Online Banks vs Traditional Banks, Which Is Better for You?

More and more online banks are debuting; are they as good as they say they are?

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Banking is changing in a big way. Finding a good deal on a checking or savings account has become increasingly more difficult due to banks charging higher fees. However, 2020 saw the most extensive integration of online banking in all of history. Gone are the days when you could only do business in a brick-and-mortar location. Now, thanks to online banks, all you need is an internet device with an internet connection.

When it comes to deciding where to put your money, the options are limitless. With so many banks out there and new ones popping up all the time, deciding where to do your banking can have significant effects on your finances.

A 2020 Bankrate survey found that the typical checking account customer at a traditional, brick-and-mortar bank keeps their account for around 14 years on average, despite rising fees and rock-bottom yields. This implies that consumers rarely switch banks and are very brand loyal when it comes to their finances, a similarity you can find in the smartphone and internet provider industries.

Still, with low fees, relatively high-interest rates, and 24/7 online access, online banking is convenient and has the ability to save you both time and money. Here is a deep analysis on both of these sectors of banking.

Online Banks vs. Online Banking Platforms

In 2020, online-only banks and platforms are winning over a growing number of consumers who are switching over from traditional banks. According to a forecast published in September 2021 by Insider Intelligence and eMarketer, the share of online bank account holders in the U.S. is expected to jump from 11.4% in 2021 to 19.9% by 2025. What is the reason for this big jump? First, we need to take a look at the difference between online banks and online banking platforms.

With similar titles, online banks and online banking platforms are two completely different financial services. Most banks provide online banking in addition to the services they offer at physical branches. However, more and more banks are operating strictly online due to the physical labor and physical location costs they save. An online bank offers similar products and services as brick-and-mortar financial institutions, but only through the internet instead of a branch location.

Online banks allow you to open up savings accounts, checking accounts, and money market accounts in a matter of minutes, making it super convenient and simple to open an account compared to traditional banks. Investment and loan options are also available in most online banks. Some examples of online banks include Ally Bank, Barclays, Axos Bank, Capital One 360, Discover Bank, and Synchrony Bank. All online banks are FDIC insured and regulated by government agencies easing fraud concerns from potential consumers.

Meanwhile, online banking platforms act like online banks but are not FDIC-insured banks. However, online banking platforms are still safe as long as their accounts are federally insured by other partner banks, which most platforms are. Some examples of these online banking platforms include Ando, Aspiration, Betterment, Chime, One, OnJuno, Wealthfront.

Online banking platforms will typically have fewer banking options than online banks. There are usually only have the choice of one or two accounts, like a savings account or hybrid checking/savings account. What separates these online banking platforms are their great benefits to consumers and interest rates some online and traditional banks can’t compete with.

Smaller online and traditional insured banks have found it mutually beneficial to team up with online banking platforms to compete against financial giants like Bank of America or Wells Fargo. Online banking platforms benefit even more as they can now be federally insured and gain trust from consumers. This leads to many online banking platforms carrying no capital for customer transactions as they act as the middle man between consumers and the partner bank.

Pros and Cons of Online Banking and Online Banking Platforms

Pros	Cons
High interest rates. Online banks and online banking platforms tend to offer higher interest rates than brick-and-mortar banks due to their physical labor and physical location costs they save.	Fewer account options. Most online banking platforms have one or two account options. Savings accounts, checking accounts, or hybrid accounts are among the most common accounts offered. Online banks have more options than online banking platforms.
Intuitive interface. Online banks and online banking platforms are often more user-friendly than traditional brick-and-mortar institutions and will often include many advanced and intuitive features. Some, like Ally and Chime, have features that also help show progress in financial goals.	Can't deposit/withdraw cash easily. You'll have to withdraw cash at an ATM which may give you unwanted fees. Some online banking platforms let you deposit cash at GreenDot locations for a fee.
Highlight specific social causes. For instance, Ando and Aspiration specialize in supporting environmental activism through banking.	​No in-person customer service. The lack of branches also means digital banks don't provide in-person customer service. Instead, you might wind up talking to someone over the phone via live chat to get help with your banking needs.
Lower fees. Online banking platforms often won't charge monthly service fees, and some have gotten rid of overdraft fees.
​Opening an account is quick and simple. Opening an account online takes a couple minutes. To set up a checking account at Ally, for instance, you must be at least 18 years old and supply just the following information: legal name, date of birth, social security number or tax identification number, and residential street address.

Traditional Bank Overview

While traditional banks have been the more stable option, times are changing, and it's important to reexamine what makes traditional banks unique.

​Pros	Cons
Cash deposits and withdrawals. Since digital banks typically don't operate branches, you most likely will need to find an ATM that accepts deposits. Traditional banks help you avoid this hurdle by letting you deposit and withdraw cash at their physical locations. Most traditional banks also have a large ATM network available all over the U.S.	​Low interest rates. Online banks and online banking platforms tend to offer higher interest rates than brick-and-mortar banks.
In-person customer service. The lack of branches also means digital banks don't provide in-person customer service. Instead, you might wind up talking to someone over the phone via live chat to get help with your banking needs. Because traditional banks do maintain branches, you can get help from a banker in person during normal business hours.	Higher fees. Online banking platforms often won't charge monthly service fees, and some have gotten rid of overdraft fees.
​Broader range of accounts and products. Traditional banks generally provide a wider range of accounts and products than online banks and platforms.	Opening an account can take a while. At a traditional bank, you’ll likely have to bring documentation with you and visit a branch during normal business hours. You could find yourself waiting anywhere from five minutes to an hour for your account to be completely set up.
Stability of technology. Technology problems and power outages could temporarily halt operations for online banks and platforms. Meanwhile a traditional bank might encounter the same problems with online functions, its branches might not be affected by tech outages.

Bottom Line

While online banks and platforms are the future, it is important to consider their practicality in terms of what service you are looking for. While online banks and platforms provide great interest rates and low fees, they are quite limited in the account options they offer deposit/withdrawal capabilities and in-person customer service. Before you make the leap into online banking, make sure to consider the most important functions that you are looking for in a financial institution.