Learn the pros and cons between online banking versus traditional banking, and decide which is the better fit for your small business.
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In the past years, online banking has grown more prominent, more prevalent, and has become a necessary part of managing money.
Online banks and traditional banks each have clear advantages and disadvantages. In this guide, we’ll explore the pros and cons of online banking. In general, we recommend going with one of our top online business bank account options because they have the lowest fees and highest rewards, but the choice squarely lies in what your business needs and what is available to your business.
What Is Online Banking?
Strictly speaking, online banking is any bank account management that is done online. Transferring funds from one account to another, depositing a check digitally, or paying bills/taxes from your computer or an app on your phone all count as online banking.
Traditional banks will offer online banking services to their customers through their website and/or app, but they are not considered online banks. One way to think of it is if you can walk into a branch — it’s not an online bank.
An online bank is a bank that only offers online/mobile services to their customers. Online banks include Ally and Axos, but also more popular names from the credit card arena like Discover Bank or Capital One 360 Bank.
These types of online-only banks are rising in popularity. With no bankers to meet face-to-face, faster application processes, and easier account access than ever before, online banking is more than just a post-COVID niche. These banks are viable options for small businesses that may utilize their features if they don’t need (or want) to visit a brick-and-mortar bank building.
How Does Online Banking Work?
Online banking is similar to traditional banking. You make an account (or several), receive a credit/debit card tied to those accounts via mail or via a virtual card, and start using your funds. The best online banks offer the same level of FDIC insurance as traditional banks and include many fraud protection services that make them safe and secure banking options for businesses.
Online Bank VS Traditional Bank
The biggest difference you’re going to run into with an online bank is that there is no physical location for you to visit. If access to real humans is important to you, an online bank is not going to be a good fit, although a good and reputable online bank will be part of an ATM network like Allpoint or MoneyPass, so you generally don’t have to worry about an inability to take cash out/put cash into your account(s). (so long as your online bank supports cash deposits).
Online banks are just as secure as traditional banks, so there’s no need to worry about that either.
The other big difference is that traditional banks are generally more established, meaning they may have more access to additional business services like lending, payment processing, or payroll. The downside is that because these banks are more established, they can get away with higher fees and fewer rewards, whereas up-and-coming online banks often offer much better checking and savings rewards like cash-back, rewards spending, and higher APYs.
Pros & Cons Of Online Banking
Let’s dive deeper into why your small business might or might not choose online banking.
Pros
- Lower Fees: Because there is no physical location to maintain/pay for, online banks are a lot less likely to charge monthly service fees. Some have even waived overdraft fees.
- Better Interest Rates: The best online bank savings accounts have annual percentage yields (APYs) of around 0.45%. The larger your account balance, the more interest rates are going to matter to you.
- No ATM Fees: Along with being part of an ATM network that allows account holders access to thousands of ATMs with no fees required, some online banks will also reimburse you for any out-of-network ATM fees you may have to pay in a pinch.
- Better Rewards: Many online banks offer cashback on checking purchases, business software discounts, and higher APYs.
Cons
- No Branches: Online banks have no physical branches for you to visit. Online banks will offer phone or chat-based customer service vs. face-to-face. This also means you have to make any accounts online, and there is no in-person option with a live bank associate there to help guide you.
- Difficult Deposits: Even though online banks might work to make sure you have access to as many ATMs as possible, it still may be more difficult for you to deposit cash into your online bank accounts vs. your traditional ones. You could find yourself at an ATM that services your account but doesn’t accept deposits, meaning you might need to deposit money into your traditional account and then transfer it into your online banking account, which is a definite pain.
- No One-Stop-Shop: An online bank could offer incredible savings accounts but have no checking account options (or vice versa). You might have to open one kind of account at an online bank and another at a traditional bank or another online bank. There’s also no way to get a cashier’s check from most online banks, so you could run into problems with paying for commercial rentals or other situations that might require a specific kind of payment other than an online one.
Pros & Cons Of Traditional Banking
And here are some reasons why traditional banking may or may not be a good fit for your small business.
Pros
- Tons Of Options: As the most established of the two options, traditional banks are going to have more options when it comes to accounts, loans, and other financial products they offer to their customers.
- Stability: For the most part traditional banks have been around for longer than online banks and are less likely to fall victim to sudden collapses. Obviously, there are exceptions to this, but as always, do your research and make sure that your money is going to be insured by the Federal Deposit Insurance Corporation with any bank you consider.
- ATM Access: If you’re an envelope budgeter or make consistent withdrawals from your account(s), it’s crucial for you to have easy access to an ATM. If you live in a rural area where there might only be one or two traditional bank locations, an online bank might not allow you to use their ATMs, leaving you high and dry with a commute to access your money.
Cons
- Branches: Some traditional banks may still require you to visit in person for certain services. This can be a problem if you move away from the local branch where you originally made your account.
- Higher Fees: With traditional banking, there are almost always going to be higher fees. They have to pay their employees, rent, cleaners, insurance, and other expenses associated with a brick-and-mortar branch, so those added costs get passed onto you.
- Lower Interest Rates: Lower is not better in the case of checking or savings accounts. The national average savings APY is 0.37%, and if you’re keeping large amounts of money in an account with a bank that offers low-interest rates, you could be losing money in the long run.
How To Choose Between An Online Bank & Traditional Bank?
If you need more help deciding, check out our full step-by-step guide on how to choose a business bank account.
