Online Banks vs. Traditional Banks: Which Is Right for Your Money?

Considering we live in a world where you can shop for groceries, pay your bills, and occasionally meet your future spouse on your phones, its not surprising that the banking world has also gone digital. If you need to open a bank account, you might find yourself debating the merits of a traditional brick and mortar bank versus an account with an online bank.

Choosing a new banking institution should be given consideration, you want to make sure you are asking the right questions and considering all the ways you interact with your money. Here's what you need to know about online banks, in addition to how they stack up against your more traditional banking options.

No brick and mortar overhead means higher APYs for you

Online banks typically offer higher APYs on saving and checking accounts than traditional banks. This is a because they don't have to pay to operate brick-and-mortar locations, which means there's more money to pass on to the customer. This is also why online banks often charge their customers lower fees than their traditional counterparts. With no leases and electric bills to pay, they can charge less while remaining competitive.

Building trust alongside transactions

An online bank doesn't offer physical locations. While this might not be a priority for you, if you're accustomed to visiting a branch and speaking to an employee when there's an issue with your account, then online banks might not suit your preferences. While online banks offer customer support, some account holders have found that they miss the experience of having a local banker with whom they've developed a rapport.

Does cash reign king for you?

With no physical locations, cash deposits can be tricky. Some online banks partner with retail chains for cash deposits, but this can be inconvenient and you might not have one of these chains' locations in your area. If you're paid via direct deposit and make all of your purchases with your debit card or phone, this likely won’t be an issue for you. If you make a significant portion of your income from cash tips, an online bank account might make your life difficult.

One financial institution for everything

while this is quickly changing as online banks become more commonplace, many do not yet offer financial products outside of consumer checking, such as mortgages and auto loans. If you don't mind doing business with multiple financial institutions, then this isn't a problem. If you prioritize having all of your accounts in the same place, then an online bank account might not be for you.

Banks with roots and an established reputation

It goes without saying that it's convenient to have access to a physical bank branch. Even if you don't often need to visit a branch as part of your routine banking, if there's ever a problem with your account such as fraud, it's nice to speak to a real person instead of a bot or a customer service agent over the phone.

There's also power in the fact that traditional banks are more well-established. Online banks are a relatively new phenomenon, whereas traditional banks have been around for hundreds of years. While online banks hold a lot of obvious appeal in our digital world, there's something about an established brand that could give you peace of mind.

Are you part of the $5.8 billion?

There is a certain level of bank fees that are just expected at this point, be they monthly maintenance fees or overdraft fees. Many traditional banks will still charge account holders a $35-50 overdraft fee. In 2023, reporting banks to the Consumer Financial Protection Bureau collected $5.8 billion in overdraft or insufficient fund fees alone. This is often not just as a one-time penalty for going over your balance, but per each transaction in the red. While some online banks charge minimal fees, many have eliminated them altogether.

How important is tech to you?

While several of the major traditional bank chains are more or less on par with online banks in terms of tech, smaller national and regional bank branches may offer limited online banking and a mobile app that lacks some of the bells and whistles, or is burdened with bugs and glitches. If you can't access your account online but the branch is closed for a holiday, you might be stuck waiting until they fix the website or the branch reopens.

Considerations for frequent fliers and road warriors

While a local bank branch might have your back, if you’re a frequent traveler, does the bank have the coverage to accommodate your travel schedule? There's nothing more frustrating than traveling out of state and realizing that not only are there no branch locations in the area, but you're going to be charged double to use the ATM.

Choosing the right option for you

Opening a new bank account should work for you. If you’re looking for higher APYs and easy-to-use tech, an online bank might be the choice for you. If deal heavily in cash and value building relationships with a single institution, a traditional bank might be the place for you. Either way, doing your research ensures you’ll find the account that is right for you and your banking needs.