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Online banks vs. traditional banks: Comparing rates, features and banking experience

Heather Petty and Yahia Barakah
Updated
Online banks vs. traditional banks (ProfessionalStudioImages via Getty Images)

Americans already do most of their banking online — at least 7 out of 10 U.S. households are enrolled in digital banking, according to a survey on digital financial literacy, with 95% of those enrolled saying they bank online occasionally or often.

If you’re using your bank’s app to pay bills or check balances, you're already familiar with how online-only banks work, and transitioning to one could be a way to save more money on account fees, get stronger returns on your savings and increase access to your cash through an international network of ATMs. But even if that’s not the way you’ve done your banking in the past, your willingness to learn how to use those tools could give you access to all the benefits that online banks have to offer.

Still, online banking isn’t for everyone. While a 2024 J.D. Power study reveals that customers of online-only banks are more satisfied overall than those of traditional brick-and-mortar banks, not all digital institutions get stellar customer service scores — especially when a problem’s complex. And with your entire experience depending on a bank's website and mobile app, when those tools get glitchy or change for the worse, customer satisfaction scores can slip.

If you’re interested in exploring your online options, here’s what to know about digital-only banks and how to get the most out of one for strong savings and a supportive banking experience.

An online bank works like your everyday bank, only without the network of physical locations you'll find with a banking chain like Chase or Capital One. With an online bank, your banking tasks are completed through your computer, phone or smart device — from opening your account, to setting up your login details, to actively managing your money.

You might already be familiar with online banking, because most traditional banks support websites and banking portals that allow you to check in on your deposit account balances, transfer money and pay your bills online. Many also support mobile banking apps through which you can deposit checks using your phone’s camera — called mobile check deposit.

While it might not matter to you whether your bank or credit union supports local branches, it can matter a lot when it comes to the interest you earn and the account maintenance fees you pay. Online banks don’t have the same kind of overhead required to keep branches and networks open, and they pass on those savings to their customers in the form of significantly higher yields on deposits and investment accounts — and lower or even no fees when compared to brick-and-mortar banks.

Online banks also tend to offer more robust mobile apps and websites with features like online budgeting, savings buckets and account alerts, among other useful tools. And just like with a traditional brick-and-mortar bank or credit union, your deposits are insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA).

Dig deeper: High-yield accounts vs. traditional savings account: Why it’s worth the switch

Online banks and credit unions work similarly to their traditional counterparts, often because they partner with larger financial institutions. You set up a username and password for connecting to your accounts through a secure website, online banking portal or mobile app to view your balances, transfer money between deposit accounts and conduct other tasks related to your personal finances.

In fact, some online banks are just the digital arm of a traditional bank. For example, Liberty Bank started online-only Owners Bank to focus on small business accounts, and American Commerce Bank opened the online-only Monesty Bank with a focus on financial security and account alerts to stop fraud.

Upgrade is an example of an online bank that partners with Cross River Bank, which supports physical branches in New York and New Jersey. Online banks like SoFi and Ally are large enough to not require partner banks at all.

A bank’s affiliations can be found in the small print near the bottom of its website, including whether it's a division of another bank or the specific bank services offered through its banking partners. That small print will also confirm the bank’s deposits are insured through FDIC or NCUA.

Dig deeper: How to make sure your bank is FDIC-insured — and what to watch for with nonbanks

When deciding whether to switch to an online bank, weigh how the higher interest rates and modern conveniences stack up against the lack of in-person services and potential technology requirements.

Pros

Cons

• Higher rates and lower fees

• Low minimum deposit and balance requirements

• On-the-go banking

• Perks that save time and money

• Round-the-clock customer support

• Access to wide ATM networks

• No in-person service

• Limited financial services

• No community outreach

• Requires digital literacy

• Cash deposits are tricky

  • Higher rates and lower fees. Online banks save a bundle without operating branch locations, and these savings translate into stronger annual percentage yields on high-yield savings accounts, checking accounts, money market accounts and investment products like certificates of deposits and IRAs. Many digital banks also commit to no-fee accounts supported by innovative budgeting and financial planning tools in banking apps for managing your money and strengthening your digital literacy.

  • Low minimum deposit and balance requirements. The best online banks require no minimum deposit to open the account and no minimum balance to earn the highest advertised APYs. These high yields help you grow your money and benefit from compounding interest.

  • On-the-go banking. You won’t need to wait in a teller line or drive-thru ever again. With an online bank, you can pay bills on your laptop while watching a movie or deposit a check in your PJs at the breakfast bar with a few swipes on your phone or tablet.

  • Perks that save time and money. You may miss the days of free toasters for opening a deposit account, but some online banks offer useful perks — like access to direct deposits up to two days early or free cellphone protection coverage in exchange for paying your mobile bill with your debit card.

  • Round-the-clock customer support. Not all online banks are created equal, but many offer customer support that’s open 24/7. And if you’d rather avoid soft jazz on hold while you wait for the next available representative, many banks also support live chat, texting or in-app messaging for help.

  • Access to wide ATM networks. With most online banks, you won’t need to hunt down a location near you to take out cash. Rather, many partner with nationwide (and sometimes international) networks of ATMs that you can use for free cash withdrawals — and they might even reimburse your out-of-network ATM fees.

Dig deeper: 13 common bank fees you shouldn't be paying — and how to avoid them

  • No in-person service. If you’re used to clearing up issues by walking into your local bank branch, lack of a personal touch can be a deal-breaker. Online banks offer several ways to get your questions answered — just make sure to read customer reviews and complaints before opening an account. With no in-person alternative, you want to be sure you’re working with a bank that gets high customer service scores from its clients.

  • Limited financial services. Online banks might not offer the wide range of deposit accounts you'll find at a neighborhood branch. If you like to keep valuables in a safe deposit box or exchange currencies with your home bank, you'll need to find an alternative for these in-person services.

  • No community outreach. Local banks and credit unions understand the needs of the areas they service. They might encourage employees to volunteer in the community or sponsor charity events and art festivals. It doesn’t help your bottom line, but it can make a difference in your backyard.

  • Requires digital literacy. You don’t need to be a computer whiz to manage an online bank account, but you should be comfortable enough with the internet and phone apps to manage your banking online.

  • Cash deposits are tricky. If your earnings tend to come as cash — whether tip money, bonuses or consulting fees — your options for deposits are limited. Some online banks partner with third-party services like Green Dot that allow you to deposit cash onto your debit card or write a check for cash at more than 90,000 retailers like Walmart and CVS. Though while your bank may not charge for the convenience, the retailer can charge as much as $5.95 per transaction.

Dig deeper: Low-cost internet for seniors and retirees: How to stay connected without breaking the bank

A traditional bank is a bank with physical branch locations where you can have face-to-face service with tellers and bankers. These brick-and-mortar institutions, like Chase, Wells Fargo and local community banks can provide a familiar and personal approach to banking.

When you walk into a traditional bank, you'll find services ranging from basic checking and savings accounts to more complex financial products like mortgages, personal loans and investment services. These banks typically operate during standard business hours, though most now complement their in-person services with online banking options that give you broader banking access.

Since traditional banks have overhead expenses to operate and maintain their branches, they typically charge higher account fees and pay a smaller percentage of interest out to their clients.

For example, the checking accounts from Chase, Wells Fargo and Bank of America charge monthly maintenance fees unless you maintain a minimum balance or receive direct deposits. The traditional savings accounts the same banks offer also come with monthly maintenance fees and typically pay 0.01% APY.

Dig deeper: As prices rise, my high-yield savings still beats inflation and traditional banks — here's how

Traditional banking focuses on your relationship with your local branch. When you open an account, you'll typically visit a branch, present your identification and sit down with a banking representative who guides you through the paperwork and explains available services.

This face-to-face interaction helps establish a personal connection that can prove valuable when you need financial guidance or assistance later. On top of that, many traditional banks also provide notary services and offer safe deposit boxes to store valuable documents or jewelry.

To fund these services and maintain their physical branches, traditional banks use various revenue sources. For example, when you keep money in your checking or savings account, the bank doesn't simply store it in a vault. Instead, they lend most of it out to other customers in the form of mortgages, car loans and business loans, charging interest rates much higher than what they pay you on your deposits.

For example, while you might earn 0.01% APY on your savings account, the bank might charge 7% interest on a car loan using those same funds. This difference in interest rates – called the spread – represents one of the bank's main sources of income. Banks also earn money through various account fees, investment services and merchant processing fees when you use your debit card. All these revenue streams help fund the overhead costs of maintaining branches, paying staff and providing you with personalized services.

Dig deeper: Top banking mistakes that could be costing you money (and how to avoid them)

Traditional banks offer several advantages that make banking easier, but they also have a number of disadvantages that mainly affect your money and passive interest income.

Pros

Cons

• Face-to-face customer service

• Easy cash deposits

• Safe deposit boxes

• Notary services

• Currency exchange services

• Access to cashier's checks

• Lower interest rates on savings

• Higher account fees

• Geographical restrictions

• Slower service during peak times

  • Face-to-face customer service. Traditional banking can help you build meaningful connections with bankers who understand your unique financial situation and goals. Having a personal banker means you work with someone who knows your history, understands your financial goals and can proactively suggest products or services that match your needs.

  • Easy cash deposits. Unlike online banks that might require you to find special ATMs or pay fees at retail stores, traditional banks make it easy to deposit cash in-branch. Many traditional banks also support after-hours cash deposits at their physical locations through a special secure box or ATMs that support deposits.

  • Safe deposit boxes. Many traditional banks offer these secure storage spaces for your valuable items and important documents. You can store property deeds, wills, family heirlooms and precious jewelry in a secure environment that's protected from theft, fire and natural disasters.

  • Notary services. The convenience of having documents notarized right at your local branch saves significant time and hassle. Instead of taking the time to find a notary public or paying higher fees at shipping stores, you can often get these services free or at a minimal cost right where you do your banking.

  • Currency exchange services. Your local bank branch can typically convert foreign currency before and after international trips, often with better rates than you'd find at airports or tourist spots. Although a travel credit card is typically a better option to pay abroad while earning rewards, this service can be valuable for getting local currency during overseas travel or helping relatives who visit from abroad.

  • Access to cashier's checks. Some transactions — like car purchases or security deposits — may require official bank checks. At a traditional bank, you can get one within minutes instead of waiting days for a check to arrive in the mail.

Dig deeper: Year-end financial checklist — your guide to reviewing and protecting your assets and future

  • Lower APY rates. Your savings won't grow nearly as quickly at a traditional bank. While many online banks currently offer annual yields of 4% or higher on savings accounts, traditional banks typically pay around 0.01% APY. On a $50,000 savings balance, that difference could mean earning $2,000 a year versus just $5 — a significant gap in passive income that requires no work from you.

  • Higher account fees. The cost of maintaining branches and staff often translates into a variety of charges that can steadily erode your balance. Monthly maintenance fees might run $6 to $15 unless you maintain a minimum balance or meet other requirements. Add in potential overdraft fees of $35 or more per incident, along with other common bank fees, and these costs can add up quickly.

  • Geographical restrictions. Aside from a few nationwide banks, many traditional banks have limited reach outside their home regions, which can be limiting if you travel frequently or spend winters in warmer states. For example, you might face additional fees for using out-of-network ATMs, experience difficulties making deposits while away from home or struggle to access full banking services when you're not near a branch.

  • Slower service during peak times. Mid-morning and lunch hour rushes mean you might spend more time waiting in line than actually completing your banking tasks. What should be a quick deposit or withdrawal can turn into a 30-minute wait during busy periods.

Dig deeper: 5 best ways to invest and grow $50,000

There’s no definitive best when it comes to online versus traditional banks. Instead, it could make sense to take advantage of both.

If you prefer an in-person touch for your day-to-day banking needs, a local bank branch can offer the perks you need while you take advantage of online-only high-yield accounts to boost earnings on your savings. Or maybe you never want to stand in line at a teller window ever again but like an easy way to exchange your currency before international trips.

If so, you can open a free account at your local bank with a minimum deposit and then find your best online-only match at the highest rates to grow your money faster.

Dig deeper: Best high-yield savings accounts — top APYs on the market today

Learn more about digital banks and online accounts when looking for the best fit with your budget and financial goals.

Digital banks use secure sites and mobile apps to support banking transactions, like monitoring deposits and payments and moving money between accounts. Fintechs — derived from financial technology — use a lot of the same technology with a focus on improving the traditional financial industry by finding gaps and streamlining services.

Fintechs can be FDIC-insured charter banks or partner with traditional banks to offer, for example, deposit insurance and other basic banking protections. Look for terms like "member FDIC," "FDIC insured" or "NCUA insured" when comparing your options. And learn more about how to confirm your nonbank is FDIC-insured.

Saving up $10,000 is an impressive milestone that opens up several financial opportunities that can better position you for a more stable financial future. You can put it to work through passive income streams, contribute to growing a retirement fund or pay down high-interest debt. See our guide to the five smartest moves to make with your $10,000.

What happens to your bank account when you die largely depends on whether you’ve named a beneficiary to receive your assets after you die or you share the account with a joint owner. Learn more — including tips you can take now to avoid complications down the road — in our guide to bank accounts and death.

Yes, online banking is as secure as other types of banking. Online banks use cutting-edge technology and encryption software that keeps your money and accounts safe. They often require multifactor authentication — a process of confirming you are who you say beyond usernames and passwords, asking you to answer personal questions or provide your fingerprint, for example — as well as monitor your account for fraud, alerting you to suspicious activity through your online account or banking app.

As with your traditional or everyday bank account, you can minimize scams, fraud and ID theft by keeping to a few practical ways to keep your financial information and identity safe online:

  • Monitor your account regularly. If you see something out of the ordinary in your transactions or statement, contact your bank as soon as possible to open an inquiry.

  • Don’t share your password or account details. Banks will never ask you to confirm or provide passwords or PINs over the phone or through email. If you receive a suspicious call, hang up and call your bank’s customer service line. Avoid clicking links in emails that say they’ll connect to your bank — instead, type your bank’s URL in a fresh browser tab and sign in with your username and password.

  • Don’t use public Wi-Fi to bank online. It’s best to avoid financial transactions on public networks, hotspots or other shared networks — even if they require a password. You never know who else you’re sharing your info with.

Keep in mind that getting a refund from your bank after getting scammed isn't always straightforward. That's why it's best to be vigilant when it comes to banking transactions.

Dig deeper: Top financial scams targeting older Americans — and how to keep your money safe

Heather Petty is a finance writer who specializes in consumer and business banking, personal and home lending, debt management and saving money. After falling victim to a disreputable mortgage broker when buying her first home, Heather set on a mission to help people avoid similar experiences when managing their own finances. Her expertise and analysis has been featured on MSN, Nasdaq, Credit.com and Finder, among other financial publications. When she's not breaking down the complexities of finance, she's a young adult mystery writer of an internationally acclaimed series — and counting.

Yahia Barakah is a personal finance writer at AOL with over a decade of experience in finance and investing. As a certified educator in personal finance (CEPF), he combines his economics expertise with a passion for financial literacy to simplify complex retirement, banking and credit topics. He loves empowering people to make informed financial decisions that improve their everyday and long-term wellness. Yahia's expertise has been featured on FinanceBuzz, FX Empire and EarnForex. Based in Florida, he balances his love for finance with freediving, hiking and underwater photography.

Article edited by Kelly Suzan Waggoner

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