This post is from staff writer Richard Barrington.
I was recently interviewed on the subject of online banking, and the reporter asked a very direct question: is online banking better than traditional branch-based banking?
It’s a fair question given the information we were discussing. This included surveys from MoneyRates.com that show online banks consistently having higher money market and savings account rates than traditional banks, as well as lower checking account fees. There was also a recent MoneyRates poll that found bank customers who use online services were a little more satisfied with their banks’ customer service than those who don’t.
So again, it was a fair question, but even though online banks might seem to have a lot of evidence on their side, the answer doesn’t come down to the banks. It comes down to the customer. In order to decide which bank is right for you, you need to look in the mirror and decide what kind of bank customer you are. That will help you sort out not only the issue of online vs. traditional banks, but also questions of size and other bank characteristics.
The following are some questions about what type of bank customer you are, along with a discussion of how each relates to your choice of bank:
- Are you a saver? If you plan to keep a large amount of money on deposit, then your bank search should focus on where you can find the best savings account, money market account, or CD rates. If, on the other hand, your need is primarily for a checking account, look for a bank which offers free checking — these are a minority among traditional banks, but most online checking accounts are still free of monthly maintenance fees.
- Are you a student? Students often have trouble qualifying for free checking accounts because they tend to have low account balances and don’t have paychecks throughout the full year to meet direct deposit requirements. However, some banks have special accounts which offer free checking to students on easy-to-meet terms. Local and regional banks seem to offer these accounts more often, but some larger banks have them as well.
- Are you over 50 years old? Just as some banks offer free checking to students, the same type of banks often have programs providing free checking to older customers — and the qualifying age is often as young as 50 years old.
- Are you wealthy? Wealthy customers need to be careful about exceeding the $250, 000 FDIC insurance limit; remember, this limit combines the total of all your accounts at any one institution. Wealthy customers may want to spread their accounts among multiple institutions to qualify for more insurance, and choose each of those institutions according to the type of account being opened.
- Do you have a very small checking account balance? At the opposite end of the spectrum from wealthy customers are those who live paycheck to paycheck, and maintain a minimal checking account balance. Banks often have minimum balance requirements to keep an account open, or to qualify for free checking. You’ll find these balance requirements tend to be lower at smaller banks than at larger banks, and they are especially low at online banks. So, if your checking account is small, focus your search on smaller banks or online banks.
- Are you a traveler? If you travel frequently, you will want to look for a bank whose ATM network is spread out across the areas you tend to visit, so you can avoid out-of-network ATM fees. These need not be the bank’s own machines; some banks belong to broader networks or have arrangements for reimbursing ATM fees in areas where they do not have machines. If you travel internationally, you may want to consider a bank which has currency exchange services or even foreign branches.
- Do you like to do business online? As mentioned previously, online banks have certain interest rate and fee advantages over traditional banks. If you increasingly manage your personal business online anyway, then you are a very good candidate for this kind of bank.
- How much do you value personal interactions at the bank? Ask yourself this: when was the last time you walked into a bank branch? If you realize that you do almost all your banking via telephone, mail, and ATMs, then it is worth considering whether you too might be a good candidate for online banking.
By the way, the question of online vs. traditional banking isn’t always an either/or decision. Many banks today have a mix of both types of accounts, and customers can choose which services they want to access online.
One thing that banking customers have in their favor is choice: there are about 7, 000 FDIC-insured institutions in the United States, and they come in all sizes and types. Thinking about what you want from a bank will help you narrow down the selection of which bank is right for you.
8 Responses to “How should you choose a bank? Look in the mirror.”
I found that interest rates for online banks change a lot more frequently than traditional banks or credit unions. So if you go around chasing the highest interest rate, you may find yourself switching banks rather often.
In general online banks do offer higher yields, that’s why I use them for my savings accounts.
I also agree that credit unions are the best! My credit union offers interest rates between a traditional bank and an online bank. Also I have never been charged a fee them, and last year received a large dividend payment just because they had a very profitable year. The ATM network is quite large, and they are a part of cuswirl.org, so I can walk into any of these credit unions across the country and deposit checks, deposit cash, am withdrawal money. Finally, I think it is am inaccurate stereotype that credit unions are lacking technologically. Both of my credit unions accepted check deposits from your phone before many large banks. They have both iPhone and iPad apps, and the apps have enormous functionality.
Jennifer, I have a Capital One 360 account and it doesn’t require direct deposit. And Jenny, I am pretty sure Capital One 360 let’s you deposit checks from your computer if you don’t have a smart phone.
Credit unions for the win.
Agree with Bear…look at your local credit union. Usually, much more risk averse than banks, which means sounder financial footing. Also, the NCUA is better funded than FDIC. Further, many credit unions are investing in the same technologies as banks so you don’t really lose out on the bells and whistles.
I also think more people should consider Credit Unions. They rarely charge monthly checking account fees, other fees tend to be much lower (ie, using another institution’s ATM, overdraft), many have agreements so that you can use a larger bank’s ATMs for free, and some belong to nationwide networks of Credit Union that allow you to walk into other Credit Union branches to deposit or withdraw on your account. The downsides are that their online capabilities tend to lack compared to banks (but some are very good) and online banks usually offer better savings rates.
Both Think Bank and capitalone360.com accept paper checks by mail, don’t require you set up direct deposit, and both actively lower or eliminate fees as compared to traditional banks.
Another question–“How will you deposit checks?” I don’t have a smart phone, which makes using online-only banks harder.
I’m a great candidate for online banking except that I’m self-employed and all of my clients pay me via online payments or check. Last I heard, most online banking required a direct deposit. Is that changing at all?