Online Banking vs. Traditional Banking — Which Might Be Best for You?

Technology has changed almost every aspect of our lives — including the ways we manage money. 

Gone are the days of balancing checkbooks, carrying cash and chatting face-to-face with bank tellers. Today, it’s possible to do all our banking in an entirely digital way. 

Almost overnight, there are online-only banks, contactless payment technology and infinite financial apps and services. All this change has taken place so quickly that it’s worthwhile to take a step back to compare online banking vs. traditional banking. 

What are we giving up when we ditch brick and mortar banks — and are the trade-offs worth it? 

Online banking vs. traditional banking

Put simply, traditional banking takes place in-person, while online banking takes place digitally (online or through an app). 

These days, every bank offers some sort of online banking system. Even the oldest banks in the world are now “hybrid” banks, offering both in-person services as well as online banking that includes the option to:

• Transfer funds

• Pay bills

• Monitor balances

The difference is that traditional banks have the option to do all your banking activities in person. Newer, online-only banks offer exclusively online banking. 

Online-only banks

There’s a new breed of bank on the block: The online-only bank. 

These new financial services don’t have physical bank branches and may not even have their own ATMs. 

Every service that these banks offer is accessed through a website or app. Some may also offer telephone banking, but the entire process is handled online for the most part. 

When traditional banks offer many of the same services in addition to retail locations, you may be wondering, what’s the point of online-only banking? Why would you give up access to physical bank branches with smiling bank tellers and (sometimes) free coffee? 

The answer is simple: 

• Cheaper services 

• Lower interest rates on loans

• Higher interest paid on your deposits 

These online-only banks have far fewer overhead costs. They don’t pay for physical retail bank space (including the free coffee) or cover extensive payrolls with hundreds of employees. In many cases, they’re able to pass those savings on to their customers. 

Are online banks safe?

Yes, online banks are safe.

Online-only banks are subject to the same financial regulations as standard brick-and-mortar banks. Most are FDIC-insured, which means your deposits are guaranteed by the federal government (even if the bank goes out of business). 

So long as you choose an FDIC-insured bank (search the FDIC database here), you don’t need to worry about the safety of your funds.

Of course, it’s still important to set a strong password for your bank account and not disclose financial details to anyone unless necessary. 

Online-only banks vs. traditional banks

If you’re looking around for a new bank, you may be weighing the pros and cons of online banking vs. traditional banking. This section breaks down some considerations to keep in mind. 

Online banking benefits

Higher yields: Online banks typically offer the best yields on savings accounts and even checking accounts, which means you’re rewarded more for keeping your money with an online bank. High-yield accounts from top online banks may offer as much as 25x the national average (although rates are still quite low by historical standards). 

Lower fees: Online banks offer cheaper services, with low or even no fees. Many don’t have monthly service or maintenance charges, and some even waive ATM fees and other miscellaneous expenses. 

ATM networks & reimbursements: Many online banks offer access to an extensive network of ATMs throughout the country. They don’t necessarily own ATMs but will partner with other banks to allow customers access. Some online banks allow you to use any ATM and simply refund any fees that the ATM’s owner charges. 

Online bank drawbacks

No face-to-face interaction: If you opt for an online-only bank, you won’t get the community aspect of going to your local bank each week. 

Cash transactions are harder: If you’re someone who likes to use cash frequently, you may find that your banking is a bit more complex if you use an online bank. You’ll be limited by ATM withdrawal and deposit limits for cash (typically $300-$600 per day). 

Traditional banking benefits

Face-to-face banking: If you enjoy the day-to-day interactions of chatting with your bank teller or personalized service, a traditional bank may make more sense. 

Additional services: Many traditional banks offer a wider variety of services than an online bank may offer. For instance, large traditional banks can rent you a safe deposit box, issue cashier’s checks, help you with a mortgage or even provide notary services. 

Easier cash transactions: Because you can go to an online bank, it’s much easier to process large cash transactions without running into ATM limits. 

Traditional bank drawbacks

Higher fees: Many traditional banks have higher fees, in the form of account maintenance fees, overdraft fees, late fees, check fees, wire fees and more. 

Lower yields: In general, the yields (the interest paid on your money) from traditional banks will be lower than online banks. Most major banks offer an APY of just 0.01%, and the average is just 0.06% at the time of publishing. 

Higher APRs on loans: If you have loans or credit card debt, traditional banks will generally charge you more in interest than a comparable online bank would. If you have existing credit card debt, Tally† can help you consolidate debt and pay off your credit card debt faster. 

Bank on it

Ultimately, the main differences between traditional and online-only banks are twofold: 

• The “Human Factor.” If you want face-to-face interactions with tellers and bank workers, opt for a brick-and-mortar bank.

• The “Cost Factor.” Opt for an online-only bank if you prefer to have lower fees, lower interest rates on loans, and better yields on your savings accounts.

Finally, keep in mind that you could opt to keep your traditional bank account open and open a high-yield online account with a new bank. This could offer “the best of both worlds,” so to speak. 

Online-only banks can be a good choice for some people, but others may prefer the benefits of a traditional bank. There’s no right choice, and deciding which bank offers the best bang for your buck is a personal choice. 

†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. Based on your credit history, the APR (which is the same as your interest rate) will be between 7.90% - 29.99% per year. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.