The pros and cons of brick-and-mortar banks vs. online banks

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While not all financial advice applies to every individual or family, there’s one money rule no one can escape. Everyone needs to have some money in a savings account.

Not only do you need savings for a rainy day, but it’s also smart to keep extra cash on-hand for emergency expenses, pricey home repairs and unexpected medical bills.

But, where should you keep your savings? That’s an entirely different question, but it’s also one only you can answer.

Keeping your savings in a bank down the street may seem like the obvious play, but there may be real downsides for doing so. If you’re trying to figure out the best place to park your cash, keep reading to find out why online banks may be a better option.

The pros and cons of using your local bank

According to a 2018 Bankrate and Money survey, the average U.S. adult has used the same bank account for 16 years. If you fall into that category, you’ve most likely been with your local bank since you opened your first checking account at age 13. They gave you your first auto loan when you barely had any credit history, and you may have even went to them for your first mortgage. Why wouldn’t you want to keep your savings with a bank that has played such a constant role in your life?

The answer is simple — opportunity cost. The average brick-and-mortar bank is paying .01 percent APY on their savings accounts this year. Some of the country’s biggest banks pay even less than that. When you park your money in a bank account that’s not offering enough interest to keep up with inflation, it’s important to think long and hard about what you’re giving up.

Imagine you have $10,000 saved and the ability to let it sit in an account for five years. If you earned .01 percent on your savings during that time and interest compounded monthly, you would earn a whole $5 over five years for a grand total of $10,005 in the end.

If you earned 2.25 percent on your savings, on the other hand, you would end the five-year period with $11,189.54 in the bank. That’s a big difference, especially since there’s no additional effort on your part.

Another downside of using a savings account from a traditional bank is the fact that most aren’t free of fees — or they make it difficult to avoid them. With a Chase savings account, for example, you must keep a minimum amount on deposit, set up repeating transfers or link to one of their premier checking accounts to avoid the $5 monthly account management fee.

Your local bank may also offer additional products and loans you need access to such as home equity loans, auto loans, personal loans and mortgages, but you’ll never know how competitive they are unless you shop around. Typically speaking though, loans from traditional banks come with higher fees and higher rates over all.

[Related: How to overcome ‘fear of the fee’ with alternatives to traditional banks]

Of course, there are upsides to using a traditional bank — and especially one you’ve known and trusted your whole life. For example, you may know your banker and have a personal relationship with people who work in your local branch. You can also stop by your bank to ask questions and speak with a person who can access your account, which makes traditional banking infinitely more personal than online banking. Some consumers enjoy the familiarity of banking with people they know, and it’s hard to blame them for that.

If you have money to deposit or withdraw, you can also swing by your local branch and complete the transaction in person. Most big banks also have broad ATM networks customers can access in the local area and other parts of the country.

Here’s a breakdown of pros and cons:

Pros of brick-and-mortar banks:

  • You can stop by in person to ask questions
  • Convenience and a personal experience
  • You may have access to a broad ATM network

Cons of brick-and-mortar banks:

  • Fees and interest rates may not be competitive
  • Most big banks pay almost nothing on their savings accounts

The pros and cons of online banks

If you love your local bank but want loans with better terms or more interest on your savings, you may want to consider an online bank. Many online banks offer interest rates that are 20 times the national average on their savings accounts and CD products, and many come with no fees at all. Online banks intentionally make it easy to transfer money into and out of their accounts, and some come with mobile apps that make mobile banking a breeze.

Take the CIT Bank Savings Builder account, for example. This high-yield savings account lets you earn 2.45 percent APY with a minimum balance of $25,000 or a monthly transfer of at least $100 — and all with no fees.

But high-yield savings accounts aren’t the only area where online banks shine. When it comes to loans, an array of online lenders ranging from Marcus by Goldman Sachs to Earnest offer personal loans with incredibly low rates and no origination fees or hidden fees.

Of course, there are downsides to online banks as well, including the fact that many don’t have any physical branches to speak of. Customer service is typically available over the phone or via chat or email, but the experience will be a lot less personal overall.

Online banks also require some patience. If you want to make a deposit via your bank’s mobile app, for example, you may have to wait a few days for the transaction to post. Wire transfers and ACH transfers can also take time, which can be inconvenient if you need your money in a hurry.

As a final downside, many online banks don’t come with a broad range of ATMs in their network. For that reason, you may wind up paying higher ATM fees than you would if you used a traditional brick-and-mortar bank for all your banking needs.

Here’s a breakdown of pros and cons:

Pros of online banks:

  • Earn more interest on your savings
  • Potential for lower fees or no fees
  • Convenience of online banking

Cons of online banks:

  • Potential for higher ATM fees
  • Not ideal for those who don’t use the internet
  • Online transactions can take time to process

The bottom line

If you can’t decide between your regular bank or an online bank, keep in mind that you don’t have to choose. You could opt to stick with your local bank for checking and ATMs and open a high-yield online savings account at the same time, for example. There’s no rule that says you must go one way or the other, so why not try both?

As always, it pays to shop around and compare accounts before you sign up. Look for checking and savings accounts with a high APY and no or low fees and keep your eye out for loans with competitive rates and terms. By comparing at least three to four banks each time you open a new account, you can save money and earn more money over time.

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Written by
Holly D. Johnson
Author, Award-Winning Writer
Holly Johnson began her career working in the funeral industry, which may make you wonder why she works in personal finance now. Yet, the funeral industry taught the author everything she needs to know about the value of one's money and time. Johnson left the mortuary business a decade ago in order to explore her passion for personal finance and travel the world, and since then, she and her husband have built a debt-free lifestyle that has them on the path to retire very wealthy in their 40s. Holly's love of budgeting also led to the creation of her debt payoff book, “Zero Down Your Debt: Reclaim Your Income and Build a Life You’ll Love."
Edited by
Megan Harney
Audience development editor