Today’s question was posted in the HTM Facebook Group recently…
“Hey Matt and Joel! LOVE your podcast. Thank you for everything you do and have taught me.
I’m newly married and my husband and I are opening a joint bank account at the end of this year! We had discussed Bank of America being that it is conveniently located near where we live.
But! I just listened to your Friday Flight (about online banks vs. big traditional ones). Please tell me the cons of banking with a big bank so that I may explain it to my new husband.
Why do you favor online banks such as Discover? My husband loves the idea of being able to go to his bank and pull out cash at any given time. So that is his reasoning to bank with Bank of America. Let us know what you guys think!”
The short answer:
Oh man. How much time do we have!? The big banks are bad news bears on basically all fronts.
Here’s the quick list of cons.
- Big banks have bad customer service
- They charge a ton of junk fees
- Large banks pay next to nothing in savings interest
- Borrowing rates are sub-par too!
The physical footprint of ATMs might seem handy for big banks. But many online banks offer reimbursement or fee waivers for using ATMs these days so it works just as good.
Let’s delve into these comparisons in more detail…
Online Banks vs. Traditional Banks
Brick and mortar banking is dying. Because you can do almost anything online these days! And likely on your cell phone!
For large banks with huge physical footprints (think, Chase, Bank of America, etc), they have massive expenses to keep these bank branches open and operational.
To pay for it all, they are stingy on interest and incentives. And they look for small fees and ways to charge clients extra to do business with them.
Online banks however, and modern fintech platforms, run a very lean ship using modern software and technology. Many of these banks are FDIC insured, and offer the basic checking, savings, and loan products that traditional banks do.
Customer service
Just google Wells Fargo and dig into the awful ways they have treated their customers over the past decade.
The culture at some of these gargantuan banks is so toxic that we’d rather see HTM listeners avoid them. We’d rather see you do business with companies who don’t actively hate you.
The sleazy tricks these banks use to charge customers extra is truly sad.
For example, they charge account fees unless you jump through hoops to maintain a certain average daily balance and set up direct deposits.
For savings products like CDs, they offer auto-renewals for customers at ridiculously lower rates than original terms. Since most people aren’t paying attention, they get locked into horrible deals.
Basically, you need to constantly be on your toes when working with large banks. The second you turn your back and aren’t noticing, they swoop in with extra charges and sneaky ‘gotchas’.
And the saddest part about this all is – they will likely continue these unfavorable practices to stay in business and keep making profits. These old-school businesses are so top heavy that they can’t compete with modern online banks at all.
Inferior checking & savings
Big banks’ products often suck too. Like savings accounts, for instance.
These brick and mortar banking giants don’t come close to paying a reasonable return on your savings. I think Wells Fargo right now is paying 0.15% interest, which is awful! Chase is paying 0.01%!
And your peeps at BOA? .03% is standard. Gold tier is .04%. Platinum is .05%. And Platinum Honors is .06%! You can’t make this stuff up!
Online banks truly shine when it comes to paying interest for cash savings. So you’ll always want to keep your emergency fund in a HYSA at an online bank.
Right now in 2024 it’s quite easy to get a 4-5% interest rate for an online HYSA. We’ll talk about our favorite banks in a little bit.
Borrowing rates
And if you need to borrow money, credit unions are almost always a better choice from a rates and terms perspective.
The customer service is better too at credit unions. Here’s a great resource page showing the difference in all lending products for banks vs. credit unions. There’s often a 1-2% difference for car loans, basic credit card rates, and many mortgage products!
You said that BOA is conveniently located. But I’d be curious to know what you use the bank branch for these days. They seem largely unnecessary! They’re rarely necessary for most folks these days. And if you really want to go in person to a bank, why not a credit union?
Online banks we like
Inertia bias is hard for humans to overcome (actually, almost all money related biases naturally work against us!). Having a big logo like BOA behind you feels good because they’ve been around for a long time. It’s easy to pop in and talk to someone or make a deposit. It’s like having a banking security blanket.
But we encourage everyone to at least try an online bank. Here are the ones we like (and use personally!)
CIT Bank is awesome. We’ve been using them for years. Discover is great, and so is Ally.
These all pay competitive rates on savings accounts, which is important. On top of that, they have no fees or account minimums for checking accounts.
Better yet, they’re all big enough to have a solid fee-free ATM network. So you can still get access to cash when you need it!
The Bottom Line:
Online banks are really the way to go. You get all the modern amenities without the horrible downsides you get with the big banks.
But if you want to appease your husband and try opening both types, that’s OK I guess. Just make sure you don’t fall victim to the account fees or sales tricks at big banks.
And keep the largest sums of savings in the highest earning accounts possible at your new online bank.
Hope this helps, Katherine!
For the full version of this discussion, check out Podcast Episode #895 (it’s the last question in the episode)
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