Traditional v. Online Banking

I often see commercials for financial institutions advertising their high yielding checking, savings, or money market accounts. On my last trip to the bank, I checked the interest rates, and found they weren’t even close to those advertised by the competitors. I figured there must be catch for the high rates offered with the banking offered on the television ads. After seeing the same ads a couple more times, I realized that the products offered by these banks are different from my local bank because they are based online. Doing business online allows these banks to cut the costs of having local branches, and tellers, allowing them to offer greater rates of return on your initial investment.

Should we invest our money in a traditional way, like going to the bank and opening a savings account, or should we do it online? These days, we can do almost everything online, from buying music to books to groceries. So, is it time to move our banking online? If you are comfortable using the internet and would like to have a higher payback on the CD, you should definitely consider online banking.

The biggest advantage of opening your investment account online is the higher rate of return.

Compare the traditional accounts opened at your local branch with accounts opened with an online competitor.

Checking Account

Traditional Bank: No APY (Annual Percentage Yield) on checking accounts. Usually you have to pay a small “account maintenance” fee. Sometimes, if your traditional bank treats their customers well, you may be able to get free checking topped off with free checks (Wow! J)

Online Bank: All of the online banks I’ve encountered offer a return on your money with a checking account. The return varies depending on the bank, but you might be able to find banks that offer a return of 4% APY or more depending on your account balance. Of course, there are no “maintenance” fees or anything like that. You also won’t need checks because you can schedule payments in your account. Simply type in the name of the person or institution and their address, the your online bank sends the payment directly to them electronically or via postal mail.

Traditional Bank: All of the traditional banks offer interest on their savings accounts. However, the APY rates are so low that sometimes we consider them insignificant. You will encounter interest rates on traditional savings that range between 0.1 – 0.3% APY.

Online Bank: Online banks offer much greater interest rates on savings than regular banks. You can find rates going up to 3.5% APY, which is quite a difference from traditional savings accounts.

Certificate of Deposit Account

Traditional Bank: You can open a traditional CD for the length of time you specify. The return depends on the time you are willing to “lock” your money for. You can sometimes squeeze a bit more than a 3% APY, depending on the bank.

Online Bank: Buying the same financial product from an online bank, you can get as much as 4% APY on your investment.

IRA CD (IRA - Individual Retirement Agreement)

Traditional Bank: If you decide to roll-over your 401(k) plan and open an IRA account with a traditional bank, you might get around 2.5% APY.

Online Bank: Doing the same thing online, you can get a nice return of 4% APY, depending on the bank.

The biggest advantage of doing your banking online, other than the higher rate of return on your investment, is the flexibility it offers. You can access your account anytime from anywhere as long as you have a computer with internet access. As well, with online bank, the closest branch is just a few clicks away, it’s open 24/7, and there is no line to the teller. Using your internet browser, you can do the same things as you can with regular banking. Online, you can: withdraw and deposit funds; open an investment account, like savings, CDs, or Money Markets; and, even pay your water bill.