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

Comerica Bank branch
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Many consumers are accustomed to doing a variety of daily activities online, whether it’s working, shopping, socializing, reading the news or watching a movie. But when it comes to banking, old habits die harder. A 2020 Bankrate survey found that the typical checking account customer at a traditional, brick-and-mortar bank has kept the account for 14 years, despite rising fees and rock-bottom yields.

Keeping your money in a bank down the street may be convenient, but online banks have some advantages that are worth exploring. Brick-and-mortar banks have benefits, too. Here are the pros and cons of each.

Pros and cons of brick-and-mortar banks

It’s easy to understand why people stick with a traditional bank. Customers build relationships with banks that have helped them reach milestones, like buying a first car or home. Traditional banking is infinitely more personal than online banking. Customers can stop by their bank and talk to someone who can access their accounts and answer their questions, providing customers more confidence and assurance.

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 a top-notch online and mobile banking experience with sophisticated websites, mobile apps and other digital tools.

Besides checking and savings accounts, local banks offer mortgages and other home loans, auto loans, credit cards and other products. The downside is, traditional banks typically charge more for everything and tend to have lower-yielding savings accounts, CDs and other savings products.

High fees, low rates

Fees are the biggest drawback of brick-and-mortar banks, which have more overhead than online-only institutions. Bankrate’s 2020 checking account and ATM fee study found that the average monthly checking account fee is $15.50, while the average minimum balance required to avoid a fee is a whopping $7,550. Then there are overdraft fees, ATM fees if you use another bank’s machines, paper statement fees and a host of other charges that traditional banks levy.

Traditional banks also typically pay lower rates on deposits. Bankrate’s latest survey found that the average rate on a savings account is only 0.06 percent, whereas you can find online banks paying 0.5 percent or higher. Likewise, with CDs, the average rate on a one-year CD is 0.15 percent, whereas some online banks are paying about 0.7 percent.

Pros of brick-and-mortar banks

  • Convenience and assurance of personal service and support.
  • 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; some banks also offer commercial banking and investment management services with a business banker or in-house financial advisor.
  • May provide easier access to commercial banking and investment management services with branch-based business bankers or financial advisors.
  • Many offer safe, sophisticated online banking and mobile banking.
  • You can 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 have a wide variety of them.
  • Loans and other products cost more.
  • They pay lower yields on savings and other deposit accounts.
  • Taking care of business at a branch takes longer than doing it online.

Pros and cons of online-only banks

Some consumers stay with brick-and-mortar banks because they’re afraid to conduct financial business online. They fear having their money or identities stolen. The Federal Deposit Insurance Corp. and the National Credit Union Share Insurance Fund provide the same coverage of customers’ deposits at online banks and credit unions as they do for brick-and-mortar institutions.  And most banks, online and traditional, use strong encryption and require strong passwords to protect customers’ personal information.

Because they don’t have to maintain buildings and have lower staffing costs, a main advantage of online banks is that they usually 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 0.06 percent, you would earn $15.02, for a total of $5,015.02 at the end of the five years. If you put that money in a savings account at an online bank paying 0.6 percent, you would have $5,151.81 at the end of five years, with no additional effort on your part.

Online banks generally outshine brick-and-mortar banks when it comes to loan costs. Some online banks are offering personal loans for below 5 percent, whereas the average rate for a personal loan at a traditional bank is 9.23 percent, Bankrate’s latest survey shows. It’s possible to find online lenders that charge no fees whatsoever. Marcus by Goldman Sachs, for example, charges no fees on its personal loans. Online banks, however, do not have as wide a variety of products as traditional banks.

Online banks make the customer experience pretty seamless. It takes less time to open an account online than it does inside a branch, where you might have to wait for a banker to help you. Online banks make it easy to transfer money into and out of your accounts and many come with apps that make mobile banking a breeze.

Impersonal service, limited options

Of course, there are downsides to online banks. Most don’t have physical branches and customer service is done electronically, by reading FAQs on the bank website, communicating via email, a chatbot and sometimes by phone, which can be frustrating for customers seeking answers.

Not every transaction is instant with online banks. 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 post. Wire transfers and ACH transfers also can take time, which is inconvenient if you need money in a hurry. And you can’t deposit cash in an online bank unless it is connected to ATMs that accept cash.

Finally, an online bank may not have a big ATM network, and you may end up paying high fees to use other banks’ ATMs.

Pros of online banks:

  • They generally charge lower fees or no fees on their products.
  • They pay more interest on savings accounts.
  • 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.
  • Federally insured online banks protect your deposits up to $250,000 per depositor, per FDIC-insured bank, per ownership category.

Cons of online banks:

  • There may be no one to talk to. Customer service can be virtual and impersonal. It’s hard to even find a phone number on some bank websites.
  • Small or non-existent ATM networks increase the likelihood of incurring ATM fees.
  • You can’t deposit cash unless the bank is connected to cash-accepting ATMs.
  • 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.

The bottom line

There’s no rule that says you must choose between a brick-and-mortar bank and an online bank. You can get the best out of both worlds by keeping your checking account and ATM usage with your local, traditional bank and opening a high-yield savings account or CD with an online bank.

Compare fees, rates and other features at three to four banks before you open a new account.

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Written by
Libby Wells
Contributing writer
Libby Wells covers banking and deposit products. She has more than 30 years’ experience as a writer and editor for newspapers, magazines and online publications.
Edited by
Wealth editor
Reviewed by
Senior wealth manager, LourdMurray