Sorry to the FF Fanatics about the lack of a podcast yesterday. I’m in between scheduled interviews and couldn’t get one posted so check back next Sunday for a new episode.
On to the post!
It’s a big change for people to move their money from a brick and mortar bank (your typical local big or local bank like Chase, Bank of America, or “insert town name here” Bank) to an online bank (Ally, ING Direct, or HSBC). People tend to shy away from big changes and when the unknown is thrown in to the equation, the idea of change seems even more impossible.
So today, let’s take a look at the major differences between online banks (OB) and brick & mortar banks (BMB) so you can feel more comfortable and knowledgeable about what a switch of banks means for you and your money.
Interest Rates
OB - This is the biggest selling point for online banks. Because these banks only exist on the internet, they can keep their costs down and give that money back to their customers in the form of higher interest rates on savings, checking, money market, or CD accounts.
Right now, Ally pays 1.29% with their savings account and .50% on their checking account. ING Direct pays 1.10% for their savings and .25% for their checking. Keep in mind that this is after all of the market turmoil, before, the OB’s savings accounts were in the 3-5% range. Over time, this means huge returns for your money in the form of compound interest.
BMB - Interest rates have never been a strong point for BMBs. The national banks have thousands of branches with each one costing millions to build and fill with workers. The interest rates on checking accounts are almost always 0% and savings accounts sometimes get .50% if their lucky. Occasionally, BMBs have high CD rates which you can keep your eye on, but their expenses are just too high to pay out a lot of interest to their customers.
Customer Service
OB – No matter how fast the internet gets or how easy it is to make a call, trying to get a hold of a customer service rep to answer your question(s) can be difficult and frustrating. The things is, many online banks have superb customer service with 24/7 availability for calls because they know that this is an issue for customers. But if you’re the type of person who prefers seeing the other person who is answering your question, then the switch to an OB is going to take some time.
One last thing which I think a lot of people have a question about: almost every OB offers their customers a way to send in checks or cash to their online savings account. It could be refunded postage and you send it in an envelope, depositing it at an ATM, or by printing off an OB sponsored envelope, but OBs do offer this service. I’ve never had to do it and it makes me uneasy to send checks and cash in the mail so I keep a checking account at my local bank for this situation.
BMB - Having the face-to-face conversation ability is a huge selling point for BMBs. No matter how big the problem, you can always go in to a branch, sit down, and discuss the problem. The issue is when you have banking problems that don’t require you to go in to a branch. Many big banks like Chase or Bank of America have so many calls that they try to answer your question through automated recordings so they don’t have to pay 400 people to answer phones. This is never a fun situation and one that you’ll almost never have to deal with at an online bank.
The ability to easily depositchecks or cash at the branch is a big plus for BMBs and something that plagues OBs because many people don’t feel safe sending money through the mail.
The personal touch may be the thing you want out of your bank, and if so, stay with your BMB because an OB may feel a little impersonal to you.
Amount of Products
OB - It depends on the bank, but some online banks only offer a savings, checking, and CDs. They pride themselves on simplicity and doing the job right so they don’t stretch themselves thin with credit cards or loans. On the other hand, some online banks, like ING Direct, have their own brokerage account (Sharebuilder), mortgages, and business accounts.
Still, you won’t be able to hold all of your financial accounts within one OB. They just don’t offer enough products – something like credit cards or student loans are never an option for an OB. The products they have are almost always stellar, but the amount is lacking.
BMB - These banks have so much more money available to them so they can offer an array of products that fit all of your banking needs. On top of checking and savings, Chase offers loans for auto, house, and students; along with credit cards and investment options. Having all of your financial information held at one bank is something I wish I had, but I prefer the quality of products at different banks. Regardless, the sheer amount of products that BMBs offer blows OBs out of the water.
Online Options
OB – This is the second biggest selling point for OBs. They only exist online so you can almost guarantee that their web interfaces are going to be superb. The two OBs I’ve used have had incredibly slick and intuitive web capabilities where after 5 minutes you feel like you know how to do everything. They offer easy transfers, multiple savings accounts, automatic saving capabilities, and the ability to do fun stuff like name your main savings account “The Benjamins.”
BMB - Some of the big banks have quality web interfaces, but there still a step below OBs. They don’t offer as many tools and it’s often difficult to do an easy task. If you have a local bank in your town, this can be even a bigger issue. Perhaps no online banking or a stripped down version from 2001.
Two years ago I asked my bank at home when they were going to update their online banking and they said within the year, but it’s been about 14 months since then. If you do 90-100% of your banking online, then an OB may be a smarter option for your banking needs.
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Every one handles their money differently, so the types of accounts you use for your money will depend on what makes you feel comfortable.
I currently use Ally for savings and checking with a local bank for checking and ease. Like I said above, I wish I had all of my financial accounts under 1 bank, but it’s just not an option for me. I like the high interest rates and web interfaces of online banks, and I like the safety/comfort of a local bank to rely on.
All I ask is that you rethink your banking situation. You don’t want your bank to use your money without giving you anything in return. If that thing in return is comfort and stability, then go for it, but with the amount of options available today with the internet, don’t close all of your available doors too quickly.
Here’s some further reading for any one looking to make the switch to an online bank:
How to Open an Online Savings Account – A step-by-step guide to opening an account including screen captures and easy-to-follow instructions.
Interest Matters: Why Your Money Needs an Online Savings Account – A look at the numbers behind higher interest rates and how much your money can benefit from just a couple interest rate percentage point differences.
Do you use an OB, BMB, or mix for your banking needs?
Photo: Aaron Escobar
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When I went through my debt management plan I was forced to get a new bank account that had no previous links to any of the people I was in debt with…. The easiest option was an online bank called the Cooperative bank… My mum was with them, no hassle so I tried them out.
Customer service has been awesome, account access is easy but they are fairly simple in their interface and things but still have a full range of products.
One great thing about them is their ethical investment policy.
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Austin Reply:
July 21st, 2010 at 12:32 pm
Have you written anything on your site about them? This is the first time I’ve heard of them and would love to read some more about them.
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Forest Reply:
July 21st, 2010 at 4:34 pm
Not yet but it’s planned (along with 80mill other posts :) )…. They are a UK company that have run as a people owned cooperative (not sure if the bank is) business since the early 1900′s… When I was a kid they owned pharmacies, supermarkets, funeral parlours and everything. They still run a few of these businesses but not as prominent these days.
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