What Are the Benefits of an Online Bank vs. a Traditional Bank?

A man wearing a blue shirt signs a check at the bank window.

Banking is changing in a big way. Gone are the days when you could only do business with a bank by visiting one of its brick-and-mortar branches. These days, thanks to online banks, all you need to do your banking is a device with an internet connection.

More than anything else, online-only banking offers convenience. But it also can supply products and services that may rise above those provided by traditional banks. Follow along as we open a vault of information about online-only banking.

What Is Online Banking?

Most banks provide online banking in addition to the services they offer at physical branches. However, more and more banks are operating strictly online. Online-only institutions include Ally, Axos, Discover and many more.

These banks operate mostly like traditional banks, except that customers do business with the bank entirely online, either via computer or mobile device. They may not have any physical branches at all, or may have just one. Account holders typically use a bank-issued debit card to spend or withdraw money, and are able to transfer or deposit money (including checks) at an ATM or via the bank's website or mobile app. In some cases, online-only banks will let you write paper checks.

Online-only banks like to boast about the simplicity of opening an account. 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
  • Residential street address in the U.S.

You also might be asked to submit a copy of your driver's license or another form of ID.

Aside from submitting an account application online, you might be able to apply over the phone or by mail.

What Are the Advantages of Using Online Banks?

In the U.S., digital-only banks are winning over a growing number of consumers. According to a forecast published in September 2021 by Insider Intelligence and eMarketer, the share of digital-only bank account holders in the U.S. is expected to jump from 11.4% in 2021 to 19.9% by 2025. Why the surging interest in online-only banks, with some folks even switching entirely from traditional to digital banking? Here are five reasons.

  1. Lower fees: In many cases, account fees at online-only banks are lower than they are at traditional banks. For instance, most digital banks don't charge a monthly account maintenance fee, whereas many traditional banks do. Ally, Axos, Discover and a number of other online banks do not require a minimum deposit to open an account, either.
  2. Better interest rates: At a lot of online-only banks, you'll earn a higher interest rate on checking and savings accounts than you would at traditional banks. For example, you could earn an APY (annual percentage yield) of 0.10% or 0.25%, depending on the balance, on an interest-bearing checking account at Ally as of September 2021. Their online savings account offers an APY of 0.50% for all balance tiers. By comparison, the interest on a basic savings account through a traditional bank can be as low as 0.01%.
  3. Large ATM networks: Many online-only banks provide access to networks with thousands of ATMs—perhaps more ATMs than traditional banks. A digital bank might even reimburse the fees you pay to use those ATMs.
  4. Convenience: If you own an account at an online-only bank, you can conduct business on any day, at any time and from any place, as long as you have a computer or a digital device. No need to head to a bank branch.
  5. Many standard bank services: In addition to standard checking and savings accounts, many online-only banks offer other traditional banking services and products, such as money market accounts, certificates of deposit (CDs), mortgages, auto loans, personal loans and investment options.

Are Online Banks Better Than Traditional Banks?

Online banks aren't necessarily better than traditional banks. But they're definitely different. Here are five ways that traditional banks may actually be better than online banks.

  1. Cash deposits: While you can pretty easily deposit a check into a digital bank account, the same is not true for cash. Since digital banks typically don't operate branches, you most likely will need to find an ATM that accepts deposits. Or you might need to deposit the cash into a traditional bank account and then transfer the money to your online bank account. You probably won't face the same hurdles if you're dealing with a traditional bank.
  2. Easier cash withdrawals: Your ability to withdraw cash from a digital bank account may be limited. Why? Because the bank might impose a daily limit for ATM withdrawals. A teller at a traditional bank branch might be able to hand you more cash than a digital bank would be able to let you take out at an ATM.
  3. 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.
  4. Broader range of accounts and products: Traditional banks generally provide a wider array of accounts and products than their digital counterparts. A traditional bank normally can, for example, offer safe deposit boxes or check-writing privileges. These and other options might not be available at an online bank.
  5. Stability of technology: Let's say your digital bank's website and mobile app aren't working. Now what? Well, you may not be able to access your money, pay bills or carry out other banking tasks. While a traditional bank might encounter the same problems with online functions, its branches might not be affected by tech outages.

The Bottom Line

Digital banking lets you potentially cash in on a bucketful of benefits—lower fees, higher interest rates and around-the-clock convenience, to name a few. Yet an online-only account usually falls short of an account at a traditional bank when it comes to things like cash deposits and in-person customer service. Before you make the leap into digital banking, be sure to take into account what's most important regarding where you stash your cash.

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