Saturday, March 19, 2011

Traditional vs. Online Banking

This is the 4th post in the Bank Deposit Account 101 series.

Online banking has existed since the mid-1990s, but it didn't become an established form of banking until this past decade. Due to the wide accessibility of the internet, web only banks are an increasingly popular option, especially amongst young people. So should you consider using an online bank? Below, I've highlighted the advantages of these two types of banking institutions. Read and decide for yourself which one's right for you:

Physical location. The most obvious and important difference between a traditional bank and an online bank is the physical presence of a bricks-and-mortar bank. Not only can you see the operation, use the safe deposit box, you can talk to a teller, a financial representative or a loan officer face to face.

ATM Network. Traditional banks, especially large national banks, are more likely to have a larger amount of ATM within their own network. Many banks, including online banks do reimburse customers for using out of network ATMs, though.

Processing. If you receive payments that don’t come in the form of direct deposit, a traditional bank might make it easier, faster, and safer for you to deposit checks or cash.

No Internet Access. More than 20% of the U.S. population still doesn't have internet connection. The number is greater if you add those who are connected, but are not tech savvy enough to take care of all of their important financial transactions online. But of course, this shouldn't be too much of a problem for you if you're reading this post ;)

Convenience. For those who are constantly surrounded by technology and web access, an online institution can be very convenient. As long as you have connection, you can bank. Also, because of their lack of "store fronts," internet banks often offer 24/7 phone services to speak to a live person. Many banks have options to email or chat with a representative online, too.

Higher Rates. Because online only banks don't have to rent/own and staff physical locations, it decreases their overhead costs. This reduction gets passed on to the customer in the form of higher rates. Of course, better rates are also offered in order to attract more customers as online banks still have a smaller market share compare to traditional banks.

Speed. In general, a fairly reputable online bank will be able to process transactions quickly because most of them are done electronically. It also saves the customer time from having to go drive to a bank and work around bank hours.

Final Thoughts
Many traditional banks now allow online banking options, though the user interface may not be as well implemented as their internet only counterparts.

As far as security goes, the argument goes both ways. Some think that internet only banks are more secure because there's less of a risk from having to transport the money. Machines are often thought of as being more reliable and accurate at repeating results. Others, however, think that traditional banks are more secure because they actually carry cash in the vaults of their physical locations. Money in internet banking is, after all, virtual. Online banking could also be more susceptible to hacking attempts if a secured web connection is not used.

When it comes down to it, the decision has to come from your banking habits. Consider the features that are most important to you. Whatever type of institution you decide to go with, don't forget to check that the bank is FDIC insured (or NCUA insured for a credit union). Keep good and secure records of all "paperwork" in case you need to find it. Take a look at my earlier post if you want more ideas of what to look for in an account.


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