Online Banking vs. Traditional Banking: Pros and Cons

Banking

Banking has never been easier. You can deposit a paper check and move money from one account to the other without even leaving home. In fact, 27% of banking customers now use an online-only bank, and that doesn’t include the many traditional bank customers who do the bulk of their banking online.

woman mobile banking

Whether you use your bank’s online banking services or you’re digital only, there are some pros and cons to each. Here’s what you need to know if you’re shopping for a bank account.

What are the differences between online banks and traditional banks?

The main difference between online banks and traditional banks is how they work. Let’s take a closer look:

Presence

  • Online banks: As the name suggests, online banks operate primarily on the internet. They may not have physical branch locations where customers can visit.
  • Traditional banks: These institutions have brick-and-mortar locations, allowing customers to walk in, perform transactions, and receive in-person assistance.

Operational Costs

  • Online banks: Generally, they have lower overhead costs because they don’t maintain physical branches or employ as many personnel for branch operations. This can sometimes translate to savings for the customer in terms of lower fees or better interest rates.
  • Traditional banks: The costs of maintaining physical branches and staff can be higher, which might reflect in the fees and services they offer.

Service Offerings

  • Online banks: While they provide a wide range of banking services, some specific services, especially those requiring in-person verification or assistance, might be limited.
  • Traditional banks: Offer a full spectrum of services, including those that require face-to-face interactions, such as safe deposit box access or notary services.

Customer Interaction

  • Online banks: Customer support is primarily via phone, chat, or email. Some might argue it’s less personal, while others appreciate the efficiency and convenience.
  • Traditional banks: Provides the opportunity for face-to-face interactions, allowing for a more personal customer service experience.

Accessibility

  • Online banks: Accessible anywhere with an internet connection, often 24/7. This provides flexibility but relies on technological infrastructure.
  • Traditional banks: Access is limited to branch locations and their operational hours. However, they provide a tangible presence and might be preferred by those wary of digital-only operations.

Online Banking

One thing to remember when considering online banking vs. traditional banking is that many traditional banks offer all three. With these banks, you can visit a traditional bank branch if you’d prefer, but you also get the convenience of online and mobile banking.

Then, there are online-only banks. Some of these allow you to use ATMs for cash-related banking activities, but you might find yourself paying ATM fees. On the other hand, many online banks offer low or no banking fees, so the costs might cancel each other out.

Pros of online banking

  • Ease of use: As convenient as brick-and-mortar locations can be for depositing and withdrawing cash, online and mobile banking make managing your accounts a breeze. Using the website or mobile app, you can typically pay bills, move money between bank accounts, and deposit paper checks.
  • Lower fees: Online-only banks know they’re competing with national banks. For that reason, you’ll also find online banking comes with lower fees. As a result, many traditional banks have lowered their rates and increased digital offerings to compete.
  • Competitive rates: In addition to lower fees, online-only banks boost very competitive interest rates on online savings accounts, checking accounts, and CDs. Best of all, the internet makes it easy to compare annual percentage yield online across multiple banks and credit unions to find the best deal.

Cons of online banking

  • Limited cash options: Before you sign up with an online bank, consider how you’ll handle financial transactions like cash deposits. Your online bank should offer an option for ATM access, but this can come with limitations and fees, so read the fine print.
  • Account setup: With a traditional bank account, you simply hand over some identification, complete an application, and make a minimum deposit. With a digital bank, you’ll need to meet these qualifications remotely, which can slow down the process a little.
  • Customer support limitations: With an online savings account or checking account, you’re usually limited to chat or phone support, and wait times can sometimes be excessive. Most traditional banks provide phone and online support, too, but you’ll also have brick and mortar branches if you need them.

Traditional Banking

Traditional banks have been around for centuries, offering checking and savings accounts, loans, and investment services. Consumers had to travel to a nearby physical location to deposit money, transfer money, withdraw cash, and handle account issues, which could be inconvenient, particularly since banking hours are often limited to weekdays.

But even as the number of online banks has grown, brick-and-mortar banks have held steady. In addition to adding digital banking to their offerings, traditional banks offer benefits not found in an online bank account.

Pros of traditional banking

  • Easier for cash transactions: One of the most compelling reasons to go with a traditional bank is the ease of cash transactions. You can withdraw and deposit cash without relying on an ATM or accruing extra fees.
  • Personal service: For some people, in-person customer service is a huge perk. Even knowing you can walk into a local branch and speak to someone face to face can give you peace of mind.
  • Available to everyone: Not everyone has an internet connection, making traditional bank branches a necessity. Those who can get online might not have access to a mobile device to be able to make check deposits. Even if you have everything you need to bank online, local branches will let you manage your finances if your internet goes down.

Cons of traditional banking

  • Higher fees: To remain competitive, many online banks reduce fees. Some traditional banks have lowered their fees to compete, but you will often find better rates on savings and CDs with online-only banks.
  • Accessibility limitations: Depending on the bank, you might find that your options are limited at your local branch. Not all physical locations will have bilingual representatives, for instance, and some buildings aren’t accessible to those with physical limitations.
  • Limited service hours: Banks have such limited hours, the term “banking hours” has become a part of the English language. Most banks are open at the same time their customers are working. Unless your bank offers weekend hours, this means you have to either take time off work or visit a branch on your lunch hour.

Are online banks safe?

As we shift towards digital-first banking solutions, the question of online bank safety becomes increasingly pertinent. This section examines the security measures employed by online banks and how they compare to traditional brick-and-mortar institutions in protecting your financial data.

Encryption and Data Protection

Online banks invest heavily in protecting their customers’ data. Strong encryption methods are used, ensuring that transactions and stored data remain confidential. When accessing an account or conducting a transaction, the data transmitted is encrypted, making it challenging for any potential interception.

Multifactor Authentication

Most digital banks incorporate multifactor authentication (MFA) to enhance security. MFA requires users to verify their identity using multiple methods, such as a password and a unique code sent to a smartphone. This added layer significantly reduces the risk of unauthorized access.

Regular Security Audits

To stay ahead of potential threats, online banks undergo frequent security audits. External cybersecurity experts conduct these, ensuring the bank’s security measures are up-to-date and robust.

Real-time Alerts

Keeping customers informed is essential. Many online banks offer real-time notifications for any suspicious or large transactions. Such proactive communication allows customers to address any unexpected account activities promptly.

FDIC Insurance

An essential aspect to consider is that many digital banks, like traditional banks, are insured by the Federal Deposit Insurance Corporation (FDIC). This means customers’ deposits are protected up to $250,000, providing an additional layer of safety.

Online Banks to Consider

Choosing a digital banking solution can be overwhelming with the myriad of choices available. To help streamline your decision, let’s take a look at some online banks that have been making waves in the industry.

SoFi

SoFi’s flagship offering is the Checking and Savings account, which uniquely combines both aspects into one product. Depositors can earn an attractive 4.60% APY on savings accounts and 0.50% APY on checking balances when they set up direct deposit.

Beyond these offerings, SoFi boasts an array of services, from student loans, credit cards to investment products and insurance. The cherry on top? Members get access to perks like career coaching, local events, and even estate planning discounts.

Chime

Chime stands out as a fintech company that focuses on transparency and affordability. They’ve eliminated common bank fees like monthly charges, overdraft fees, and minimum balance requirements. But the benefits don’t stop there.

With your free debit card, you get access to over 60,000 ATMs nationwide, customers can conveniently withdraw cash. Their SpotMe® feature offers fee-free overdrafts, and their savings tool lets users round up purchases to effortlessly boost their savings. To round off, Chime offers an early direct deposit feature and a user-friendly mobile app for both iOS and Android.

Axos Bank

Axos Bank offers a rich suite of banking products, loans, and even commercial banking solutions, all without monthly fees or minimum balance stipulations. Though certain services like wire transfers might incur fees, customers benefit from high APYs and unlimited out-of-network ATM fee reimbursements.

The Axos Rewards Checking account, in particular, offers up to 3.30% APY and a tempting $100 sign-up bonus. For assistance and inquiries, Axos provides a well-reviewed mobile app and round-the-clock customer service, complemented by a live chat during regular hours.

Current

Current is a fintech firm that emphasizes transparency and affordability. With no hidden or monthly fees on its standard and teen bank accounts, it’s a hassle-free banking option. Current also waives common fees like overdraft charges and money transfer fees.

A standout feature is its credit-building tool, which allows users to boost their credit score through regular debit card usage, bypassing the traditional borrowing route. On top of this, with access to over 40,000 Allpoint ATMs and cash deposit facilities at major retailers like Walmart and CVS, Current makes managing money convenient for its users.

Summary

Weighing online banks vs. traditional banking can be tough, considering traditional banks offer so many digital banking options. Although online-only banks can discount fees and boost interest earnings, they can come with limited customer service offerings. Compare multiple banks to make sure you’re getting the best deal for your banking needs.

Stephanie Faris
Meet the author

Stephanie Faris is a professional finance writer with more than a decade of experience. Her work has been featured on a variety of top finance sites, including Money Under 30, GoBankingRates, Retirable, Sapling, and Benzinga.