There are two main choices for banking today—online or at a branch. Of course, you can do both at most banks. Some banks, though operate exclusively online and don’t have physical branches. But, what’s the real difference? Is one better than the other? And is an online savings account or online checking account better than one through a branch?
A physical bank location—or branch—is one that you can walk into and talk to a bank teller in order to make deposits, withdrawals, transfers, etc. It’s the most traditional form of banking and is preferred by some individuals because it lets you talk to a real person.
Banks that have physical locations almost always also have a website or online services as well. Online services are often called the online branch.
There are banks today that operate exclusively online and that have no physical branch locations. Examples include Ally Bank and Discover Bank. Deposits and withdrawals from these banks are done exclusively over the Internet.
But, how do you choose which to use—a bank with physical and online branches, or one that does business exclusively online?
Whether you choose an online-only bank, one with an online branch and physical locations or one with only physical branches is about your personal preference. But, you may not realize, it can also come down to personal benefits.
Why? Because some banks that do business exclusively online actually pay higher interest rates for their online savings accounts. Online banks can do that because they’re not paying overhead to maintain and manage physical locations. Instead, they pass the money on to you.
Online Account vs. Physical Bank Account
Here’s a general breakdown of how online accounts compare to accounts at a physical bank.
With an online-only bank:
- You have access to your accounts 24 hours a day 7 days a week.
- You can “go to the branch” anytime from your smartphone or computer.
- You don’t have to wait in line or talk to anyone.
- You may get a somewhat higher interest rate on deposit accounts and lower rates on loans.
With a physical bank or credit union:
- You can go into a branch and speak face-to-face to a person if you’re having an issue with your account.
- You’re limited to going to a physical branch during business hours.
- You can likely also use the bank’s online branch 24×7.
- You may get a somewhat lower interest rate on deposit accounts and higher rates on loans—even if the bank offers an online branch.
Benefits of an Online Savings Account
Banking online makes it easier to keep track of your accounts, especially if you have an online savings account. An online savings account is a long-term investment, unlike a checking account. It’s interest-bearing and lets you grow your money over time. And, if an online savings account for an online bank pays you a higher interest rate, your money grows more than it will at a lower interest rate.
At the time of publications, traditional physical banks, like Wells Fargo, offer only .01% interest on regular savings accounts, which are those with lower deposits. Those same banks offer only about 1.5% on accounts with larger deposits. For example, the Wells Fargo Platinum Savings account offers 1.49% interest with a $25,000 balance. And that’s the case even though these banks, including Wells Fargo, have online banking options.
Comparatively, an online-only savings account offers interest rates in the 2.25% range with no minimum balance. The CIT Savings Builder account offers a tiered 2.421% interest rate. Note that interest rate and annual percentage yield (APY) are not the same. APY is actually higher than the interest rate 2.45% on the CIT account—because it includes compounding interest.
In addition to the chance to earn a higher interest rate, online savings accounts—whether with a bank that also has physical branches or not—may offer some conveniences, including:
- The ability to log in to your account to view your balance, any time of day, any day of the week.
- The ability to connect your account to other online accounts and make transfers to and from another account at any time.
- Access to an online checking account as well—usually one that also earns interest, although a very small amount.
- Access to other online deposit accounts, including money market accounts and certificates of deposit (CDs).
Limitations of Online Savings Accounts
A downside to online banking, however, is that you can’t directly deposit or withdraw cash. So, if you were recently married, for example, and received cash as a wedding gift, you need to find another way to make the deposit, such as by wire transfer, check or online transfer.
Once you turn your cash into a check though, you can simply use the bank’s mobile banking app to take a picture of the check you wish to deposit to your savings account and you’re done. No need to go to a brick and mortar location and stand in line. Mobile check deposit is fast and convenient. And it’s offered almost any online banking service whether through an online-only bank or one that also has physical locations.
Another limitation you’ll encounter with an online savings account is a limit on the number of withdrawals you can make in a month. Six withdrawals is the legally allowed maximum that’s governed by federal law for electronic and phone transactions. You can do more withdrawals, but will be charged a fee of roughly $10 to do so.
Minimum balances are also sometimes required on savings accounts—online or off—which means you have to maintain that daily balance or risk being charged fees or not earning your interest. Minimums can be as low as $1. Many accounts offer added interest at higher minimum balances though.
Some also require a minimum initial deposit and even minimum deposits as well as monthly maintenance fees. If you look though, you can easily find accounts that don’t include these limitations.
Security of Online vs. Brick and Mortar Banks
Banking online and banking at banks with brick and mortar branches are equally secure. Even if banks are solely physical, they use data and computers to manage your money, those computers are no more or less vulnerable to hacking as an online account. If your bank is hacked, the bank is liable for all but $50 of your stolen money, not you. That’s assuming you notify them quickly if you’re aware of the loss yourself. And should that financial burden make the bank fail, FDIC insurance steps in.
That make ensuring your bank—online or off—is FDIC insured. FDIC insurance guarantees your deposits up to $250,000 if the bank itself fails.
All that said, you should take measure to protect yourself too. If you primarily use the banking app on your phone, consider changing some of the security settings. If you have a newer generation smartphone, set up a fingerprint lock rather than a password to access the app. Also, turn on all notifications. Anytime money is transferred to and from your account, the app will immediately notify your phone.
Additionally, if there are any transactions that were made without your consent, act on them quickly. A bank won’t always find a problem before you, so be vigilant and check your accounts fairly regularly.
Email Phishing Scams
You also want to watch out for targeted scams.
Almost all online-only and brick and mortar banks send out routine emails to their clients regarding account statements, information about loans, recent updates and changes, etc. Scammers use a “phishing” scam to your information. The scammer sends you a fake email that looks identical to the one you would get from your bank.
They might ask for you to send your private info via a return email or try and get you to click on a link and enter your email or other information in what looks like your bank’s website. Note that your bank will never ask you to provide your information this way. You’ll instead be called and/or asked to come in.
The easiest way to avoid one these scams is by being aware of your bank’s policies and keeping their contact information on hand. If you ever have suspicions, you can always call your bank and ask them about it. This is especially advisable if your bank calls you—hang up and call back to ensure you’re not getting lured into a scam trap.
Reasons to Save
Regardless of whether you chose an online-only bank or one with both online and offline branches, there are several reasons to save, including:
- Establishing an emergency fund
- Saving for a down payment for a new home or car
- Saving for retirement
- Putting away money for that vacation you need
- Preparing for big purchases and expenses like a new television, new appliance or other purchase
If you’re ready to start saving and/or want to open an account, check out some options for an online high-yield savings account here on Credit.com.