Online Banking vs Traditional Banking: What’s the Difference?
Tricia has nearly two decades of experience in commercial and federal government lending. Her expertise is highlighted throughout small business loan content on Fit Small Business.
This article is part of a larger series on Business Banking.
Online banking is the process of conducting financial transactions through a company’s website or mobile application. Traditional banking involves visiting a physical banking location—a branch or an ATM—to conduct transactions.
Traditional banks provide in-person customer service and a wider range of business products and services than online banks. Meanwhile, online banks typically offer lower fees and higher interest yield. Choosing between the two is simply prioritizing what the most essential features of a bank are to your business and picking a provider that specializes in those features.
Bank of America is our choice as the best small business checking account, thanks to waivable monthly fees and a stellar selection of business products and services. Check out the company’s website for more information.
Online Banks vs Traditional Banks at a Glance
Online Banks | Traditional Banks | |
|---|---|---|
Monthly Account Fees | Typically no monthly fees | Low monthly fees, often waivable with qualifying actions |
Network Availability | No physical locations; most offer ATM access | Both physical locations and ATM network access |
Cash Transactions | Either not accepted, less convenient, or more expensive | Accepted; usually free up to a certain limit each month |
Transaction Limits | Often no limits | Typically a set amount of free transactions before fees are charged |
Product Selection | Usually a limited set of business products and services | Typically a full set of products and services, including merchant services and savings and lending products |
Security & Insurance | Bank accounts and websites are secure; accounts are either FDIC insured or backed by an FDIC-insured bank | Bank accounts and websites are secure as banks are FDIC insured; information might not be as exposed to the internet |
Interest Rates | Can offer APY on checking, usually higher than traditional banks | Most entry-level accounts don’t offer APY; those that draw interest earn less than online banks |
Customer Service | Email and the mobile app, sometimes with extended hours | In person, by phone, email, or mobile app; some limit banking hours while others are 24/7 |
Online Banks vs Traditional Banks: How To Choose What Is Best
Both online and traditional banks offer excellent bank accounts. Which is best for your business will depend on the type of transactions you conduct, whether you want to do banking in person or online only, and what kind of additional products and services you need from your bank.
There is quite a bit of a gray area between the two types of banking. A traditional bank, such as Bank of America or Chase, has the option for you to open a business bank account and visit a physical location. Meanwhile, an online-only bank, such as Relay, allows you to make cash withdrawals and deposits at specific ATM locations.
In the next eight sections, we list the different features of all banks and compare the differences and similarities between online banking vs traditional banking.
1. Monthly Account Fees
Monthly banking fees can range from no fees to as high as $95. On average, banks that charge monthly fees set them between $10 and $50, and they are often waivable:
- Online banks: Many online business bank accounts have no monthly fees. The ones that charge monthly fees either offer criteria by which the customer can waive those fees or offer outstanding products and services that justify the monthly fee. See our list of the best online business banks for the typical fees.
- Traditional banks: While some traditional banks like U.S. Bank and Huntington Bank offer business bank accounts with no monthly fees, most like Bank of America and Chase have fees that can be waived if the customer meets specific balance or transaction criteria.
2. Network Availability
Choosing a bank based on network availability means picking a provider that offers physical access to your account, either through a branch location or an ATM:
- Online banks: Online banks don’t have physical locations, so you won’t be able to visit a branch. However, most online banks offer access to a larger ATM network, allowing you to withdraw money for free. Some will let you deposit money at those same ATMs, while others use a third-party option like Green Dot.
- Traditional banks: Most traditional banks have a large network of physical locations and a full ATM network you can access for your day-to-day transactions. Remember that just because a bank has locations, there might be none near your business location. If you need to visit a physical location occasionally, choose a bank with a branch nearby.
3. Cash Transactions
Traditional banks will always have an advantage over online banks for businesses that handle cash regularly. However, online banks have made strides in allowing cash withdrawals and deposits into digital accounts:
- Online banks: Cash availability ranges widely with online banks. Brex, for example, doesn’t allow ATM withdrawals or cash deposits. Meanwhile, Relay allows cash deposits at Allpoint ATMs and withdrawals at any ATM. Be sure to check the availability and fees of cash transactions with online banks if your business handles cash regularly.
- Traditional banks: The most convenient option for businesses that handle cash regularly is to choose a traditional bank. Not only can you make deposits and withdrawals at branch locations, but you can also often do the same at ATM locations. Some traditional banks limit free transactions and monthly cash deposits, so find those out before choosing a bank.
4. Transaction Limits
Of all the potential fees you might encounter, fees resulting from transaction limits might be the hardest to calculate. Some banks have a limited amount of free monthly transactions, which might only include transactions at a branch location:
- Online banks: Online banks usually don’t charge transaction fees for day-to-day banking actions. You may encounter wire or automated clearing house (ACH) fees, but most will allow unlimited deposits, withdrawals, and ACH transfers.
- Traditional banks: Some traditional banks, such as Capital One, have unlimited everyday transactions. Most will limit your number of free transactions each month and charge between 30 and 50 cents for additional transactions. Be sure to clarify which transactions count toward your free limit with your bank.
5. Product Selections
Online banks typically have a narrow range of business banking products and services. Some online banks, such as First Internet Bank and NBKC Bank, offer full-service banking. In most cases, if you need a wide range of products from your bank, you need to choose a traditional bank:
- Online banks: While there are online banks that have a full complement of products and services, most are limited. Some offer savings accounts and limited lending options. For example, Mercury offers a credit card and venture capital term debt.
- Traditional banks: One of the biggest advantages of traditional banks is their wide range of products and services. You can get lending, savings, and merchant services with a traditional bank. In addition, if you want personal banking services, you can get those with a traditional bank too.
6. Security and Insurance
Regardless of whether a bank is online-only or traditional, the bank’s website will list all of the security features to keep your information safe. Traditional banks might expose your information a little less than online banks, but if you access your bank account online, you have the same risk whether you choose an online bank or a traditional one.
In addition, all of the online and traditional banks recommended by Fit Small Business are either insured by the Federal Deposit Insurance Corporation (FDIC) or backed by a bank that is FDIC insured. Some of these banks may offer additional protection through outside insurance companies, a sweep network, or partner banks to safeguard your business funds in case of a bank failure:
- Online banks: All online banks have security features to protect your business and personal information. In addition, they are either FDIC insured or backed by an FDIC-insured bank.
- Traditional banks: Because traditional banks also use websites and mobile apps for their banking products, they also have the same type of safeguards in place as online banks. These banks are also FDIC insured. The only thing that might make your information a little safer would be if you conducted all transactions in person with no online access, but that would be very rare.
7. Interest Rates
Both online and traditional banks offer accounts that will earn you interest. Typically, online banks are more likely to offer a higher rate on more entry-level accounts due to the lower overhead costs of running an online bank. Traditional banks may offer larger interest earnings on investment products, business money market accounts, and certificates of deposit (CDs). These accounts typically come with larger monthly fees:
- Online banks: You are more likely to earn a solid rate of return on an entry-level business checking account with an online bank. Bluevine offers 2.0% APY on balances of $250,000 or less, and Grasshopper offers up to 2.25% APY uncapped. Both of those accounts have no monthly fees.
- Traditional banks: Interest earnings from entry-level business accounts at traditional banks are almost nonexistent. Even base-level savings accounts offer very small APY outside of short-term promotional rates. If you can tie your funds up in a CD, you might earn more. You will need larger balances and often pay larger monthly fees to earn high rates of return with traditional banks.
8. Customer Service
All banking providers recommended by Fit Small Business have strong customer service. The difference between online and traditional bank customer service is how and when you can contact them.
- Online banks: You can typically reach online banks via electronic communication, although some provide toll-free phone customer service. Most have either email or in-app messaging available. While some have limited hours, others have extended customer service outside traditional banker hours.
- Traditional banks: You have the most ways to reach traditional banks’ customer service. You can visit a branch location, call a toll-free number, write an email, or send an in-app message. In many cases, this customer service help is limited to banking hours. Some of the larger national banks may offer customer service 24/7.
When To Use Online Banks
In summary, you should consider opening an account with an online bank instead of a traditional bank when most of the following criteria are true:
- You have no need to visit a physical location for banking
- You may not need a full range of business banking products and services
- You find an online-only bank with limited features that you like, and you are OK with getting other business services from other providers
- You handle cash infrequently and rarely need to make cash deposits
- You want to earn higher rates of return on entry-level checking products
- You want a fee-free banking product without the need to get monthly fees waived
Pros & Cons of Online Banks
| PROS | CONS |
|---|---|
| Most charge no monthly fees and have limited other fees | No physical branch locations, and some limit or prohibit ATM transactions |
| Higher interest rates on entry-level accounts | No in-person customer support |
| Unique rewards like bonus perks and software discounts | Cash transactions are limited, and cash deposits may be costly or inconvenient |
| Access to your account 24/7 | Fewer account options and business services |
When To Use Traditional Banks
You should choose a traditional bank for your small business instead of an online bank when most of the following criteria are true:
- You would prefer to visit a branch location, or you have banking transactions that are more convenient in a physical location
- Your business handles cash and needs to make regular cash deposits
- You have regular transactions that allow you to waive monthly fees
- You would prefer in-person customer service to online support
- Your business might need a full range of business products and services, such as savings, lending, and merchant services
- You would prefer to have your personal and business bank accounts with the same provider
Pros & Cons of Traditional Banks
| PROS | CONS |
|---|---|
| Branch locations and ATMs are widely available | Typically charge higher fees, some of which may be hard to waive |
| More convenient and less expensive cash transactions | Entry-level accounts often have no or meager interest earning |
| In-person customer support in addition to access through the website and mobile app | Transactions and customer service may be limited to business hours |
| Offers a wide variety business products and services which can scale with your growing business | If you need a physical location, it may limit your choice of banks to a provider with branch locations near your business |
Bottom Line
Both online and traditional banks provide excellent products and services to support your business. Choosing which is best for your business completely depends on what you expect from your bank. Consider the types of transactions and services you might need from your bank and choose one that best meets your needs for the lowest cost to your business possible.
If you choose an online-only bank for your business, Bluevine is a great option. You can earn 2.0% APY on qualifying balances of $250,000 or less. Check out Bluevine’s website for more information.
