4 Reasons Online Banks Shouldn't Be Overlooked

By Alexa Serrano Cruz

Approximately 83% of individuals worldwide favor traditional banks over digital banks, according to a recent UserTesting study. Among Americans, the primary reason behind this preference is the desire for face-to-face interactions with bankers. Though there may be another reason: A study by Morning Consult reveals that 69% of Americans trust traditional banks more than digital banks.

While the majority prefer traditional banks, those who overlook online banks may be missing out on key features and advantages that could enhance their banking experience. Here are four benefits that make online banks worth considering:

1. Convenience 

Online banks have revolutionized the banking landscape by eliminating the need for physical branches, resulting in unparalleled convenience for their customers. This starts right from the moment you initiate the application process. 

Unlike traditional banks that often demand branch visits for verification, adding joint owners and even making an initial deposit, online banks simplify everything. They offer streamlined application procedures, enabling online or phone-based verifications, allowing seamless addition of joint owners or custodians and facilitating transfers for your initial deposit.

While most traditional banks now have mobile apps, they’re often not as sophisticated as those offered by online banks. I’ve often experienced many frustrating glitches while using traditional banking apps that have prevented me from signing in, making transfers, paying bills and checking my balance. In contrast, mobile apps offered by online banks are more user-friendly, with readily available customer service through 24/7 chat support.

2. Higher rates

Online banks don't have the same overhead costs as traditional brick-and-mortar banks, such as rent and utilities. Due to fewer expenses, they can pass these savings onto customers in the form of better rates and lower fees.

Although savings rates have been on the rise since 2022, most traditional banks are still offering savings accounts with a meager 0.01% APYs — a rate that’s currently well below the 0.42% national savings rate average, according to the FDIC. In comparison, you’ll find online banks offering savings accounts reaching 5.15% APY. 

This substantial difference can significantly impact your savings, especially when considering the power of compound interest. For instance, if you were to keep $5,000 in an account earning 0.01% APY, you would only earn roughly $1 over a year. But if that same amount were deposited into an account earning 5.15% APY, you would earn about $264 in one year.

3. Lower fees 

With online banks, monthly fees are a thing of the past. It’s rare that you’ll find one with a monthly fee, and many have significantly reduced or eliminated other types of bank fees altogether.

On the other hand, traditional banks typically impose monthly maintenance fees on their accounts to cover operational expenses. They often come with specific requirements that must be met to waive the fee, and some accounts don't offer an option to avoid it at all.

4. Stronger features

Online banks are known for their ability to seamlessly integrate with various fintech services, allowing customers to manage their budget, track expenses, receive early paychecks and connect with other financial apps. Many now also offer all-in-one experiences where you can keep your savings and spending money separate while offering attractive yields and enticing cashback rewards. 

Bottom line

When comparing financial institutions, it’s clear that online banks shouldn’t be overlooked due to their unmatched convenience, higher interest rates, lower fees and robust features. In contrast to traditional banks, they provide a more convenient, cost-effective and technologically advanced approach to banking, allowing you to manage your finances effortlessly for a streamlined banking experience.

However, depending on your financial needs, online banks aren’t a good fit for everyone. Traditional banks have advantages that online banks can’t replicate, such as in-person experiences and the ability to make free cash deposits. 

It's also worth noting that you don't have to choose one or the other. You can opt for a hybrid approach keeping your checking account at a traditional bank while placing your savings with an online bank. This way, you can enjoy the benefits of both banking experiences.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Banking