6 Pitfalls of Online-Only Banks

Banks, credit unions and online-only banks (or fintechs) can help you manage your money. Each type of financial institution comes with a set of pros and cons. Before you consider going completely virtual, consider these pitfalls of online-only banks.

It’s incredible how far banking has come. One generation ago, everyone was standing in line to cash their paycheck and making hour-long appointments to discuss loans. Fast-forward to today and we’re clicking our way through accounts and loan applications without leaving home!

Most banks and credit unions currently offer virtual banking options. Some, like Desert Financial, have highly-rated mobile banking apps in addition to full-service online banking. But in this era of digital money management, a new online-only banking industry has also emerged. About 30% of Americans have an account at an online-only bank, according to a recent Finder survey.¹

If you’re considering switching to an online-only bank, or you work with one now, there are some pros. Because online banks have lower overhead costs, you may pay fewer fees. Some may offer lower loan rates or pay higher dividends on savings accounts — though credit unions can be just as competitive in these areas. But there are also some major cons if you choose a virtual financial partner.

Here are some of the online-only bank pitfalls to consider:

If you grew up with touchscreens, contactless payments and mobile apps, doing all of your banking online might be a snap. If, on the other hand, you aren’t digitally savvy or find yourself often frustrated by technology, online banks probably aren’t the best choice.

Granted, you’re probably not going to take your personal banker out to lunch. But with an online bank or fintech, you can’t even put a face to the company’s name — just like you’ll never be more than an account number or a group of letters on a screen to them. If you want the ability to talk one-on-one with a financial advisor or sit down with a loan officer to discuss your options, skip the online-only bank and work with a local financial institution. Credit unions take pride in building strong relationships with their members so they can feel connected to their money and their financial institution.

Without the ability to walk into a local bank branch or at least call a banking representative you’ve built a rapport with, you’re at your online-only bank’s mercy. How fast will they get back to you? Will they work with you if you’re struggling or have a unique situation? Credit unions are member-owned, so they literally work for you. Because you’ve built a strong banking relationship, you can be sure that your credit union associate will do everything they can to help you work toward your financial goals. Think of CUs as part financial coach and part cheerleader — they can help improve your financial game, but they’re also there to cheer you on. Minus the pompoms.

While fintechs may have fewer fees in some areas, they don’t generally have their own ATMs. If you’ve ever been charged fees for using another bank’s ATM, you know what comes next. Without an ATM network, most online banks and fintechs have to charge fees whenever you withdraw money or perform other transactions at an ATM. You may also end up paying extra fees to some brick-and-mortar banks if they don’t have a large ATM network or an ATM in your area. Community banks and credit unions have their own ATMs, plus CUs like Desert Financial offer their members access to nearly 30,000 ATMs worldwide through the CO-OP ATM Network.

Many online-only banks are specialists in one area. Some offer a wide range of checking and savings accounts, but little to nothing in the way of investments and estate planning. Others focus solely on one type of loan or account. Credit unions take a more holistic approach to personal finance, with products ranging from money market and free checking accounts to mortgages, auto loans and investment services. They even have some products and services you might never expect!

Do you know where your online bank or fintech is located? San Francisco? East Coast? Is it even in the U.S.? Truth is, most fintech and online bank customers probably have no idea where their financial institution is located. Local credit unions and community banks are exactly where you think they are — in your community, town or state! You are guaranteed to help your community in a few ways if you go local. Not only do statewide and community credit unions employ residents near their branches and headquarters, they typically focus their community giving efforts in these areas as well. Plus, local credit unions just “get” you. Who else but an Arizonan would understand haboobs, wearing flip-flops year-round and ignoring Daylight Saving Time?

Whether you’re considering changing financial institutions for online benefits or you’d never give up your brick-and-mortar connection, it’s important to understand your options. Online-only banks can be cost-effective but lack the flexibility and personal interaction of credit unions. Traditional banks might not be able to compete with credit unions or online-only rates.

Think about how you manage your money, what’s most important to you and what your financial goals are. Once you know what you’re looking for in a financial institution, you can choose the banking relationship that works best for you.