Banking in the Digital Age: Comparing Traditional, Online, and Neobanks

Wells Fargo was the first bank to offer internet banking to customers. The year was 1995. Since then online banks have proliferated, offering customers higher rates and lower fees. Now Neobanks have entered the picture, challenging the online banks. In this article we'll explore the features and differences of traditional vs online banks vs neobanks.

Traditional vs. Online Banks vs. Neobanks

Traditional Bank vs. Online Bank vs. Neobank

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Traditional, Online and Neobanks

What Is a Traditional Bank?

A traditional bank is a financial institution with both physical and online locations. These are the big-name banks like Bank of America, US Bank, Wells Fargo, and JPMorgan Chase, to name a few. They also include regional and community banks.

Traditional banks offer online banking, but they also can charge hefty fees and pay minimal interest on deposit accounts. Yet, you'll find a full array of products including loans, mortgages, and credit cards.

What Is an Online Bank?

Online banks usually do not have physical locations. The benefit is that customers pay little to no fees because the bank doesn't have to pay the overhead to manage physical branches.

Online banks often offer free checking accounts and higher rates on savings accounts. You'll also find a good selection of products including CDs and money market accounts.

What Is a Neobank?

When finance and technology intersect, you get neobanks. A neobank is a fintech company that partners with a bank. Neobanks take your finances to the next level with app-driven, high-tech experiences.

Like online banks, you won't be able to access a neobank in person. But, neobank apps can turn your smartphone into an information powerhouse. The focus is on providing you with tools to better manage your money on the go.

Key Features of Traditional vs. Online Banks vs. Neobanks

We touched on some of the features of traditional, online banks, and neobanks above. This section covers what each banking type provides, who is best served by the bank, and any limitations.

Online and Neobanks Charge Lower Fees

In some cases, non-traditional banks don't charge any fees. For example, neobank Chime does not have overdraft fees or monthly service fees. Chime also offers fee-free ATM locations and there is no minimum balance to open an account.

Online bank Axos offers both checking and savings accounts with no fees. Its checking account charges no overdraft or monthly fees, and offers unlimited ATM fee reimbursement.

Online and Neobanks Offer Higher Savings Rates

Interest rates for a traditional savings account are dismal averaging 0.37% APY. Compare that with offerings from neobanks like Current, where accounts pay up to 4.00% APY. While Current's APY applies to up to $6,000 in savings, others offer above average rates on unlimited amounts. For example, UFB offers 5.25% APY on its FDIC-insured savings account.

Traditional Banks Offer Physical Branches and May Offer More Financial Products

Are traditional banks the worst choice, then? Not a chance. Traditional banks focus on in-person customer service, physical locations, and financial products.

If you often make cash deposits, a traditional bank is likely most convenient for you. You may also want a traditional bank to speak with someone in-person about getting a loan or mortgage.

Traditional banks can often better serve people with larger account balances or investments. Bank branches may also offer change machines, safety deposit boxes, and notary services.

Banking Apps

Online banks and neobanks tend to lead the way in technology. But, that doesn’t mean that traditional banks haven’t learned a thing or two along the way. Capital One has an excellent app to connect banking, credit, and loans in one central location.

If banking on the go is important to you, be sure to read user reviews in the app stores before choosing a bank.

The Similarities of Traditional vs. Online Banks vs. Neobanks

There are two features you can usually count on regardless of the type of bank you choose. The two features are FDIC insurance coverage and ATM networks.

You can find FDIC coverage at traditional, online and neobank accounts. FDIC insurance means your deposit is safe in the event of a bank failure. FDIC insurance insures funds up to $250,000.

For ATM access, traditional banks offer them in-branch. Online banks and neobanks offer ATM access from networks like Allpoint and MoneyPass.

Are Online and Neobanks Safe?

FDIC insurance means that your money is safe in an online bank or neobank. Neobanks use partnerships with banks to provide FDIC insurance protection. For example, Juno, another neobank, partners with Evolve Bank and Trust, Members FDIC, for its FDIC insurance. You can refer to the FDIC’s BankFind tool to lookup more information.

How to Choose Between Traditional vs. Online Banks vs. Neobanks

A good, modern personal finance strategy is to have multiple bank accounts. Consider getting a checking account at a traditional bank to make cash deposits. You'll also have access to a full array of banking products.

Then, look into an online bank or a neobank to get the best rate for your savings. Look for banks offering bonuses and free features that will make it easy for you to manage your savings.

If you want to see the cutting edge of fintech in action, neobanks are where the innovation lives. Plus, the higher rates on savings accounts are well worth your time.

Final Thoughts

The right path forward depends on your banking habits. If you prefer in-person service and make a lot of cash deposits, then a traditional bank may be the best fit. An online or neobank can give great rates on savings while offering low fees.

Again, you don't have to limit yourself to one bank account. A traditional bank account along with an online or neobank account may give you the best bang for your buck.