Key takeaways

  • Brick-and-mortar banks offer face-to-face customer service.
  • Online-only banks, also known as direct banks, don’t operate their own branch locations – limiting customer service to phone calls and online chats.
  • Online banks offer higher interest rates on savings products and lower interest rates on loans.
  • If you need to deposit cash regularly, you’ll likely want the convenience of a brick-and-mortar bank’s ATM network.

If you’re looking for a place to manage your money, you have a lot of options. There are more than 4,000 banks in the U.S. A lot of those banks are brick-and-mortar banks, meaning they have physical branches that you can visit. Some of them, however, operate solely online. As you compare different places to open your next checking or savings account, read on to learn about the pros and cons of brick-and-mortar banks vs. online-only institutions.

Brick-and-mortar banks

Customers build relationships with banks over the years as they reach milestones, like buying a home or a new car. Traditional banking offers a personal touch. Customers can stop by their bank and talk to someone who can access their accounts and answer questions. To many people, this is more assuring than dealing with a machine.

Depositing cash is easy to do at a physical bank, but it’s not possible with an online bank unless it is linked to ATMs that accept cash. Most traditional banks have large ATM networks that customers can access locally and in other parts of the country or even the world. Many traditional banks also offer top-notch online and mobile banking with sophisticated websites, mobile apps and other digital tools.

Besides checking and savings accounts, traditional banks offer mortgages, mortgage refinancing, auto loans, credit cards and other products. The downside is that traditional banks can be costlier — they typically charge more fees and offer lower yields on interest-bearing accounts.

High fees, low rates

Fees are the biggest drawback of brick-and-mortar banks, which have more overhead than online-only institutions. Monthly service fees alone average $15.33 for interest checking accounts, according to Bankrate’s 2023 checking account and ATM study, with the average minimum required to avoid the fee at $8,684. Many traditional banks typically also charge lofty overdraft fees — the average is $26.61. Then there are out-of-network ATM fees, paper statement fees, transfer fees and more.

Traditional banks also typically pay lower rates on deposits. Bankrate’s latest survey found that the average rate on a savings account is only 0.58 percent, whereas you can find online banks paying nearly 10 times that amount. Likewise, with CDs, the average rate on a one-year CD is 1.74 percent, whereas top rates offered by online banks are above 5 percent for a one-year CD.

Pros of brick-and-mortar banks

  • Convenience and assurance of personal service and support, including some big banks that offer 24/7 customer service.
  • Access to a big ATM network and a wide variety of products and services, such as home and auto loans, credit cards and safe deposit boxes.
  • Commercial banking and investment management services with financial advisors.
  • Typically, there are advanced options for online and mobile banking as well at big, traditional banks.
  • You can easily deposit cash.
  • Federally insured banks protect your deposits up to $250,000 per depositor, per FDIC-insured bank, per ownership category.

Cons of brick-and-mortar banks

  • They charge higher fees and often have high minimum balance requirements.
  • Loans and other products may cost more.
  • They typically pay lower yields on savings and other deposit products.
  • Visiting a branch takes longer than banking online.

Online-only banks

If you’re worried about the safety of conducting your financial business online, or you’re concerned that you may have bigger risks of having your identity stolen with an online bank, you can lay those fears to rest. The Federal Deposit Insurance Corp. and the National Credit Union Share Insurance Fund (NCUSIF) provide the same coverage of customer deposits at online banks and credit unions as they do for brick-and-mortar institutions.  And most banks, online and traditional, use strong encryption, multifactor authentication and require strong passwords to protect customers’ personal information.

Because they don’t have branch buildings to maintain and have lower staff costs, online banks typically pay higher interest rates on deposits. Let’s say you have $5,000 saved and plan to not touch it for five years. If the bank paid 0.01 percent APY, as many big banks do, you would earn $2.50 from interest at the end of five years.

Meanwhile, if you put that money in a savings account at an online bank paying 5 percent, you would earn more than $1,381, for a total of $6,381.41 after five years.

Online banks generally outshine brick-and-mortar banks when it comes to loan costs. While the average rate for a personal loan is 12.10 percent, according to Bankrate’s latest survey, some online banks are offering personal loans with rates as low as 7.99 percent. It’s possible to find online lenders that charge no fees whatsoever. SoFi, for example, doesn’t charge fees on its personal loans. Online banks, however, do not have as wide a variety of products as traditional banks, and some might not offer loans at all.

Online banks make the customer experience pretty seamless. It takes less time to open an account online than it does inside a branch. Online banks make it easy to transfer money into and out of your accounts — and many come with apps that allow you to do your banking on a mobile device, such as a smartphone. A lot of customers love their experience with online banks, too: Ally, Discover and Capital One all earned very high customer satisfaction ratings in J.D. Power’s most recent research.

Impersonal service, limited options

Of course, there are downsides to online banks. Most don’t have physical branches, and customer service is provided electronically via FAQs on the bank website, emails, chatbots and sometimes by phone. Having no human contact can be frustrating for customers who need assistance.

Not every transaction is instant with online banks, either. If you deposit a check using your bank’s mobile app, for example, you may have to wait a few days for the transaction to be posted – although, you’re also going to need to wait for a check to clear with any type of bank.

If you deal with a lot of cash, you’re likely to deal with some major hiccups with an online bank. You can’t deposit cash in an online bank unless the bank is connected to an ATM network that accepts cash or offers an alternative option. For example, Capital One allows cash deposits at stores like Walgreens and CVS, but the process involves getting a barcode and using the mobile app. Additionally, an online bank may not have a big ATM network, which means you can end up paying high fees to use other banks’ ATMs.

Pros of online banks

  • They generally charge lower fees or no fees, including for overdrafts, for their products and services.
  • They typically pay more interest on deposits.
  • Online banking is a big time-saver that lets you avoid trips to the bank and waiting in drive-thru lanes or lobby lines.
  • Most have safe, sophisticated websites that make it easy to open an account, pay bills, and track and manage your money from anywhere.
  • Some offer ATM fee reimbursements for cash withdrawals.
  • Federally insured online banks protect your deposits up to $250,000 per depositor, per FDIC-insured bank, per ownership category.

Cons of online banks

  • Customer service can be virtual and impersonal.
  • You are more likely to incur ATM fees if the online bank has no ATM network or is part of a small network.
  • You can’t deposit cash unless the bank is linked to ATMs that accept cash.
  • The number of products tends to be more limited at online banks. Some only offer a few types of accounts.
  • They aren’t a good fit for everyone. People who rarely use computers or don’t have a reliable internet connection are not good candidates for online banking.

Bottom line

For some, there may be a clear better option between online and brick-and-mortar banks, but you don’t necessarily have to choose one over the other. It could be worth it to keep one account with a local, traditional bank to take advantage of branch services and ATM networks, while keeping another savings account or CD with an online bank to get better rates.In either case, it’s important to compare options between several banks to find the best rates, lower fees and other features that work for you.

David McMillin updated this article.