Friday | February 10, 2012
Online Banks vs. Traditional Banks
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By
Darin Shebesta
11 March 2004
Tired of keeping your cash hidden in a sock drawer? Fortunately, there are much better places to store your money, including brokerages, credit unions, and banks, to name a few. Banks are a popular option because they contain the most liquid products (easiest to convert into cash).
As early as the 1800s, people have held their money in banks. These banks set up businesses in towns with buildings called branches. This is known as traditional banking (a.k.a. brick and mortar) and continues strong today. Some examples of traditional banks include but are not limited to: Bank of America, Bank One, and Wells Fargo.
Online banks entered the market in the 1990s and are located solely on the Internet. Examples of online banks are: NetBank, Virtual Bank, and EverBank. Both types of banks have their pros and cons, but many people are not aware of them.
Interest Rates
One major difference between online banks and brick-and-mortar banks is the interest rates paid by the two institutions. Online banks do not have the expenses and overhead of traditional banks’ physical branches, so they can offer better interest rates on all their products.
For example, the rate of an interest-bearing checking account with Bank of America was .10 percent on the date of this writing, according to www.bankrate.com. Meanwhile, the rate offered on a similar account with NetBank on the same date was much higher at 1.30 percent.
Fraud Prevention
An important factor people expect in a bank is security. If a person places money with a bank, they expect it to be there when needed. The majority of banks (both online and traditional) are insured by the FDIC (Federal Deposit Insurance Corporation) up to $100,000 of coverage in case a bank cannot cover its accounts. Another aspect of security is protection from identity theft.
Online banks are tempting targets for computer hackers, so some people may think they are not safe.
"There is a possibility someone can get a hold of your ID and other private information and steal your identity," says Dave, a student at Arizona State University.
Unfortunately, identity theft can occur whether you belong to an online bank or a traditional bank. Most banking websites are run on secure server lines and have tough encryption safeguards to thwart potential lawbreakers. Also, some traditional banks allow customers to access their accounts online, demonstrating the need customers have for online access.
Customer Service
Another important issue concerning banks is the quality of their customer service. With traditional banks, one is able to see a teller or customer service representative for questions or comments during normal banking hours.
"I’m not able to have face-to-face interaction with an Internet bank like I have with my traditional bank," says Carlton, an Arizona State University student.
Online banks offer a different advantage by having customer service representatives available by phone almost 24 hours a day, seven days a week, to solve any problems that may arise.
Account Withdrawals
Frequent ATM (automatic teller machine) users may be wondering "How would I withdraw cash from an Internet bank? Cash withdrawals can be made through surcharge-free networks, which allow anyone with an ATM card to use. For example, Washington Mutual is a savings and loan bank that does not charge to use its ATMs.
Some retailers permit cash back transactions when making a purchase with a debit card. Most traditional banks also allow customers to use their own bank’s ATMs free of charge.
Account Deposits
Unlike traditional banks with physical branches that take care of deposits, online banks use the mail system to send deposits to the processing center. The negative aspect of this is the extended time it takes for the deposit to clear compared to depositing at a traditional bank. Another option to help speed the deposit process in either a traditional or Internet bank is enrolling in direct deposit, where the employer automatically deposits the check to the bank.
As for bill payments, most banks (traditional or online) give the customer a selected amount of personal checks to use as a payment option The newest technology is bill pay, which allows for check-less payment. Internet banks started this option and traditional banks joined in soon after.
"It’s not that people are ignorant about the different types of banks [traditional and online], it’s just that they aren’t educated about this subject," says Melody, a student at Arizona State University.
Online banks aren’t for everyone. However, traditional banks aren’t for everyone either. Doing the proper research is always important, especially in relation to choosing the right bank for your needs.
© 2008, Young Money Media, LLC. All rights reserved.
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