11 Best Alternatives to Traditional Banks

Banking

In the past, big banks were the go-to for checking accounts, savings accounts, and other financial products. Recently, however, more and more people have begun to transition away from traditional banks and traditional banking services.

This is mainly because traditional banks offer expensive overdraft fees, low APYs, minimum balance requirements, and other inconveniences.

couple banking online

Fortunately, there are many traditional banking alternatives that offer financial services and can provide you with higher interest rates, lower fees, great customer service, and other perks. So if you’re in the market for an alternative to your current bank, keep reading to learn more about your options.

Best Alternatives to Traditional Banks

1. Credit Unions

Credit unions are similar to banks in that they offer a variety of banking services and products, such as cash deposits, checking accounts and savings accounts. Their business model differs in that they’re member-owned, meaning they prioritize their members or customers, instead of their shareholders.

Furthermore, credit unions return profits. As a result, credit unions tend to charge higher interest rates on saving accounts, lower rates on loans, and more personal customer service. Rest assured local credit union funds are insured by the National Credit Union Administration (NCUA) for up to $250,000.

The downside to credit unions, however, is that you must join them to take advantage of their products and services. While some credit unions have lenient membership requirements, others are quite strict and only grant membership to people in certain communities or professionals in specific occupations.

Credit unions also tend to be less technologically advanced than banks so you might not get access to online or mobile banking. Several examples of credit unions you may want to explore include Pentagon Federal Credit Union, Navy Federal Credit Union, and Alliant Credit Union.

2. Online Banks

It’s no surprise that online banks and online savings accounts are more popular today than ever before. Not only are they convenient, they can save you a lot of money because they don’t have the high overhead costs that come with staffing and operating physical locations.

While online banks may not offer as many products and services as traditional banks, their competitive interest rates and low to no monthly fees or balance requirements make them worthwhile.

Of course, the most noteworthy drawbacks of online banks is their lack of physical access. These financial institutions don’t have physical locations so you’ll have to perform all your banking online.

The good news is many online banks usually join Allpoint and other ATM networks, which make it easy to withdraw funds as you need to. If you feel comfortable with online banking, you might want to explore online banks, such as Ally Bank, Marcus by Goldman Sachs, and Varo Bank.

See also: Open a Bank Account Online with No Deposit and Bad Credit

3. Neobanks

Also known as challenger banks or digital-only banks, neobanks are fintech companies that offer apps and other technologies to simplify online and mobile banking. In most cases, these financial technology companies specialize in online checking accounts, savings accounts, or other financial products.

Unlike traditional brick-and-mortar banks, neobanks invest a lot of resources in technology. Therefore, they’re designed for customers who plan to do most of their banking online or from their mobile devices.

Neobanks are also known for higher rates on saving accounts and tools for money management and budgeting. They differ from online banks in that they don’t have a bank charter and limit their offerings. The most popular neobanks you may want to look into if you think you’ll be better off with a financial technology company include Chime, Current, and Revolut.

4. Cash Management Accounts

Often offered by robo advisors, online investment firms, and mobile trading apps, cash management accounts (CMAs) allow customers to invest and bank all in one place.

While these accounts don’t earn interest, they’re backed by additional Federal Deposit Insurance Corporation or FDIC insurance for your peace of mind. Since cash management accounts are typically linked to investment accounts, they might also allow you to invest extra cash automatically.

Depending on the cash management account, you may receive a debit card and checkbook you can use to make purchases, just like you would with a checking account at a traditional bank.

Furthermore, CMAs are often a part of a large ATM network so you may withdraw cash with ease.  If you’re a confident investor and understand the market, a CMA might be a good fit. Otherwise, you may find this option to be very risky.

5. Regional Banks

Compared to large banks, regional banks are smaller and serve one or two regions, like the Midwest or Pacific Northwest. It’s typical for regional banks to offer no monthly fees and competitive interest rates on deposit accounts.

In addition, their lending criteria are flexible so you may have more luck with loans from regional banks if your credit isn’t in the best shape. Regional banks also tend to invest in technology, such as mobile apps and expand their offerings on a regular basis.

Some of the most popular regional banks in the U.S. include Bank of the West, First Horizon Bank, and People’s United Bank. A regional bank might be a suitable option if you’d like to do business with a locally owned institution instead of a large, national bank.

6. Community Banks

Community banks are smaller banks that are located in specific geographic areas. While they’re widely seen in rural towns, you can also find them in cities. Due to their smaller size, community banks typically offer more individualized service and get to know their customers. Plus their interest rates are usually lower than rates at large banks.

The downside to community banks, however, is that they’re not as technologically advanced as other financial institutions. In addition, they’re less convenient as they have fewer branches and a smaller ATM network.

If your priority is to develop a relationship with a banker and you prefer in-person banking, a community bank is likely the way to go. Carver Federal Savings Bank, Fremont Bank, and CB&S Bank are all examples of community banks. You can drive around your local area to find a few community banks that might meet your needs.

7. Payment Services

Payment services make it easy to send and receive money from others. Some options also let you set up direct deposit and load cash at popular retail stores. While each payment service is unique, most of them require you to sign up with basic personal information.

If you’re looking for a true alternative to a traditional bank account, payment services, such as PayPal, Zelle, Venmo, and Cash App are worth exploring. Just keep in mind that their features and services are limited so you may have to open a checking or traditional savings accounts eventually. In addition, some payment services, like PayPal, charge fees for certain transactions, like sending money to pay businesses.

8. Prepaid Debit Cards

Popular credit card issuers like Visa and Mastercard offer reloadable prepaid debit cards that are not tied to bank accounts. Here’s how a prepaid debit card works: You preload money onto it and may only spend that amount. For example, if you load $500, then you’ll have a spend limit of $500.

With a prepaid card, you can make in-store and online purchases, pay bills, and withdraw money from ATMs. You may also add cash, receive direct deposits from your job, and make mobile check deposits. Most prepaid debit cards let you manage your account online but you won’t be able to write checks and may be on the hook for fees for loading money and paying bills.

9. Peer-to-Peer Lenders

Peer-to-peer (P2P) lending lets you borrow money from individual investors, instead of traditional banks and credit unions. Typically, P2P lending platforms use automated systems with algorithms to assess potential borrowers and determine their rates and terms.

Even though P2P lending is newer than traditional lending and its investments aren’t FDIC insured, it’s legal and safe, as long as you do your research and choose a reputable organization. If you’re having trouble qualifying for loans, like personal loans, P2P lenders such as Lending Club, Funding Circle, and Kiva might help you out.

10. Online Investment Apps

Also known as online brokerage services, online investment apps are often a solid alternative to traditional banks with investment accounts. These apps are designed to make investing easier and more affordable. M1 Finance, for example, will allow you to create and maintain a diverse portfolio of stocks and ETFs for free.

There’s also Robinhood, which makes it a breeze to buy and sell stocks for free at market price. Online investment apps might be worthwhile if you’d like to invest your money, without paying steep commission fees or having to adhere to minimum deposit requirements. Since there are so many options out there, it’s a good idea to shop around and weigh the pros and cons of each app.

11. Brokerage Accounts

You can use brokerage accounts to buy and sell a variety of investments, like stocks, bonds, mutual funds, and ETFs. These accounts may be useful for both short-term profits and long-term goals.

You can open a brokerage account through a full-service broker, online broker, or robo-advisor. Note that you’ll likely be charged management fees and commissions. Plus you might be required to meet a minimum balance.

If you’re interested in brokerage accounts, you can look into financial companies, like Charles Schwab, TD Ameritrade, and Fidelity Investments.

Best Alternatives to Traditional Bank Savings Accounts

Money Market Accounts

Money market accounts are essentially hybrids between checking and savings accounts. After you open a money market account, you’ll be able to make debit card purchases and write a certain amount of checks each month. Compared to a traditional checking or savings account, a money market account typically offers higher interest rates.

The disadvantages of money market funds, however, include maintenance fees and monthly minimum deposit requirements. There may also be a limit on how many transactions you can make on a monthly basis. In most cases, you’ll be limited to six withdrawals, debit purchases, account transfers, from different bank accounts and check payments each month.

Certificates of Deposit (CDs)

Certificates of Deposit (CDs) let you store your money for a set amount of time while you earn interest. To open a CD, you’ll be required to make a minimum initial deposit and choose a term, which is the amount of time you’ll keep your money in the account. In most cases, CD terms range from three months to five years or more.

A longer CD term usually leads to higher interest rates so if your goal is to maximize interest, you’ll want to choose a term for at least five years. Even though a CD is less liquid than a traditional savings account and may not be the best place for your emergency fund, its returns are typically higher.

If liquidity is important to you, you can always use a CD laddering technique, where you open multiple CDs at different interest rates with various maturity dates.

U.S. Treasury Bonds

Issued and secured by the federal government, U.S. Treasury bonds are fixed-income securities and one of the safest investments you can possibly make. To purchase them in $100 increments, visit TreasuryDirect.com.

The most noteworthy benefit of the U.S. Treasury bonds is that they offer consistent income and won’t go down if the stock market takes a hit as they’re treasury inflation protected securities. Moreover, you won’t be responsible for paying taxes on the interest you earn.

Interest-Bearing Checking Accounts

Interest-bearing checking accounts are checking accounts with annual percentage yields or APYs that earn interest. An interest-bearing checking account is a lot like a traditional checking account in that you can make deposits via bank transfer, direct deposits, and ATMs.

You may write checks, use debit cards, or transfer funds to withdraw money. Depending on the account, you may have to pay monthly maintenance fees and settle for lower than average interest rates.

Real Estate Investments

When most people think of investing, stocks, bonds, and mutual funds come to mind. Real Estate IRAs, however, are powerful yet overlooked investment vehicles. With a real estate IRA, you can diversify your portfolio, enjoy greater returns, and reap some tax benefits. It may be just what you need to meet (or even exceed) your financial goals.

You may also want to consider REITs, or real estate investment trusts are companies that invest in income-producing real estate. You can buy publicly traded REIT shares, a REIT fund on stock exchanges, or private REITs to generate income.

Frequently Asked Questions

What are the major issues with big banks?

Some large banks have a better reputation than others. But many of them prioritize profits over customers. Depending on the bank, you may face lower interest rates on deposit accounts, high fees, and poor customer service.

The good news is you can avoid these problems if you switch to an alternative. You don’t have to settle for regular savings accounts and checking accounts if you don’t want to.

Where should I put my money instead of the bank?

If you’re in search of a reliable place to store your money but don’t want to go with a traditional bank, consider cash management accounts, local credit unions, regional banks, and community banks. The ideal option depends on your particular goals and preferences.

Do I need a bank account?

While a bank account isn’t required and you may be able to live without one, your options might be limited. If you’d like overdraft protection or FDIC insurance, for example, a traditional bank account is important. You won’t receive these perks with alternative options, like prepaid debit cards, for example.

Can I avoid a large bank?

Absolutely! These days, there are many alternatives to traditional banks, such as neobanks, money market accounts, CDs, interest-bearing checking accounts, and more. Explore all your options to hone in on the ideal one for your unique situation.

Do brick-and-mortar banks still exist?

Yes. If you prefer in-person banking rather than online only accounts at an online bank, you can stop into a brick-and-mortar financial institution. Credit unions, regional banks, and community banks are likely your best options as they’re known to provide more personal, in-person service. You’re sure to find brick and mortar locations in your local area.

What is a non-traditional bank?

Non-traditional banks are usually online banks or neobanks, such as Ally Bank and Chime. They offer their products and services digitally and don’t have physical locations like brick-and-mortar institutions.

Bottom Line

Fortunately, there is no shortage of bank alternatives. Whether your goal is to land better interest rates, receive more personal customer service, avoid hefty fees, or support a locally owned and operated institution, one of the options we listed above is sure to meet your needs. You can also use a combination of them to check off all your boxes.

Anna Baluch
Meet the author

Anna Baluch is a freelance personal finance writer from Cleveland, OH. She enjoys helping people make smart financial decisions.