Money Girl

Is Switching to an Online Bank Worth It?

Episode Summary

Laura answers a listener's question about finding the right digital savings account and gives tips for easily switching banks.

Episode Notes

Laura answers a listener's question about finding the right digital savings account and gives tips for easily switching banks.

Money Girl is hosted by Laura Adams. A transcript is available at Simplecast.

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Episode Transcription

Welcome back to Finance Friday, another special edition of Money Girl, where I answer your burning money questions! Today's topic comes from Wilma V., who says:

"'I listened to Money Girl episode 799 (High-Yield Savings Accounts–Pros, Cons, and Tips for Choosing One) about using high-yield savings accounts. It was great advice since online-only banks seem to have the best offers and interest rates.

I love your podcast, but I am now anxious about choosing an online bank! I see myself going with a brand name such as American Express, but their interest rate isn't as high as some other banks I'm unfamiliar with. Can you recommend a good and trustworthy online-only bank?"

Thanks for your question, Wilma! Switching from a traditional, local bank to one that only exists online can initially feel strange, and you have many options. This post will review the pros and cons of online and traditional banks. I'll cover how to find a better bank, move your money, and manage it easily.

Thanks for downloading episode 911 of the Money Girl podcast! I'm Laura Adams, an award-winning author, money speaker, on-camera spokesperson, and founder of The Money Stack, a free Substack newsletter.

You can learn more and connect with me at LauraDAdams.com. That's also where you can email your money question, learn more about my books and courses, and sign up for The Money Stack. You can also record a brief question or comment on our voicemail line at 302-364-0308.

LISTEN ALSO: 6 ways using credit cards can build excellent credit

How do online banks work?

While traditional banks and credit unions with brick-and-mortar locations usually offer online accounts for handling some or all of your banking needs, online-only institutions have few or no local offices or branches. Their customer service is available only by online chat or phone.

Digital banks and credit unions have become popular. They offer every service you might need, like paying bills, depositing paper checks, and making transfers online.

However, because digital banks operate only online, they have much lower costs than traditional banks. That allows them to pass the savings to their customers as higher interest rates on savings and lower or no account fees.

Depending on the digital bank, they may also offer other financial products like certificates of deposit (CDs), credit cards, and personal loans. Many offer coverage up to $250,000 per eligible account type through the Federal Deposit Insurance Corporation (FDIC).

Like a traditional institution, when you open an account with a digital bank, you must provide personal information, including your photo identification (such as a driver's license), proof of address, and email address. You must generally be at least 18 years old and have a Social Security or Tax Identification Number.

Once your account is open, you can link it to one or more bank accounts you already have. That allows you to move money between accounts as needed.

The difference between banks and credit unions

If you're unfamiliar with credit unions, they can offer highly competitive interest rates you shouldn't miss. The main difference is that credit unions are non-profit financial cooperatives, and banks are for-profit businesses. Credit unions are owned by their customers, known as members, and investors or shareholders own banks.

Banks are in business to please their investors, which can contradict what's best for customers. Credit unions exist only to serve their members, which is why they generally offer better customer service. Most earnings are returned to a credit union and ultimately returned to members in benefits such as competitive interest rates paid on deposits, lower interest rates charged on loans, and fewer fees.

Just like most banks have FDIC insurance, which covers up to $250,000 per depositor, credit unions offer the same insurance amount through the NCUA or National Credit Union Administration. Both types of insurance are backed by the full faith and credit of the U.S. government.

However, credit unions aren't allowed to serve the general public like banks. Each one has different requirements. Some limit membership to defined groups, such as those living in a particular geographic area or working for a specific organization, such as a military base, hospital, or school system.

Sometimes, you can become a credit union member by making a small donation to an association or charitable organization. And most credit unions give automatic membership to the immediate family of existing members.

For example, to join the Consumers Credit Union, you pay a one-time $5 fee to their sponsor, the Consumers Cooperative Association, and then maintain a minimum of $5 in your account. They offer various online checking and savings options, even free rewards checking.

Wilma, the more you keep in a rewards checking or savings account, the higher your interest rate will likely be. So, consider your average balance when comparing rates on potential new accounts.

The pros and cons of using an online bank

Digital banks come with many benefits, including the following:

Paying lower fees: As previously mentioned, not owning and staffing a network of physical locations means digital banks have significantly lower expenses, allowing them to charge customers less.
Getting competitive products: Since online-only banks can charge less, their products can pay higher interest on savings, charge lower interest rates on loans, or pay better rewards on credit cards.
Being more convenient: When you can do all your banking online, you can manage your finances anytime and anywhere you have an internet connection.

The downsides of digital banks include:

Getting limited customer service: If you rely on customer service for various financial tasks, there may be limited phone or online support. However, most chat functions are available 24/7, and you can usually connect with a bank representative during business hours.
Having limited ATMs: Digital banks often use an existing ATM network, which could be smaller than a large traditional bank. Since ATMs are the primary source for withdrawing cash from a digital bank account, be sure you have access to enough machines. Oftentimes, you can use an out-of-network ATM and pay a transaction fee, such as $3 to $4.
Being tech-savvy: If you don't have an internet connection or enjoy using a computer or app on a smart device, you're not a good fit for a digital bank.
Not getting checking: Some digital banks only offer savings and not checking accounts. However, it may be a high-yield savings that is highly competitive.

The pros and cons of using a traditional bank

While online banks have many benefits, consider the following pros for using a traditional bank or credit union.

Having local branches: Even if there's only one physical location near you, it could make you feel more connected to a bank or credit union if you want a personal relationship with it.
Depositing cash: If you get paid in cash or prefer paying most of your expenses in cash, a traditional bank with a nearby branch will be more convenient than an online-only platform. Some ATMs allow cash deposits, but they may not be as easy or safe as a physical branch.
Getting a vast ATM network: Most traditional banks and credit unions offer ATMs nationwide, allowing you to deposit or withdraw cash as needed.
Receiving more services: Traditional banks likely offer services that many digital banks don't, such as depositing cash and giving professional guidance. That in-person interaction could make the difference for those who prefer it to banking remotely.

Here are the downsides of traditional banks and credit unions.

Having limited hours: Branch locations usually keep typical banking hours during the week, with no or a few weekend hours. You'll have to do your banking when they're open or rely on an online account when a branch is closed.
Paying higher fees: Traditional banks usually charge higher fees than digital banks to remain profitable.

Is switching to an online-only bank worth it?

I've been a USAA member for many years. They only have a few nationwide locations and none where I live. They were one of the first mobile banking apps to offer remote deposits for paper checks and have a terrific user experience that I enjoy daily.

You must be a current or former military member or the family of one to qualify for most USAA services. In my experience, their customer service surpasses traditional banks because they have representatives available by phone or chat 24/7. While I've never had a problem with the USAA app, I could speak to someone quickly if I did.

If you feel uneasy about switching to an online-only bank, I recommend using both a digital and traditional institution until you feel comfortable about it. You could open your online account and fund it with a bit of money to try it out. Kick the tires by using it to pay a bill or two and depositing a paper check–even one you write to yourself from another account.

You could gradually shift all your banking to a digital option and keep a minimum balance in a traditional bank account so you maintain your relationship or the ability to cash a check or deposit cash when needed.

You can quickly transfer funds from a traditional account to a digital account as needed. There's no limit on the number of checking and savings accounts you have. While I always recommend keeping your financial life as simple as possible, there's nothing wrong with having an online and a traditional bank if it suits you.

5 steps to switch bank accounts

When you're ready to change banks, use the following five steps.

1. Research options and apply for your new account.

Wilma asked for a good online banking recommendation, which is difficult because offers always change! Committing to a good option is better than chasing the highest possible interest rates. Wilma, if you're a happy American Express customer, going with their banking products may be an excellent option.

You can shop and compare personal and business accounts at sites like Finder and Raisin. In addition to a bank's interest rate, ensure it has FDIC or NCUA insurance, low or no fees, free ATM access, other products you may need, and a user-friendly website or app.

2. Fund your new account.

Most institutions require you to make your initial deposit by transferring funds from your existing financial institution. Remember to keep enough money in your old account to cover any outstanding payments drafted before you can change them.

3. Update any automatic transactions.

Make a list of automatic or recurring transactions—such as payroll deposits, gym memberships, insurance premiums, and monthly subscriptions—including the next date you expect them. Notify any person or organization that sends you automatic deposits first, so you know when income will start flowing into the new account. Then, you can switch any automatic payments.

Most banks have a direct deposit form you can send to your employer or other income sources authorizing an update. The change may take a complete accounting cycle depending on how much advance notice an employer or a merchant needs. So, leave enough money in your old account to cover outstanding recurring payments.

4. Stop using your old account.

Stop using your old debit card or paper checks after you switch any automatic deposits and withdrawals to your new account. Remember that you might have other accounts linked to it, such as a credit card or Venmo account, that must be updated.

5. Close your old account.

One of the biggest mistakes people make is closing their old bank account before all their pending transactions clear. So, wait until you have an account statement from your new bank to verify that each of your monthly automatic transactions is linked.

Many banks require you to speak to a representative to close an account. If you have a remaining balance, they can transfer it to your new account or mail you a paper check. Once your account is officially closed, you can destroy your old debit card or paper checks.

Switching to a better bank can be the key to getting better service, paying fewer fees, and earning more interest on the money you already have.

Before we go, here's a quick reminder to subscribe to The Money Stack, my Substack newsletter, when you visit LauraDAdams.com. It's filled with money tips, tools, news, challenges, and things I enjoy! You can subscribe for free or become a paid member with access to live educational events like my upcoming Smart Investing Masterclass called Overcome Your Fears & Procrastination and Start Building Wealth.

That's all for now. I'll talk to you soon. Until then, here's to living a richer life!

Money Girl is a Quick and Dirty Tips podcast, and I want to thank our fantastic team! Steve Riekeberg audio-engineers the show. Brannan Goetschius is our director of podcasts, Holly Hutchings is our digital operations specialist, Morgan Christianson is our advertising operations specialist, Davina Tomlin is our marketing and publicity associate, and Nathaniel Hoopes is our marketing contractor.