Online banks, often referred to as neobanks (we’ll use both terms in this article), have increased in popularity over the last decade. To keep up, most traditional banks have improved their online presence and introduced comparable digital-friendly services.
But with all these new banking options available to consumers, it can be overwhelming to figure out if a traditional or neobank is best for your own financial goals.
Let’s break down the similarities and differences between neobanks and traditional banks, so you can make an informed decision.
There is a difference between a neobank and a traditional bank with a digital presence
As neobanks increase in popularity and traditional banks try to compete by establishing a stronger digital presence, it can seem, at a quick glance, like they’re now all pretty much the same.
And while they may offer some of the same services, neobanks and traditional banks remain fairly different in their features and capabilities. Here are some of those differences at a glance:
Neobanks (online banks)
- No physical locations – Neobanks don’t have physical locations you can visit, so you’ll do all your banking via the web or a mobile app.
- Speedy account opening process – Opening an account with a neobank can be quick and easy. You’ll need to provide some personal info and identification documents, but once you identify yourself, your new account can be up and running in a matter of minutes.
- A user-friendly interface – Neobanks focus on the user experience, making banking as easy as possible via online platforms.
- Some ATM fees – Online banks may offer ATM access, but you’re likely to encounter in-network fees.
- Few to no fees – Neobanks are the clear winner regarding fees. They don’t always have the expenses that traditional banks do — no buildings mean fewer overhead costs — so they can pass some of those savings on to the customer.
- Better interest rates – Neobanks usually offer better interest rates thanks to the low overhead.
- Phone or online customer service – While neobanks do have customer support teams, more often than not you’ll find yourself scrolling for answers in support forums or chatting with an online bot to get the help you need.
- Local branches are available – Banks have actual buildings, called branches, that you can visit on foot or via drive-through. The branch staff usually consists of bank tellers and other employees who can take care of all your banking needs IRL.
- Opening an account can take a while – At a traditional bank, you’ll likely have to bring documentation and visit a branch during regular business hours. You could find yourself waiting anywhere from five minutes to an hour to open an account.
- Some online banking options – Traditional banks frequently offer a banking website or mobile app to conduct some of your transactions, although they may not be as robust as a neobank.
- Large ATM network – Since traditional banks have bank branches, they’ll also offer ATM access in their network of ATMs.
- Typically come with fees – A traditional bank might charge $10 or even $15 per month to have a checking account, plus other fees.
- Lower interest rates – You might get 0.10% APY (or even 0.01% APY) on savings accounts at a traditional bank.
- In-person customer service – Here’s where traditional banks certainly have the edge. After all, part of all that overhead that keeps them charging more is staffing bank branches with friendly faces.
Read more: The history of the biggest banks in America
Benefits of neobanks
A neobank is a new concept to many, which can create some distrust, especially among older consumers. But neobanks are typically as safe as traditional banks, and their funds are FDIC-insured.
Not only that, but we’ve all become far more digital savvy over the past several years, and so a digital-only approach is far more suited to today’s market than it was in previous generations.
Let’s break down some of the other benefits:
One of the most significant benefits of most neobanks is that they typically offer much better interest rates on your savings accounts. Since neobanks have lower overhead, they can pass those savings on to the customer.
The interest rates with neobanks can be as much as 10x higher than at standard banks. Granted, it might not be as much as you’re hoping for — say, 1.0% APY — but that still beats the 0.10% APY of typical traditional banks.
Read more: Best online savings accounts
Low (or no) fees
In addition to competitive interest rates, most neobanks offer their customers significantly lower fees than traditional banks.
Some neobanks offer fee-free checking or savings accounts with no minimum balance requirement. This perk alone can save you about $10 or $15 a month, depending on the bank.
You might even find a bank that doesn’t charge ATM, transfer, or other fees.
Read more: Best online checking accounts
Who should use neobanks?
- People who are living their best online life — Neobanks will require you to be comfortable using an app or website to use your account. You can do it all from your laptop or phone: check your balance, order a new card, deposit a check, transfer money, and so much more, and often with little to no fees. If you can confidently open an app and follow on-screen directions, then using neobanks will be extremely easy.
- People who are tired of paying for their money — One of the best things about neobanks is that most accounts are free to open and maintain. And most accounts boast no minimum balance requirements, making them attractive to young, tech-savvy consumers like us, with little money but big financial goals.
- People who are short on time — Neobanks use streamlined operations to create a faster experience. Services like opening accounts, depositing checks, and sending money to friends are quick and easy. And with 24/7 online customer support, someone with an overnight work schedule and account issues won’t need to call out of work to fix their problems.
Benefits of traditional banks
Though neobanks sound extremely attractive, there are some benefits to using traditional banks. Neobanks are a newer concept, and someone who is comfortable with traditional banking (especially older consumers) may not want to step out of that routine.
Here are some other perks, as well:
A considerable benefit is that traditional banks can offer you more personalized services. Depending on the bank you choose and the tellers who staff your local branch, you might wind up banking at a place where everybody knows your name.
These employees can offer a more customized approach when setting up your banking products, such as loans and credit cards, based on your personally identified financial goals.
Traditional banks are definitely in your favor if you prefer a personal touch to your banking experience.
Range of service
There are services that traditional banks can offer that neobanks don’t. Think services like currency exchange and safe deposit box rentals, thanks to having brick-and-mortar locations.
Most traditional banks offer a wider range of financial products as well. You can use one bank to do it all: buy a house, refinance a car, set up emergency savings, invest for retirement, and manage your monthly expenses in a checking account. With neobanks, you may need to use different banks for different financial features.
Read more: How to choose a bank: 6 features to look for
Who should use traditional banks?
- People who value a personal customer experience — Traditional banks are a better option for those looking for a personal touch to their banking. You’ll be able to pop over to your local branch and see a smiling face (instead of spiraling through the multiple-choice labyrinth of a customer service call).
- People who deal with large amounts of cash — The branches that traditional banks have allow you to deposit and withdraw larger amounts of money, as opposed to the daily limit fees placed on neobanks that strictly use ATMs.
- People who want to invest and bank together — A considerable amount of traditional banks offer investment services or partner with brokerage firms to offer this service to their clients. This benefit is attractive to those focused on wealth building.
Whether you go with a neobank or a traditional bank depends a lot on your banking needs, not to mention your preferences and budget. For the low-cost, tech-savvy route, neobanks might fit the bill, while traditional banks may be more your speed for the high-budget and high-features path.
Remember, no law says you can have only one account — you might prefer to keep your money at a traditional bank but use an online savings account for the great interest rates. It’s up to you. No matter your decision, you’ll be stashing your cash in a safe, dependable place so it can grow — which is the whole point of a bank account, no matter where you put it.