Brick-and-mortar banks vs. online banks: Pros and cons
Key takeaways
- Online banks typically offer higher interest rates on savings products and charge fewer fees than their brick-and-mortar counterparts.
- If you need to deposit cash regularly, you’ll likely want the convenience of a brick-and-mortar bank’s ATM network.
- Large brick-and-mortar banks invest in their technology, so you can also bank online with them.
If you’re looking for a place to manage your money, you have a lot of options. There are more than 4,000 banks in the U.S. A lot of those banks are brick-and-mortar banks, meaning they have physical branches that you can visit. Some of them, however, operate solely online. As you compare different places to open your next checking or high-yield savings account, read on to learn about the pros and cons of brick-and-mortar banks vs. online-only institutions.
Main differences between brick-and-mortar and online banks
The main difference between brick-and-mortar banks and online banks is the fact that the former has physical branch locations, while the latter usually doesn’t (though sometimes does!). But those aren’t the only differences:
| Brick-and-mortar banks | Online banks |
| Physical locations | No branch locations (typically) |
| In-person support available | Limited to phone or chat support |
| Low APYs on savings and other deposit products (usually) | Higher APYs on savings and other deposit products (usually) |
| Easier to make cash deposits and withdrawals | No cash deposits or withdrawals unless allowed through ATM or company partnerships |
| Out-of-network ATM fees more likely | ATM fee reimbursements often offered |
The pros and cons of brick-and-mortar banks
Traditional banking offers a personal touch. Customers build relationships with banks over the years as they reach milestones, like buying a home or a new car. Customers can stop by their bank and talk to someone who can access their accounts and answer questions. To many people, this is more assuring than dealing with a machine. Here’s what you should know about the advantages and disadvantages of brick-and-mortar banks.
Pros of brick-and-mortar banks
Cash and customer service accessibility
Depositing and withdrawing cash is easy to do at a physical bank. You can find a branch and have a bank teller’s help or go to a bank ATM. Most traditional banks have sizable ATM networks that customers can access locally and in other parts of the country.
You can also always get customer service help at a branch. This is great if you have a complex problem that needs solving or just prefer to do your banking in person. But this pro is highly variable. In-branch support is only helpful if there’s a branch near you and if the business hours work with your schedule.
Digital tools
Though it may seem like online banks would automatically have the edge in digital tools for their customers, that’s not necessarily the case. Many traditional banks, especially the bigger ones, also offer top-notch online and mobile banking with sophisticated websites, highly-rated mobile apps and other digital tools. That’s because they have the resources to invest in technology and the motivation, since they are competing with online banks and their digital platforms.
Account variety
Besides checking accounts, savings accounts, money market accounts and certificates of deposit (CDs), traditional banks offer mortgages, mortgage refinancing, auto loans, credit cards and other products. If you’re looking to keep a lot of your financial life in one place, a brick-and-mortar bank might be right for you.
Cons of brick-and-mortar banks
High fees
Fees are one of the biggest drawback of brick-and-mortar banks, which have more overhead than online-only institutions. Brick-and-mortar banks often charge monthly maintenance fees for their deposit accounts (though they also usually offer ways to waive the fees too).
Low rates
Traditional banks also typically pay lower rates on deposits. The average rate on a savings account is only 0.62 percent and some of the largest brick-and-mortar banks have savings rates that are even lower — 0.01 percent at Chase Bank, for example. At online banks, you can find savings accounts paying 4 percent or above.
Likewise with CDs. The average rate on a one-year CD is 1.85 percent, whereas top rates offered by online banks are above 4 percent for a one-year CD.
Summary of pros and cons for brick-and-mortar banks
Pros
- Large ATM network.
- Easy to deposit and withdraw cash.
- Wide variety of products and services, including commercial banking.
- Advanced technology for online and mobile banking.
Cons
- Higher fees.
- Low yields on savings.
- Potentially inconvenient if no branches nearby.
The pros and cons of online-only banks
Online-only banks offer a different banking experience than brick-and-mortar banks. Many online banks only offer a few types of accounts, as opposed to a brick-and-mortars larger suite of offerings. But the accounts they do offer tend to come with perks, like no fees and high savings rates.
A lot of customers love their experience with online banks, too: Ally, Discover and Capital One and Marcus by Goldman Sachs all earned very high customer satisfaction ratings in J.D. Power’s most recent research. But they might not be for everyone. Here are some advantages and disadvantages of online banks.
Pros of online banks
High rates
One of the biggest draws of an online bank is the high rates they tend to offer on deposit accounts. Because they don’t have branch buildings to maintain and have lower staff costs, online banks typically pay higher interest rates on deposits.
Let’s say you have $5,000 saved and plan to not touch it for five years. If the bank paid 0.01 percent APY, as many big brick-and-mortar banks do, you would earn $2.50 from interest at the end of five years.
Meanwhile, if you put that money into a high-yield savings account at an online bank paying 4 percent, you would earn more than $1,083, for a total of $6,083.26 after five years.
Low (or no) fees
Another way online banks attract customers and pass on their savings from not running physical locations is through low (or no) fees. For example, it’s typical for online banks to not charge monthly maintenance fees for checking or savings accounts, unlike their brick-and-mortar counterparts. There are also plenty of online banks who have gotten rid of overdraft fees, such as Ally Bank and Discover Bank.
Sophisticated online experience
Online-only banks do their business online, so they have an incentive to give their customers a good, clean experience.
Cons of online banks
Cash accessibility is worse (or nonexistent)
If you deal with a lot of cash, you might deal with some major hiccups with an online bank. Some online banks don’t offer cash withdrawals or deposits, especially if they only have a savings and CDs in their product suite.
If an online bank does offer deposits and withdrawals, it’ll likely be through a partnership with a third-party ATM network such as Allpoint or MoneyPass or with businesses where you can deal with your cash. For example, Capital One allows cash deposits at stores like Walgreens and CVS, but the process involves getting a barcode and using the mobile app.
If your online bank does offer an ATM card with its accounts though, there’s a chance you’ll be able to withdraw cash for free as some online banks may offer ATM fee reimbursements.
Still, if you deal with cash a lot, an online bank might not be ideal.
No in-person service
Most online banks don’t have physical branches, and customer service is provided electronically via FAQs on the bank website, emails, chatbots and phone. Not being able to see a human when you have a problem to solve can be frustrating for customers who need more personal assistance.
Fewer account types
It’s not unheard of for an online bank to offer a wide-ranging suite of services on par with a brick-and-mortar bank but it’s not always the norm. And there are some online-only banks that, when it comes to banking products, only offer savings and CDs and no checking account.
Summary of pros and cons of online banks
Pros
- High rates on deposits.
- No (or low) fees.
- Possible ATM fee reimbursements.
- Sophisticated online experience.
Cons
- Fewer customer service options.
- Potential lack of cash accessibility.
- Fewer account types, products and services.
Your money is safe with both brick-and-mortar and online banks
If you’re worried about the safety of conducting your financial business online, or you’re concerned that you may have bigger risks of having your identity stolen with an online bank, you can lay those fears to rest. The Federal Deposit Insurance Corp. and the National Credit Union Share Insurance Fund (NCUSIF) provide the same coverage of customer deposits at member online banks and credit unions as they do for brick-and-mortar institutions. And most banks, online and traditional, use strong encryption, multifactor authentication and require strong passwords to protect customers’ personal information.
Should you choose a brick-and-mortar bank or an online bank?
Whenever you’re choosing a bank, you need to consider what features you need the most in your life.
With an online bank, you’ll be able to take advantage of more competitive APY on your savings, for example. But if your financial situation requires more personal customer service, you might prefer a brick-and-mortar bank. This is also true if you want access to more extensive products and services, like loans, credit cards, or small business, commercial and investment solutions.
Bottom line
For some, there may be a clear better option between online and brick-and-mortar banks, but you don’t necessarily have to choose one over the other. It could be worth it to keep one account with a local, traditional bank to take advantage of branch services and ATM networks while keeping a high-yield savings account or CD at an online bank to get better rates. In either case, it’s important to compare options between several banks to find the best rates, lowest fees and other features that work for you.
