Online Banks Vs. Traditional Banks: Which Are Better?

Online banking lets you manage your money from anywhere at any time, and it’s outpacing in-person banking. More than three in four Americans say they’d rather bank via a mobile app or website than go into a local branch.

While most financial institutions offer digital banking, online banks operate fully online and often have more robust, user-friendly websites and mobile apps than traditional banks. Often, these digital banks also tout lower fees and more competitive interest rates. But for some people, traditional banks may win out.

What Is Online Banking?

Online banking is banking that takes place digitally through a computer or smartphone. Most financial institutions now allow customers to access their accounts online through a website or mobile app and complete basic actions like balance inquiries, electronic transfers and bill payments.

There are also online banks, which are financial institutions that operate mostly or fully online—like Ally Bank, Vio Bank and Axos Bank. Online banks don’t typically have physical branches, although some hybrid banks like Capital One 360 operate a handful of brick-and-mortar locations. Like traditional banks, online banks are usually chartered and insured by the FDIC to keep your deposits safe.

With online banks, you can take care of all your banking needs electronically, including:

• Opening a new account
• Depositing checks
• Transferring funds
• Paying your bills
• Tracking expenses
• Saving money

Many online banks operate ATM networks where you can deposit and withdraw cash, often without fees. Others may offer ATM fee reimbursements for using out-of-network ATMs.

What Are the Advantages of Using Online Banks?

Because online banks are completely digital, they tend to have lower overhead costs and focus more on building user-friendly, feature-rich mobile apps and websites. This allows them to offer the following perks:

• No or low fees. Most online banks don’t charge monthly maintenance fees. And others, like Discover Bank, go even further by eliminating all common banking fees, including overdraft fees or out-of-network ATM fees. Almost all of the best no-fee checking accounts and best no-fee savings accounts are available with online banks.
• Competitive interest rates. Online banks tend to offer the highest annual percentage yields (APYs) on deposit accounts. Online banks also have many of the best high-yield savings accounts and high-yield checking accounts. If you’re looking for the best CD rates, credit unions and online banks usually come out on top.
• Low or no minimum deposit requirements. Unlike some traditional banks, most online banks don’t require you to maintain a minimum balance. They also tend to have low or no minimum deposit requirements to open an account.
• Early paychecks. If you get direct deposits from an employer, some online banks, like Capital One and SoFi, will let you get paid up to two days early.
• Automated bill payments. Online banks make it easy to schedule automatic bill payments electronically so you can avoid missing payments and track when money will be withdrawn from your account.
• Mobile check deposits. Most online banks let you deposit checks electronically by snapping a photo of your check and uploading it to the mobile app.
• Free ATM withdrawals. Some online banks operate fee-free ATM networks that are just as, if not more, expansive than those offered by traditional banks. Others, like Charles Schwab Bank, don’t have ATM networks but offer ATM fee reimbursements.
• Additional perks. Many online banks entice customers with benefits like cash-back debit cards, generous bank account sign-up bonuses and in-app saving and budgeting tools.

What Are the Drawbacks of Online Banks?

While online banks excel in many areas, there are some drawbacks to keep in mind:

• Cash deposits and withdrawals may be limited. While some online banks let you use an ATM to deposit cash, others don’t accept cash deposits at all. Some online banks that only offer savings products might not offer ATMs or allow you to withdraw cash. Instead, you’ll have to withdraw funds by transferring them to an external account.
• Most don’t have physical branches. Unless it’s a hybrid bank like Capital One, online banks don’t have branches you can visit, so you won’t be able to access in-person financial services.
• The range of account offerings may be limited. Most online banks offer fewer financial services than you’d find at a full-service traditional bank. An online bank may only offer a checking account, a savings account and a CD account, while big national banks like Chase and Bank of America offer a full range of lending and investment products in addition to bank accounts.

Are Online Banks Better Than Traditional Banks?

Online banks are better than traditional banks when it comes to minimizing fees and securing the most competitive rates. These banks also tend to offer superior websites and mobile apps with more features.

When it comes to finding a full range of financial services all in one place, traditional banks tend to win out. Plus, if you like banking in person or need to deposit cash, traditional banks may be better for you.

To reap the best of both worlds, consider having traditional bank accounts for in-person service and online accounts for low fees, high APYs and other perks.