Online vs Traditional Banks: Pros, Cons, and More Explained

The way people bank has changed over the years. Traditionally, people would go into a brick-and-mortar building to take care of their banking needs, such as paying bills, depositing checks or opening a savings account. However, with advances in technology, online banking has become more commonplace.

To meet evolving customer needs, banking has evolved even further with the rise of digital banks. These banks are only available online—not in-person—and can offer many benefits over traditional banks. That said, it's worth knowing the differences between a digital bank and a traditional bank, so you can decide what's best for you.

What is Digital Banking? 

Digital banks have no physical locations. They operate online only. Since online banks have lower overhead costs compared to traditional banks, they're often able to pass on those savings to their clients in the form of no or low fees and competitive interest rates.¹

In most cases, digital banks will offer multiple types of bank accounts, often without charging any monthly account fees. Some will offer debit cards, but not all of them. Depending on the digital bank, they may also offer other financial products, such as credit cards and Certificates of Deposit (CDs).

How Do Online Banks Work?

Online banks work very similarly to traditional banks. They just lack physical locations to conduct in-person services. With online banks, everything is done online, including opening a bank account. Many online banks, like Synchrony Bank, even offer Federal Deposit Insurance Corporation (FDIC) insurance on eligible deposit accounts.

For instance, to open a bank account, you generally need to be a U.S. person for federal tax purposes, have a valid U.S. address, be at least 18 years old and have a U.S. Social Security or Tax Identification number.² 

When you open your account, you'll provide your physical address, email address, occupation, employer and source of funds to open the account. But with an online bank, you'll do everything virtually instead of providing this information in person to a bank teller. Easy and convenient!

Once your account is open, you can link it to a traditional bank account that you may already have. This will allow you to move money between the two banks, as needed.

Benefits of Online Banks 

• Lower fees: Since online banks have lower overhead costs than traditional banks, they typically offer no or low fees for their bank accounts.⁴
• Competitive product offerings: Online banks may offer more competitive interest rates for savings accounts or investment products, or better rewards for their credit cards.³
• Bank at your own convenience: All of your banking is done online with a digital bank, so you can sort your finances anywhere at any time.³

Downside of Online Banks 

• Limited customer service: Since online banks have no physical presence, you need to rely on phone or online support if you have any customer service needs.³
• Lack of ATMs: Many digital banks have a much smaller ATM network, if at all, compared to traditional banks.³
• Must be tech savvy: Digital banks are ideal for people that are tech-savvy and have an internet connection.³
• May not have checking accounts available: Many digital banks don't offer checking accounts, so you won't be able to do day-to-day banking with them.

Benefits of Traditional Banks

• Physical locations: With physical banks, you can walk into a location and talk to a live person. This can be ideal for people with complicated banking needs or who prefer to have a personal relationship with their bank.³
• More services available: Traditional banks offer some services that digital platforms simply can't accommodate. For example, you can deposit cash at a physical bank and get professional guidance from a banking advisor in person.³
• Developed ATM network: When you're with a traditional bank, you'll have access to its network of ATMs. This is incredibly convenient as you can quickly deposit or withdraw cash as needed.³

 Downsides of Traditional Banks

• Limited hours: Physical banks have set hours, so you'll need to do your banking when they're open.³
• Higher fees: Traditional banks typically charge higher monthly fees than digital banks.⁴
• Not every experience is the same: The selling point of traditional banks is human interaction. However, customer service can vary greatly by person and location.³

Mobile Banking vs. Online Banking vs. Digital Banks

There's often confusion regarding mobile, online and digital banking. While some terms can be interchangeable, each refers to something different. Understanding how each work can make things less complicated. 

• Mobile banking: This refers to doing your banking with a smartphone or tablet using your financial institution's app. Both traditional and digital banks generally offer mobile banking.³
• Online banking: Generally, this refers to people who do their banking online through their traditional bank's online account.
• Digital banks: When it comes to digital banks, people are usually referring to banks with no physical locations. Some people will refer to online banks as the same thing as digital banks

The Bottom Line

When it comes to online banks, there are facts and fiction. Online banks are safe if they have FDIC insurance, and they typically offer competitive interest rates and low or no account fees.⁵ These benefits alone are often enough to get people on board.

Even though digital banks offer lower fees and convenience, some people may not be comfortable doing all their banking online. Some people prefer the expanded services, products and in-person interaction that a traditional brick-and-mortar bank offers.

That said, you don't need to choose one type of bank over the other. Many people use both online and traditional banks and link their accounts. By doing this, you're getting the best of both experiences.

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