Banks are an essential part of life.
After all, banks are where we deposit checks and obtain loans. They’re the place where we get credit cards, make withdrawals, and exchange currencies.
For centuries, banks have provided (most) of these financial services on one condition: you needed to transact in person at the physical bank branch.
That’s not the case anymore, and in 2022, the world of banking has moved online.
While 75% of the U.S. population is banking digitally in some form, roughly 14% of the population is “online only.” In other words, their bank of choice has no physical location.
By 2025, that number will grow to 20% — when over 53 million Americans will bank exclusively online.
And while many people are continuing to visit bank branches in person, that number is steadily declining.
In 2019, there were 5,000 fewer commercial bank branches than there were in 2010. And in 2021 alone, nearly 3,000 bank branches shuttered across the country, including storefronts from industry leaders JPMorgan Chase and Wells Fargo.
There are three major reasons for this shift:
- Society is becoming increasingly “cashless”
- COVID-19 accelerated the relevance of online banking
- Challenger/digital-only banks have surged in popularity
While banks struggle to adapt, consumers are enjoying increased optionality.
They only need to answer one question: how do you choose between an online-only bank or a traditional one?
Here are some general reflections to help you move forward with confidence.
The Appeal of Traditional Banks
Let’s face it: old-school banks have big-name appeal.
Institutions like Chase, Bank of America, and Citigroup manage trillions of dollars.
They have branches in America’s smallest towns and biggest cities, and the C-Suite executives at each of the biggest banks are on a first-name basis with lawmakers on Capitol Hill.
In other words, traditional banks give consumers confidence because they’re an established presence. They have a long history and have survived the highs and lows of the market.
Traditional banks also deliver the largest selection of financial products and services. Beyond standard checking and savings accounts, traditional banks offer mortgages, personal loans, auto loans, credit cards, and more.
Plus, many of these institutions will provide investment management services with an in-house financial advisor. This can be a great, convenient way to grow and protect your assets under one roof.
Finally — and perhaps most notably — bigger banks are best regarded for their customer service. When you visit brick-and-mortar branches, you’ll not only be able to use their ATMs, but you’ll be assisted by their professional staff.
Note: Though traditional banks are different from their “online-only” counterparts, most of them have a robust online presence. For example, banks like Chase and Wells Fargo have advanced mobile apps that allow you to manage your financial life on the go.
Traditional banks are certainly online. They’re just not online only.
The Value of Online-Only Banking
Practically speaking, online banks are quite similar to traditional banks.
Like the bigger institutions, online-only banks are subject to the same laws and regulations — and most of their accounts are backed by the Federal Deposit Insurance Corporation (FDIC).
In other words, your money is equally safe at both a traditional or online-only bank.
The only major difference is that online banks don’t have physical branches (in most cases).
And because they aren’t paying rent for big buildings and have leaner operational costs, online banks are typically able to provide higher interest rates on deposits.
For example, let’s say you have $5,000 saved and plan to leave it in the bank for five years.
If you put the money in a traditional bank — where interest rates are currently .06 percent — you would earn roughly $15 at the end of those five years.
However, if you put the money in an online-only bank paying .6 percent interest, you would earn $152 at the end of those five years.
The value of such high-yield savings accounts is undeniable (especially in periods of record inflation).
To run similar compound interest computations, use this free calculator.
Secondly, it’s important to note that online-only banks have little to no fees.
It’s no secret that traditional banks are infamous for monthly checking account fees, non-network ATM fees, and worst of all, overdraft fees. In 2020, banks charged U.S. consumers over $12.4 billion in overdraft fees.
Online-only banks aim to be different, and most of them go out of their way to avoid charging fees of any kind.
Note: If you’re worried about having limited access to ATMs, don’t be. Most online-only banks provide access to major networks with thousands of available ATMs. Plus, some digital banks will even offer to reimburse you for any fees incurred from ATM withdrawals.
Moving Forward
Here’s the good news: you don’t have to choose between a traditional or online-only bank.
You can have the best of both worlds.
In fact, you may actually benefit from having more than one account.
For example, you may decide to dedicate one account to your recurring bills, while your online-only bank account may be suited for monthly expenses (like entertainment and dining out).
Beyond the obvious budgetary benefits, having both a traditional and online-only account will also give you access to the widest array of financial tools. For example, if you’re in the market for a personal loan, you’ll be able to pick the best available rate — rather than being stuck with only one option.
Ultimately, the differences are clear: while traditional banks have superior name recognition and in-person accessibility, online-only banks typically offer lower fees and higher interest rates.
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