. While upselling alone isn’t a terrible thing, some traditional banks have taken the practice too far. Conversely, online banks, for the most part, have not been noted for engaging in such behaviors.

Traditional banks

Traditional banks don’t offer the exact same ease and convenience of online banks, but they still have some unique advantages that might benefit some consumers:

You can deposit and exchange cash at brick-and-mortar banks. While this is a relatively minor advantage, it is one that’s still important to note. You can’t deposit physical cash in many online banks, as there’s no way to process it remotely aside from workarounds like prepaid cards. If you’re lucky, your online bank will be part of an ATM network that allows you to use the machines for free, but that’s not the case for every online bank, which means you may have to pay a fee if you use an ATM. In addition to cash deposits, brick-and-mortar banks offer the convenience of withdrawing change (for parking and laundry) and breaking large bills.

Brick-and-mortar banks (especially large ones) can help you plan your finances. Traditional banks excel in providing a multitude of products, and among them is financial planning. You can go into a bank, sit down with someone and discuss a myriad of things – from issues you might be having with your accounts to advice around planning for long-term goals. While some online banks provide similar over-the-phone services, most do not offer this face-to-face interaction.

Interpersonal interaction and long-term relationships may lead to better deals. Because brick-and-mortar banks more often than not require you to deal with people face-to-face, if you’re good at negotiating or if you’re able to build a relationship with the staff at a branch, you may be able to get better rates on any future services or products you use. While this isn’t a guarantee, it’s something to consider if you hope to have a long-standing relationship with your future bank.

Some traditional banks offer more investment instruments. If a savings account or CD isn’t enough for you, a number of traditional banks offer a wider range of account types. Some might even allow you to manage a mutual fund or other investment account through them, depending on the bank. Combined with any financial planning resources the bank provides, this could prove to be beneficial for many customers.

Which should you choose?

When it comes to online banks vs. traditional banks, the choice really boils down to what you need out of a bank. We’re moving toward a cashless society, so for a number of individuals the potentially-limited ATM network size of most online banks might not be a deterrent. Similarly, someone looking for more robust investing options and that face-to-face interaction might prefer to use a traditional, brick-and-mortar bank. Keep in mind, this isn’t an either, or situation. A number of people bank at multiple institutions, using a mix of both online and traditional banks to satisfy their needs. Perhaps you can have a primary account with an online bank to rake in a higher APY and have secondary accounts offline and simply transfer money between each as needed. Regardless of what you decide to do, make sure your actions fit in with your financial goals.

If you’re looking for a competitive APY, take a look at the online savings accounts we review to get a good idea at what some of the top names in the online banking industry offer.