Online Banking vs. Local Banking - Which Is Better?

February 18, 2019 SC

What is an online bank?

I’m not talking about the online banking feature that your bank offers, which allows you to make digital account deposits, transfer money and view account statements. An exclusively online bank is one that doesn’t have a physical brick and mortar building that you can walk into and get a lollipop at the counter.

Online banks are just as viable and safe as traditional banks, and may even be a better selection in many cases because they can often offer higher interest rates. And higher interest rates on your savings account means more free money for you.

And mo’ money, mo’ tacos.

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But if online banks were the end-all, be-all*, then how are traditional banks still a thing?

*What even is that expression? I’m not deleting it at this point, because I’ve already procrastinated this post so much. But note to self to look up the origins of “end all, be all.” Sounds like a good use of time.

Well, both have advantages and disadvantages. Let’s review the pros and cons:

Which is better — online banking or traditional banking?

Online Banking, the Pros:

1.) Lower fees

This is pretty simple. Online banks don’t have to pay for physical brick and mortar. That’s a big one by itself — do y’all know how expensive it is to own or lease a building in Charleston? Spoiler alert: A lot.

Online banks simply don’t have branch maintenance costs, they don’t have to pay for coffee in their lobby, and they don’t have to pay for so many smiling faces that greet you at the deposit counter.

With traditional banks, all of those things ultimately end up costing the customer money in the form of monthly maintenance fees, random extra fees or, my personal favorite, “processing fees.” (Like, what are you processing? And how is that different than the service fee? Le sigh.).

2.) Higher interest rates

Again, online banks are able to offer significantly higher interest earnings for the same type of account because they aren’t paying for as much overhead cost as traditional banks.

For example, an online bank may offer 2% APY on a savings account, versus my local bank’s .10% APY.

Remember, when it comes to banking, APY = money you earn; APR = money you pay.

2% compared to 0.10%?! That’s FREE MONEY that you’re leaving on the table.

There are some drawbacks, like withdrawal restrictions, but more on that later. Your money can earn money by just … existing. That’s a pretty sweet deal.

3.) Convenience

Ever heard of “banker’s hours”?

It’s a whole thing. Traditional banks are open from 9 a.m. to 5 p.m., and they will be closed for every possible holiday, from President’s Day to National Taco Day.*

I’ve never really understood how a person is supposed to get things done at the bank if they, too, have to hold traditional work hours.

My office’s formal work hours are 8:30 a.m. to 5:30 p.m., so I guess we are expected to do any errand over our lunch hour. But realistically, it’s hard to get away because someone scheduled a lunch meeting (WHY?), or it’s inconvenient to get the other side of town.

I’m in a fortunate situation because my company is incredibly flexible when it comes to stuff like this — doctor’s appointments, car service, unscheduled kid pick-ups. Flex hours are one of our biggest perks (aside from the downtown parking spot. Have I mentioned that once or 98 times on this blog before?), so banking locally is not a problem for me. As long as I get all my work done and before the deadline, it doesn’t really matter when I do it.

But I think I’m in the minority there —not everyone has the luxury of going in to the office late and staying late, or leaving an hour early. So what do those people do if they really need to cash a check TODAY? I don’t know. I guess mobile banking has helped with this.

*Not really, but it’s a celebration worthy of EVERYONE’S attention

Online banks are on 24/7. Simple as that.

Online Banking, the Cons:

1.) Depositing cash can be a pain.

Some online banks have a network of ATMs that you can use to deposit cash. Many can connect to your account at your local bank or credit union (assuming you have one) and you can transfer the cash online or on mobile once you’ve deposited it there first. This makes the most sense to me if you handle a lot of cash.

You know, if you work in food and bev, or in drug dealing.

I’m just here to educate. Not judge.

You could also buy a money order from your local post office or grocery store and make out a check to yourself, but that sounds like an obnoxious extra step to me. Maybe it’s no biggie for you. (More details on how to buy a money order here.)

Withdrawals pose the same limitations as depositing cash when it comes to online banks, but you can typically withdraw cash from any of the ATMs in your online bank’s networks. Which, if they’re smart, would be located conveniently and all over the place.

2.) Access can be a problem.

Though it is a rare occurrence, online banks are websites that can go down. In that scenario, it’s not like you can go to a local branch as a backup, and it may be difficult to reach customer service at this time (because literally everyone else will be, too).

3.) No face-to-face help.

This is the #1 drawback when it comes to online banks. As much as my fellow millennials tend to believe that interacting with real humans is sCaRy and wEirD, sometimes, you just need assistance from an actual person.

A quick illustration:

A few months ago, I was in Charlotte, North Carolina for a marketing conference (#nerdalert).

On the morning of Day 2, I made my way to the convention center’s Bojangles with sunglasses still on inside and a dull headache reminding me why I don’t ever stay out late with friends. My colleague and I stood in line for what felt like three hours, then finally — finally — placed our order. It was my turn to pay and expense it, so I pulled out my wallet annnnnd … no debit card. My poor little sunglasses-covered eyes almost started welling up.

Because it’s all fun and games until you don’t have money for a chicken biscuit.

Rewind to the night before, when I went to dinner and then to a cute little patio bar with all of my coworkers that were in town for the event. The little patio bar, while cute, hosted a few patrons who — how can I put this politely? — were the living WORST.

I’ve never, and I mean NEVER, understood those people who invite themselves to wriggle into your small circle of friends and then immediately argue every point of a political debate. A political debate that … nobody was talking about?

Like, hi, Rick, was it? I don’t know you. Please leave. Now?

Suffice it to say, we decided to make a swift exit. In my haste to get the hell out of Dodge and as far away from Rick as possible, I did something I’ve never done: I forgot my card and left it with the bartender.

First of all, if I am paying, I close out after every drink. I like to know I’m settled up in case the bar gets crowded or I have to evacuate because of a Rick. Also, it’s a good way to minimize your spending because, wow, such a hassle to go order another drink and pay for it. So your guess is as good as mine as to why the bartender would’ve had my card. I guess I was chit-chatting with friends and wasn’t paying attention.

All of these thoughts, played out in quick succession as I stood dumbly before the Bojangles cashier.

But mostly this one: Darn you, Rick. Darn you right to heck.

Without Bo ‘Rounds in hand, I stepped outside to call my local bank back in Charleston (and really, Bo ‘Rounds in hand is the only way to call a bank).

It rang twice.

“Hi Lizzy*, it’s SC.”

“OMG! Hi girl, how was Scotland?! Did y’all have so much fun?!??”

In two (overly) excited questions, Lizzy has demonstrated the value of local banking. She knows my face, she knows my story, she knows ME. She recently walked my husband and me through the merging of our accounts, and knew all about our honeymoon plans.

*Names have been changed for privacy. Also, because I’m an anonymous blogger - or did you not know that?

Does Lizzy’s good memory and polite interest make local banking priceless? No, but it made it VERY painless to have the following conversation:

“Scotland was magical! I’ll have to show you pictures when I come in. Listen, Lizzy, I did something dumb. I think I may have left my card at a restaurant here in Charlotte, but I can’t go check yet because they aren’t open. Just in case I lost it, what should I do?”

“I can do a temporary freeze, no problem. That way, if someone else DOES have it that shouldn't, they won’t be able to use it. But if you get it today, just call me and we’ll unfreeze it.”

Now, power walking through uptown Charlotte, climbing over a roped off area to track down the restaurant manager, and racing against the clock to leave town before rush hour is a whole different blog post. But the gist is: I got my card back. Plus, the entire process was painless, dull headache notwithstanding.

I didn’t have to go through nine rounds of customer service runaround, and I didn’t have to online chat with a call center in another country (which, I couldn’t have anyway, because the conference center’s Wi-Fi was completely overwhelmed and not working). All I had to do was call, ask Lizzy for help, and then call back when I had my card in my hand.

And there’s value in that.

Are online banks safe?

Like anything that’s accessed digitally, it’s never really 100% safe. But, there are plenty of safety measures in place and many precautions you can take to prevent any kind of hacking.

Just remember that online banking safety is the responsibility of both the bank and the consumer.

What the bank does:

The bank needs to be insured by the Federal Deposit Insurance Corporation (and credit unions by the National Credit Union Administration) — that’s what you hear on the commercials that says “member FDIC.”
Basically, being insured by the FDIC means that even if your bank fails you, you’re covered up to a certain amount of money. The FDIC was initially created in the wake of the 1929 stock market crash and subsequent Great Depression with the hopes of stabilizing the economy and protecting depositors against failing banks. Learn more about the FDIC’s history and purpose here.

Note: A few weeks ago, I wrote about whether or not Venmo is safe; you might recall that Venmo money is NOT FDIC-insured.

Additional measures of account security at your bank will include encryption and fraud monitoring.

What YOU can do:

Don’t be careless. Only access your online bank account from a secure connection, and never through a public Wi-Fi like at the airport or a coffee shop. All the standard internet safety tips apply here: Don’t open suspicious emails, don’t ever download or click-out to a link provided by an unknown email sender, and keep your anti-virus software up to date. Oh, and don’t make your password “password.”

What’s the best online bank?

I started to draft this list up, and realized there was no reason to reinvent the wheel.
The College Investor and PT Money have excellent resources readily available and recently updated on which best online banks are the best and which offer the highest rates. As always, I’d encourage you to use these round-ups as a diving board, but to do your own research to determine what’s best for YOUR life and money.

So which is better? Online or traditional banks?

The takeaway:

Although online banks have the edge on convenience and interest rates, traditional banks still have some advantages, such as in-person help and accessibility.

This is what seems like the best solution for ME:

Have a checking account with my local bank. Maintain my cheery relationship with Lizzy and stay in that bank’s good graces — there may be a time soon when a solid relationship with a bank is of great benefit to me.
Put a large chunk of our savings into a CD in an online bank and earn multiple times the interest that it earns currently. And if we decide to buy a house in the next 12 months (which is not in our plans, but both the market and the Lord DO have a funny sense of timing, can I get amen?), we can pay early withdrawal fees.
Have emergency cash more readily available than the rest of our savings. It would probably be just fine safety-wise and accessibility-wise to keep my emergency fund in an online bank, but I just don’t know if I am comfortable with that. I think our solution is to keep the BIG kahuna emergency fund (6 months of living expenses, including student loans) where it might earn a little interest in an online savings account, but to keep a minimum of $1,000 cash readily available at all times in a local bank.

Our emergency fund is currently in a money market fund at a local bank. It probably (definitely) could earn more interest in a 1-year or 10-month CD, but then there are fees to withdraw that money if you actually have to use it. We don’t want that money to be untouchable, but what if the fee to break in early is pretty insignificant comparatively? I could be missing out on 2.75% APY.

Or, maybe I just shop around for an even better high-yield savings account so that I have even more flexibility/accessibility than in a CD. For example, with this UFB Premium Money Market account I just found, it looks like there aren’t any early withdrawal fees, only a minimum of $25,000 to qualify for 2.45% APY.

(We’ve also been getting hammered with marketing for SoFi’s high-yield savings accounts — does anyone use that? Just curious and looking to hear your experience.)

For us, we wouldn’t need to use that emergency fund unless we have a catastrophic life event/accident, or my husband lost his job. For other “emergency” expenses — flat tires, unexpected medical bills, Taylor Swift concert tickets we have that covered. So, it may make more sense to put the big emergency fund into something a little more inaccessible but higher-earning.

It sounds like I have a little bit more thinking to do about where to house our emergency fund, and if we should split it in two parts — high-yield savings and CD. Thoughts?

Where do you keep your emergency fund? Sound off in the comments below, pretty please!