Online Banking vs Traditional Banking: What's Your Best Option?

By Janet Siroto · July 29, 2022 · 7 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

Online Banking vs Traditional Banking: What's Your Best Option?

Deciding between an online and a traditional bank? First, let it be known that no two people’s banking styles are exactly the same. For every person who loves popping into their local branch and chatting with their favorite teller, there’s someone else who avoids bank branches at all costs, preferring to seamlessly swipe their way through financial transactions on their mobile phone.

Traditional vs. online banks also have other important distinctions, including the dollars-and-cents bottom line. Their typical fees charged and interest rates paid differ as well.

So how can you decide which kind of financial institution best suits your needs? Read on to get the intel you need, including:

•   The differences between traditional and online banking

•   How online banking vs. traditional banking works

•   The advantages of online banking

•   How to open an online bank account

Differences Between Online and Traditional Banking

Online and traditional banking both typically offer reliable ways to manage your money, but they do differ considerably in several ways. First, a little lesson in what they are:

•   Traditional banks are ones that have branches you can visit, have ATMs, and often have a website and app for conducting some business digitally. They tend to charge account fees and offer interest rates that may be lower than online banks.

•   Online banks offer many (most, even) of the same services as traditional banks, but they don’t have a footprint in the physical world. You won’t be able to visit a branch or use their branded ATMs (though they may partner with an ATM network or refund your fees). The lack of branches usually allows them to charge lower or no fees and pay depositors a higher interest rate.

Now, here’s a closer look at some key points of differentiation:

Security

If you keep your money at a traditional bank and visit a branch, you likely feel reassured by the presence of security guards and perhaps a glimpse of a massive vault inside. You might wonder if online banking is as secure as a bricks-and-mortar bank. If you use a strong password and avoid conducting online banking with a public WiFi connection or on a public computer, you are following good advice for keeping your account safe. While there are no 100% guarantees, your money should be well protected.

What’s more, both online and traditional banks abide by the same federal regulations. This means that if your financial institution is insured by the Federal Deposit Insurance Corporation, you are covered in the event of a bank failure up to $250,000 per depositor, per account type. Want to be sure of that safety net? You can use the FDIC BankFind to make sure your online bank is FDIC-insured.

Bank Fees and Interest Rates

As briefly noted above, online banks typically save big on real estate and staffing costs and pass that along to their customers. Many charge no or low fees. Which may be a very big deal: According to the Consumer Financial Protection Bureau, Americans pay more than $15 billion a year on bank overdraft fees, which are usually $30 to $35 a pop.

Online banks also likely offer higher interest rates on saving accounts and may offer interest on checking, too. For instance, at press time, SoFi was offering 1.80% APY on savings, while Chase offered 0.01%. That’s quite a noticeable gap. So if you don’t use traditional banking services, you can probably save money and earn more interest with online banking.

24/7 Banking

A few years ago, online banks tended to have the advantage here, providing services around the clock. Traditional banks, which may only be open from 9 a.m. to 5 p.m. Monday through Friday, have been working hard to close the gap and offer services (from check deposits to money transfers) via their website or app at all hours.

Still, online banks may have the edge in terms of 24/7 support, since they have offered this kind of service from the get-go. Making mobile deposits or switching up your password at 2 a.m. is no problem for them, and if you hit a speed-bump, you can likely chat or phone your way to help.

ATMs

If you’re an account holder at a large traditional bank, you’ll probably have a good number of conveniently located ATMs that you can access without a fee. However, those who bank at a smaller, local or regional institution may have fewer options. They may have to make a special trip to get to their bank’s ATM or otherwise pay an out-of-network fee.

How about online banking and ATMs? Digital banks don’t have branches, so how can they have cash machines, you might wonder. The answer is: They don’t. Instead, they usually have work-arounds in this situation. Most online banks partner with a large cash-machine network that you can use for free for withdrawals or for depositing cash at an ATM. Or they may have an arrangement that refunds you for any bank fees you incur using an ATM. Online banks tend to work hard to level the playing field on this front.

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How Online Banking Works

If you’ve been used to traditional banking, online banking may seem like a brave new world, and a somewhat intimidating one at that. In truth, however, online banking closely mirrors what happens at a bricks-and-mortar bank, minus the bricks-and-mortar and those free lollipops.

For example, you can open checking and savings accounts, get a debit card, sign up for automatic bill pay, transfer funds, and more. The one challenge can be withdrawing or depositing cash; there’s no teller service, but you may be able to manage cash at a linked ATM (as mentioned above). You may find that the pros of mobile banking and online transactions make up for this inconvenience.

If you typically go into a branch for certain services, such as wire transfers, you’ll likely find you can do them online with a digital bank. And the fact that you can do them on a website or app means the bank isn’t paying the overhead of having a bricks-and-mortar location. So you are probably earning more interest and avoid account management fees than if you kept your money at a traditional bank.

Recommended: How Many Bank Accounts Should I Have?

Advantages of Online Banking Over Traditional Banking

Here’s a side-by-side comparison of how online vs. traditional banking compares.

Feature

Online Banking

Traditional Banking

Interest ratesTypically have considerably higher interest rates since they can pass along their savings on overhead to the customerTend to have lower APYs (annual percentage yields) as they need to cover the costs of their branches and staffing
Bank feesUsually offer no fees or lower fees than traditional banksOften assess monthly account fees, minimum balance fees, overdraft charges, and more
ATMsProbably lack branded ATMs but likely partner with a network for fee-free transactionsTypically have a network of their own ATMs, which may or may not be conveniently located
Customer ServiceUsually offered 24/7 via chat or phoneUsually offered in person during business hours and by chat or phone 24/7
SecurityHigh-level online security and fraud protectionHigh-level online security and fraud protection at large chains

How to Know if Online Banking Is Right for You

Whether you choose to bank online or with a traditional financial institution is a very personal decision. Here are a few of the most important signs that online banks will be a good fit:

•   You prioritize high interest rates and low fees to help your money grow faster.

•   You are comfortable accessing a partner network of ATMs vs. a bank’s own branded machines.

•   You are satisfied with seeking customer service via chat or phone.

•   You are confident managing your money without having a personal banker at your local branch.

•   You are digitally savvy enough to conduct transactions online; you also know not to use public WiFi or computers for banking business or else you’ll risk bank account fraud.

Opening an Online Bank Account

With online banking, you don’t have to wait until Monday morning to open a new account. You can just log on from your couch on a Sunday afternoon to start a new account and otherwise manage your money.

Technology is allowing financial companies to change the entire banking experience and improve it for customers. One of these new ways is by opening an online bank account with SoFi. With our Checking and Savings, you’ll earn an amazing APY and pay no account fees.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall. Enjoy up to 4.60% APY on SoFi Checking and Savings.

FAQ

How does online banking work?

Online banking allows you to manage your money without going into a bricks-and-mortar branch. Using the bank’s website and/or app, you can spend, save, transfer funds, and conduct other business.

What are the advantages of online banking over traditional banking?

Online banking can offer several advantages: Some people prefer using a website or app vs. going into a bank branch as often happens with traditional banking. What’s more, online banking usually offers lower fees (or none whatsoever) and higher interest rates than bricks-and-mortar banks.

What is a disadvantage of online banking?

Online banking doesn’t offer the opportunity to build a personal relationship with your banking team. Also, depositing cash can be a challenge.


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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.


Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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