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Online Banks v. Traditional Banks

By manybanking.com Staff
These days, there are more banking options available to consumers than ever. One decision you have to make is between online banking and banking at traditional brick-and-mortar institutions.

Category Product: 
Savings
Category Finance: 
Personal Finance
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Online Banking, Internet Banking, ING Direct, Benjamin Maljevec, Banking, Savings Account, Checking Account, HSBC, Bank
Introduction: 

By manybanking.com Staff
These days, there are more banking options available to consumers than ever. One decision you have to make is between online banking and banking at traditional brick-and-mortar institutions.

Both options have their advantages and disadvantages. Here are some things to consider.

The main draw of online-only banks like ING Direct (Stock Quote: ING) or HSBC Direct (Stock Quote: HBC) is the high interest rates they offer on their checking and savings accounts. Because these banks do not have the same overhead costs as traditional institutions, they can afford to offer customers interest rates that are often several times higher than traditional banks. For example, ING Direct’s Orange Savings Account offers a 1.50% APY while the national average according to manybanking.com’s current survey is 0.26%. HSBC Direct’s online savings account offers a 1.65% APY.

Like brick-and-mortar banks, most online banks are also covered by FDIC insurance, so customers don’t have to worry about losing their money if an online institution fails.

Using online banks can expose you to some higher than normal fees, however. Because most online banks do not maintain their own network of ATMs, you may have to pay ATM use fees when using cash machines to make withdrawals. Some banks like ING will waive these fees on their side, but you will probably still have to pay ATM operator’s fees.

Another potential drawback to using online banks is the slowness of money transfers and deposits. Check deposits must be mailed to the bank, and it can take several days before those funds are accessible. While transferring money between different accounts at the same online bank is instant (like between savings and checking), transferring funds between an online bank and a traditional bank can take several business days. On the plus side, this can restrict mindless spending, but it can prove problematic if you need your money right away.

One of the main advantages to using a traditional banking account is the quick and easy accessibility of your money. Traditional banks typically have a network of fee-free ATMs in your area and you can get face-to-face customer service from bank tellers when needed. Customer service is also available by phone from most online banks, however.

Making non-electronic deposits is often easier at a brick-and-mortar bank. Traditional banks accept all kinds of deposits including cash, paper checks, wire transfers and electronic deposits. While most online banks will accept paper check deposits, they take longer to deposit because they have to go through the mail. To deposit cash, you have to do a wire transfer. 

For those who are used to working online, online banking is an appealing option. Most large traditional banks also offer online banking features, however. Checking balances, bill paying and transferring funds between accounts is just as easy with these online features as it is with online-only banks.

To get the best of both worlds, consider opening accounts with both an online bank and a brick-and-mortar bank. Linking your online account to a traditional bank is typically free and easy. Stash savings in the online account to enjoy higher interest, but keep some cash in the traditional account for every day expenses and easy access.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.

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Both options have their advantages and disadvantages. Here are some things to consider.

The main draw of online-only banks like ING Direct (Stock Quote: ING) or HSBC Direct (Stock Quote: HBC) is the high interest rates they offer on their checking and savings accounts. Because these banks do not have the same overhead costs as traditional institutions, they can afford to offer customers interest rates that are often several times higher than traditional banks. For example, ING Direct’s Orange Savings Account offers a 1.50% APY while the national average according to manybanking.com’s current survey is 0.26%. HSBC Direct’s online savings account offers a 1.65% APY.

Like brick-and-mortar banks, most online banks are also covered by FDIC insurance, so customers don’t have to worry about losing their money if an online institution fails.

Using online banks can expose you to some higher than normal fees, however. Because most online banks do not maintain their own network of ATMs, you may have to pay ATM use fees when using cash machines to make withdrawals. Some banks like ING will waive these fees on their side, but you will probably still have to pay ATM operator’s fees.

Another potential drawback to using online banks is the slowness of money transfers and deposits. Check deposits must be mailed to the bank, and it can take several days before those funds are accessible. While transferring money between different accounts at the same online bank is instant (like between savings and checking), transferring funds between an online bank and a traditional bank can take several business days. On the plus side, this can restrict mindless spending, but it can prove problematic if you need your money right away.

One of the main advantages to using a traditional banking account is the quick and easy accessibility of your money. Traditional banks typically have a network of fee-free ATMs in your area and you can get face-to-face customer service from bank tellers when needed. Customer service is also available by phone from most online banks, however.

Making non-electronic deposits is often easier at a brick-and-mortar bank. Traditional banks accept all kinds of deposits including cash, paper checks, wire transfers and electronic deposits. While most online banks will accept paper check deposits, they take longer to deposit because they have to go through the mail. To deposit cash, you have to do a wire transfer. 

For those who are used to working online, online banking is an appealing option. Most large traditional banks also offer online banking features, however. Checking balances, bill paying and transferring funds between accounts is just as easy with these online features as it is with online-only banks.

To get the best of both worlds, consider opening accounts with both an online bank and a brick-and-mortar bank. Linking your online account to a traditional bank is typically free and easy. Stash savings in the online account to enjoy higher interest, but keep some cash in the traditional account for every day expenses and easy access.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.

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