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Are online banks good for consumers?

July 28, 2020

As predicted, people stopped visiting bank branches frequently during the COVID-19 pandemic. 

Branch traffic fell more than 30% in April and the first three weeks of May compared with the same period last year, according to Novantas, a financial-services research firm. Teller transactions dropped 32% in March and April compared with the same period last year, Novantas said.

While some may expect that bank branch traffic will pick back up when the pandemic dies down, recent trends suggest otherwise. The rise in online banking and, more specifically, the emergence of online-only banks may cut down the need for brick-and-mortar bank branches permanently. 

Online banks are banks that are primarily only available through a website or app. They offer most of the features of a traditional bank including transferring funds, depositing checks and paying bills electronically, along with many new features. They don’t have any physical locations that you can walk into for your banking needs, but in return they can keep costs down and give you a better return for your money. 

How banking has changed for customers

A study done in 2016 asked households whether they used online banking in the last 12 months, and over 70% of households reported using online banking. In comparison, only 4% of households reported using online banking in 1995. Clearly the technological advancements in mobile apps and improvements in information technology have led to the increase in the use of online banking services. 

But does that mean that brick-and-mortar bank locations are completely irrelevant?

The same study referenced above contained questions asking whether respondents visited a local bank branch. About 84% of households with a checking or savings account reported visiting the local branch of the institution of their main savings or their main checking account within the year, and almost all households who visited their local branch did so to use banking services other than just the ATM.

Whether or not they stick exclusively to online banks, it seems like most people appreciate the availability of online banking and its many advantages.

Pros of online banks for customers

Lower fees

Online banks don’t have the same expenses as traditional banks (such as utilities and maintenance for branches, bank teller salaries, rents, etc.). They pass on these savings to customers in terms of low or no fees. 

In comparison, traditional banks with physical branches may charge monthly service fees, overdraft fees, and other hidden charges. The average overdraft fee at large banks is $35, according to a 2019 NerdWallet study.

Better interest rates

Online banks tend to pay higher interest rates, especially in their high-yield savings account offerings. Some online banks have APY (annual percentage yields) of around 1.5%. The national average savings rate is 0.06%, and some of the largest traditional banks have savings accounts that earn only 0.01% APY. If you have an emergency fund of $10,000, that difference could add up to $149 a year. 

Other features

Online banks have robust mobile apps and websites that work smoothly and are easy to navigate. Traditional banks are moving towards the same features but are behind online banks in this regard. 

As we mentioned earlier, many online banks can pull data from your other investment and retirement accounts (after you give them access) to give you a 360-degree picture of your finances. These online platforms also have additional features like savings and retirement calculators, push notifications, automated transfers and bill pays, and more. This is difficult to do in a traditional bank setting where you have to go into a bank branch to get access to your own data or transfer money. 

Cons of online banks for customers

No branches

When signing up with an online bank, most people are aware that they will have no access to physical locations or face-to-face meetings with bankers. Sometimes, however, a complicated situation or a bank error may need personalized support. Many online banks do offer phone support and online chats (and some are even providing access to personalized support for an additional fee).

It can be difficult to deposit cash

In today’s nearly cashless economy this may not be a big negative anymore, but it is difficult to deposit or withdraw cash when you deal with an online bank. You will most likely have to use a third-party ATM or deposit the cash in a traditional bank account first. This is one of the main reasons many people cannot entirely part ways with their traditional bank. 

The takeaway

Your requirements and needs may dictate if you go with an online or traditional bank. If you can’t decide, the good news is that the line between the two types of banking is getting blurrier every year. Many traditional banks now offer robust online banking platforms. Their interest rates are still considerably lower than purely online banks because they do still have more costs to recoup, but the convenience of having a bank branch close to you may be more of a draw for you. On the other hand, many online banks now have customer service associates on call or even available for web-based appointments for their customers because they realize the importance of being present for their customers. You don’t even have to pick! A combination of online and traditional bank accounts can give you the service you need and interest rates that can help preserve the value of your cash. 

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