Smart Money Podcast: Is Banking Stable, and Traditional vs. Online Banks
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Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions.
This week’s episode starts with a recap of the banking crisis that started with Silicon Valley Bank.
Then we pivot to this week’s money question from a listener who left this voicemail: "Hi, I've been listening to the podcast for a long time and recently I listened to the episode about high-yield savings accounts and did some research this weekend and realized that all the online banks are the ones that give you great rates. Traditional banks give really poor rates, including checking, whereas other banks give up to over 2% for checking accounts. Just wanted to get some information on online banking versus traditional banking. It seems like online banking is the way to go and the way of the future and has more perks to it, but didn't know what your thoughts were and if it's worth having maybe one of each or just kind of going all in on the online banking. Thanks for your help, and I look forward to listening."
Check out this episode on either of these platforms:
Our take on the recent banking crisis
The collapse of Silicon Valley Bank, followed by Signature Bank, has many of us concerned about the security of our money at our own banks. However, a broader failure of more banks seems unlikely as the federal government has already intervened to stabilize the system. The FDIC took over SVB and Signature Bank and said that all deposits would be covered, even those above the FDIC’s $250,000 insurance limit. The Federal Reserve also created the Bank Term Funding Program, which will give banks one-year loans in order to safeguard customers’ deposits.
If you’re still worried about getting access to your cash in the bank, you can do a few things to minimize your individual risk. Consider spreading your money across different banks, especially if you have more than $250,000 in one bank. You might also double-check that you have your money in a bank that is FDIC insured, or if you use a credit union, that it’s insured by the National Credit Union Administration. Keeping some cash on hand may also give you peace of mind — but make sure that money is stored safely to survive theft or damage to your home.
Our take on online vs. traditional banks
Online banks have recently received a lot of positive attention as their interest rates have largely risen in tandem with the Federal Reserve’s funds rate. Online banks have other merits, too, including low or zero monthly fees, early paycheck direct deposits and user-friendly apps. But brick-and-mortar banks have their own benefits, making traditional banks far from obsolete. It’s easier to deposit cash, make international wire transfers or get a cashier’s check from a traditional bank. And sometimes, in-person service is invaluable. Given that online and traditional banks have their own unique sets of benefits, it often makes sense to have money with both.
Know your needs: If you like to bank in person, a traditional bank or credit union could be a good option. But if you want the best savings rates and don’t require a brick-and-mortar bank, online banks could be a good fit.
Think about a hybrid approach: Both traditional and online banks have their benefits and drawbacks. By taking a hybrid approach, you could get the best of both worlds.
Shop around: If you’re in the market for a new high-yield savings account, take the time to look at a few banks. NerdWallet’s roundups are a good place to start.
More about online and traditional banks on NerdWallet:
Have a money question? Text or call us at 901-730-6373. Or you can email us at [email protected]. To hear previous episodes, go to the podcast homepage.
Sean Pyles: The banking system is feeling shaky. In the U.S., two large financial institutions failed in the last few weeks.
Sara Rathner: The FDIC agreed to cover customers deposits in full, which means all the bank's clients won't get their money back. Still, these are the biggest bank failures since the 2008 financial crisis.
Sean Pyles: So this week we are all about banking. Sara and I will start by talking about how worried we need to be about the turmoil in the banking system. Then Liz Weston and I will dig into a listener question about how to decide between a traditional brick-and-mortar bank or an online bank. Welcome to the NerdWallet Smart Money podcast, where you send us your money questions and we answer them with the help of our genius Nerds. I'm Sean Pyles.
Sara Rathner: And I'm Sara Rathner. Do you have a money question for the Nerds? Call or text us on the Nerd hotline at 901-730-6373, that's 901-730-NERD, or you can email us at [email protected]
Sean Pyles: Before we tackle this week's listener question, Sara and I are going to talk about the turmoil at Silicon Valley Bank and in the banking system in general and what it means for us. Quick disclosure: NerdWallet banked with SVB before the bank closed, but that won't affect the way we talk about this today.
Sara Rathner: Thankfully, we are in good hands today. We've got NerdWallet banking writer Chanelle Bessette here to help us make sense of all of this. Chanelle, thank you for joining us.
Chanelle Bessette: Thank you.
Sean Pyles: Chanelle, it's been a wild few weeks in the banking world. Can you talk us through what happened at Silicon Valley Bank and Signature Bank?
Chanelle Bessette: Yes. At a super high level, lots of startups and venture capitalists banked with SVB, and a lot of those startups decided to pull their money out all at once. SVB has invested some of their money in assets and they had lost value, and then SVB decided to sell those assets at a loss to get depositors their money.
Sara Rathner: And then a few days later, it seems like something happened with Signature Bank. What went on there?
Chanelle Bessette: Signature Bank hasn't gotten as much coverage, but that was another bank that catered to startups and the tech sector. That bank says that after the run on Silicon Valley Bank, its depositors got worried and started withdrawing their money too. Both banks failed, and the Federal Deposit Insurance Corporation took them over and said that customers' deposits would be fully covered, even if they were above the FDIC insurance limit. The Federal Reserve also created a one-year loan program that banks can draw on so that they don't have to sell off assets suddenly the way that SVB did.
Sara Rathner: The phrase FDIC insurance is getting thrown around a lot lately. Can you explain what FDIC insurance is and how it works?
Chanelle Bessette: Sure. If you have $250,000 or less in the bank, the federal government ensures your deposits in full, which means that if your bank fails, you'll get your money back. FDIC insurance typically covers up to $250,000 per depositor per institution for each ownership category, which means things like single accounts, joint accounts, and trust accounts. If your bank balance is $250,000 or less, your money will be returned to you no matter what happens to your bank.
Sean Pyles: I'm assuming that is most people, but what about those fortunate enough to have more than $250,000 in cash in a bank account?
Chanelle Bessette: If your balance is over $250,000, then you can consider moving it to a different bank or moving some of it to a joint account. If you have multiple accounts at different banks, then each of them is going to be insured up to $250,000. If you're looking to see if you have this insurance, you can look for "member FDIC" or the FDIC logo at the bottom of your bank's website. That'll help you confirm that you're covered. Or if you keep your money at a credit union, instead of the FDIC, your funds would be insured through the National Credit Union Administration. If your bank isn't part of the FDIC or NCUA insurance, then you should get out of there.
Sean Pyles: Sounds like good advice. Well, Chanelle, how worried do we all — regular folks — need to be? We've seen some ripple effects from the SVB collapse hit banks in Europe. With the bank Credit Suisse being acquired by the bank UBS to shore up the global banking system, are there more issues to drop, or can we just go about our days as normal?
Chanelle Bessette: There have been bank failures that have happened between 2008 and now, even though they haven't grabbed headlines like these ones did. There were four bank failures each in 2019 and 2020 and eight in 2017. That's still a relatively small number, though. There were more than 4,200 banks in the U.S. in 2021. Silicon Valley Bank and Signature Bank — those banks cater to the same relatively niche industries, mostly serving businesses with a lot of cash on hand. That's pretty unusual. Most banks are a lot more diversified than that, which ought to make them more stable.
Sara Rathner: Even if a bank failure is pretty unlikely, it is suddenly on people's radars as something that they might need to be prepared for. What steps can we all take to guard against this?
Chanelle Bessette: If you are concerned that your bank might fail or go out of business, you can take extra steps by considering spreading out your emergency fund at multiple banks. So that way if one account becomes temporarily unavailable or unaccessible, you can still have money to pay for your bills. Credit cards can also be a good stop-gap measure for helping you float expenses when you know your money exists, but you can't access it right now. Although, of course, taking on debt for a long period of time is not something we'd recommend, but credit cards can be good while you're waiting to have your bank situation sorted out.
And then some people like to keep cash safe at home for true emergencies. That way it's accessible no matter what. If a bank failure were to happen to you, you probably need to communicate with your landlord or mortgage lender to ask for a payment extension, and the same goes for utility companies. You also might want to call 211 to be connected to food or utility assistance programs. But again, bank failures are a pretty remote possibility in most cases, and it's just good to make sure you know how to find this contact information just in case.
Sean Pyles: Well, Chanelle, thank you for talking with us.
Chanelle Bessette: Yes, thank you for having me.
Sean Pyles: Listeners, if you have any questions about banking, if you're concerned about the stability of your bank, maybe leave us a voicemail or text us on the Nerd hotline at 901-730-6373, that's 901-730-NERD, or you can email us at [email protected] Now, let's get onto this episode's money question segment.
Liz Weston: This episode's money question comes from a listener's voicemail. Here it is.
Listener: Hi. I've been listening to the podcast for a long time, and recently I listened to the episode about high-yield savings accounts. Did some research this weekend and realized that all the online banks are the ones that gave you great rates. Traditional banks give really poor rates, including checking, whereas other banks give up to over 2% for checking accounts. Just wanted to get some information on online banking versus traditional banking.
It seems like online banking is the way to go and the way of the future and has more perks to it, but didn't know what your thoughts were and if it's worth having maybe one of each, or just going all in on the online banking. Thanks for your help, and I look forward to listening. Bye, bye.
Sean Pyles: To help us answer this listener's question on this episode of the podcast, we are joined by banking Nerd Margarette Burnette. Welcome back to Smart Money, Margarette.
Margarette Burnette: Hi. Thank you for having me.
Sean Pyles: It's great to have you on to talk about this interesting topic that we hear about a lot from our listeners. To start, can you please explain the difference between a traditional bank versus an online bank, because traditional banks are also accessible online?
Margarette Burnette: That is very true. With a traditional bank, you can open an account at a branch. You can go to a brick-and-mortar building and go and see a teller. You can open an account. You can make a deposit. You can withdraw cash. It's kind of what you typically think of when you think of going to a bank or going to a bank branch. With an online bank, on the other hand, it markets itself primarily online. You typically don't have branch access, and you usually access your accounts through a mobile app or on the computer.
Since they don't typically have those costs of maintaining a building, they can typically offer higher rates on savings accounts. There are traditional banks that have online imprints where they offer accounts that are again primarily marketed or offered online, and so we can refer to them as online banks.
Liz Weston: Well, beyond the high-yield savings account rates, what other perks do online banks offer?
Margarette Burnette: Online banks may also have low fees or no monthly fees. Or if they do have a fee, it could be very easy to waive. For example, if you had direct deposit in an account, they might waive the fee for that particular account. Some of the online accounts have good rewards features or cash-back features or just make it really easy to save. As far as online checking accounts, they might be more likely to have innovative programs. If you spend some money, then they can round up the transaction purchase and put the difference into savings accounts.
Sean Pyles: With online banks, you obviously can't go into the internet in person and get your money from them, so you'll have to rely on ATMs primarily to get cash out. Do these banks typically cover ATM fees or not so much?
Margarette Burnette: Some online banks do cover them. Others participate in large networks, so that even though there may not be an ATM with the name of the bank branded on it, it may participate in a network that lets customers withdraw cash without paying fees. Another way to move cash in and out of an online bank account is to set up an electronic transfer with an existing bank that you may have or an existing account.
You can move money that way and then access it from a traditional account. Ideally, a feature of an online bank is that there would be solid mobile apps — mobile apps that are easy to use, that could get great ratings in the app stores. We typically see some of the more solid apps with the more popular online accounts.
Sean Pyles: Online banks seem to have the edge when it comes to fancy apps and better rates on accounts, but there are some times where traditional banks can be more beneficial. Can you talk about those?
Margarette Burnette: The No. 1, I would say, is if you want that person-to-person service. If you need to see somebody, maybe you have an account situation that's unusual, or you just need to talk to someone about something with your account, or maybe if you're opening an account and for some reason the bank can't verify your identity very easily, if you go into a branch, they can pretty much verify your identity or at least go a long way towards it. It's a lot easier to do when you can see someone face-to-face than online. That's when a traditional bank can be more beneficial.
Also, in the example I gave about being able to transfer funds, it's usually pretty easy if you transfer from an online account to a traditional account, and then you can go and withdraw cash as needed either at a bank branch or at an ATM that's branded with that bank's name. Also, if you need other bank services such as wire transfer, international wire transfer, if there's a need for you to have a cashier's check, then it's usually easier to do at a traditional bank. Also, it's easier to deposit cash as well for obvious reasons.
Liz Weston: Our listener mentioned getting 2% on a checking account. How common is that? What kind of hoops do you have to jump through to get that much on your checking?
Margarette Burnette: It's definitely something that you are more likely to see with an online checking account, a higher APY, but usually you do have to do certain things such as have direct deposit. I see a lot of accounts that have that stipulation. The direct deposit might have a certain minimum. It might be something like receive direct deposits of at least $1,000 each month. Other accounts might have that direct deposit and an additional qualification of making monthly debit card purchases. These financial institutions really want you to use your account and have this account be your go-to for everyday spending.
They might say, "Make a minimum of 12 purchases each month and have direct deposit. And then if you do those things, then you may have that high APY of 2% or more." Another thing to keep in mind is that some of these checking accounts have limits, so an upper balance limit to earn the high APY. They may be pretty high. For example, some are $10,000. But if you are keeping a lot of money or if you're thinking, oh, well, I can just keep all of my savings in this account, and if it goes above that amount, then the APY above that could be a lot lower. You still might need to look at an high-yield savings account for extra cash or at least just be aware there could be an upper limit on that very attractive APY.
Liz Weston: That's really good to know. It sounds like there are a few hoops you have to jump through and you want to know what those are and make sure that fits with the way that you're planning to bank.
Margarette Burnette: Yes, absolutely.
Sean Pyles: Do you think it makes sense to have all of your money in an online bank or all in a traditional bank if you're going to go one way or the other? What about a hybrid approach?
Margarette Burnette: For a lot of people, it might be easier to do a hybrid approach, especially if you aren't sure about putting your money into an online account for the first time. You could try it out by opening a high-yield online savings account and keep all of your existing checking accounts, even keep your old savings account. It might actually be fun after a few months to see the rates that you're earning on the online savings account if it has a high yield compared to the traditional account. That could be a good way to get used to it, see what it's like to make transfers with the mobile app on your phone, look at electronic statements online.
And then if you're comfortable, you can move into other accounts such as an online checking account that offers a great rate, and even certificates of deposits, CDs, just other ways to put your money into interest-bearing accounts that earn really great rates. And then as you start shifting your banking to these other accounts, then you can close some of the old accounts that aren't serving you as well.
Sean Pyles: The way I approach it is that I have different types of accounts for different purposes. I keep my savings in a highly rated online bank that gives me a great yield on their high-yield savings account, and I have about half at different accounts with this bank for my various savings goals. My checking is with a local credit union, and then I actually have one account with a traditional old-fashioned mega bank that I've been with since high school, and that's largely so I can pay my mom my part of the cell phone bill monthly.
Margarette Burnette: I think for a lot of people, a type of hybrid method could be a great approach. In fact, I use a hybrid approach as well. My spouse and I have a high-yield online savings account with an online bank, but he prefers sticking with this traditional bank that he's always had for everyday spending. Our checking account is with a bank that has a branch down the street. It's not to say that he's always going there to bank in person or I'm always going there to bank in person, but we do still have it. It's convenient if we occasionally need to get a cashier's check or something like that. But for the most part, for our savings, we do have the funds in a high-yield online savings account, and that's how we roll.
Liz Weston: Well, I also voted for hybrid. We have our traditional bank account where we have our home equity line of credit, we have our business accounts. All that's a brick and mortar bank, but I really like the higher interest rates you can get from online banks. I also have some online checking accounts, and those are primarily used when we travel abroad. I like being able to access cash without paying big foreign exchange fees. That's another reason to look into online banks. Not all of them offer that, but that's one thing to have.
Also, I'm a little bit of a belt-and-suspenders type of person. I've been overseas and then had one of my debit cards not work, and so I like to have more than one just in case I need access to cash. I am a little too prone to chasing bonuses though, because some of these online banks offer nice bonuses for moving money, and right now I just have way too many savings accounts. I really need to consolidate.
Sean Pyles: How do you think about whether chasing bonuses is worth it or not? Because to me, I tend to be a little lazy with things like this. I see all the offers and I just think, my money's fine where it is. What makes it worth it for you?
Liz Weston: Well, part of this is research too. I want to know how these different banks work. I'm using that as an incentive to get me out of my laziness. You can get a couple $300 for moving a chunk of change to a bank. You don't necessarily have to have it there for that long, 30 days, 60 days, 90 days. It all depends on the bank. But for me, I just chalk it up to research and then a few extra bucks.
Sean Pyles: I like that excuse. I might have to do that myself.
Liz Weston: Worked for me.
Margarette Burnette: I do hear from readers that do the same and they're very happy. It's a nice little feeling to get that deposited after opening the account.
Sean Pyles: Or essentially just opening an account. It's like free money.
Margarette Burnette: Yes.
Liz Weston: And until you actually have money there, it's hard to know how well the app works, how well customer service works. I've had a couple online banks that had a really slick interface that did not turn out to be that great. In one case, I had a transfer scheduled. I could not find it on the app, so I rescheduled the transfer and then they both went through. That was a bit of a shock because it overdrew my checking account and I was not happy about that at all. I think when you're writing about these banks, I'm sure you agree, Margarette, having some experience with them can really help point out where the strengths are and where the deficits are.
Margarette Burnette: Yes, it does. Another issue that I hear a lot about is trying to verify identity. The bank just isn't able to verify the identity. Here they are, they've just opened this account, but the bank might turn around and close the account if they can't. There is some caution to be used there, and it is good to do some research. We certainly try to help. If we hear the same story over and over, we reach out to the bank and ask, what's going on here? Do you have a response to this? But nothing beats knowing for yourself, just experiencing the account for yourself.
Liz Weston: We should mention that NerdWallet spends a lot of time and effort reviewing online banks and brick-and-mortar banks as well, right?
Margarette Burnette: Yes, absolutely. We spend hours as a team researching over 90 banks to find the ones for our Best-Of Awards, and we are happy to say that there are some really good online banks that have good products for customers.
Liz Weston: We'll link to that in our show notes.
Sean Pyles: One question we hear a lot from listeners is how to find the right online bank. Obviously the NerdWallet Best-Of Awards is one really handy resource, but many people still aren't sure what to think about when they're comparing one bank to another. What do you think are maybe the top three things to consider?
Margarette Burnette: Well, first and foremost, you want to have an account with federally insured funds, if the institution is a member of FDIC or maybe they partner with a bank that offers FDIC insurance. Either way, just make sure that the money in the account is insured. If you're looking at a credit union, credit unions are also federally insured through the NCUA, the National Credit Union Administration. It makes sure that the funds in federally chartered credit unions are insured.
Sean Pyles: That's a really big important thing just right off the bat: Make sure your money will be secure. And then after that, I think a lot of folks can have a hard time distinguishing one bank from the next. They might have a different color logo perhaps. But then beyond that, what really would be a difference that would make someone choose one bank over another?
Margarette Burnette: You're going to want a bank that has good rates with low fees. You can just look at the comparisons. A lot of the banks that we research tend to typically have strong rates each month. You see the same ones rise to the top in terms of what they're able to offer their customers. I would absolutely look at that. And then I would choose a bank that just seems to have its information available as far as how to apply. Does it look like it's easy to apply on their mobile apps? Do they have high ratings? And if they just seem like they have a good customer presence.
Sean Pyles: For me, as I've considered one online bank versus another, what's made the difference for me is realizing that the bank that I want to have my money stored at will help me bank the way I want to. And by that I mean, do I want to have my bank account information accessible in a number of different apps? There are a lot of apps and services where you can connect your bank account and see your net worth and all of these things in one place.
For whatever reason, the online bank that I use primarily is not compatible with Plaid, which is a service that connects various financial institutions with companies that will show you all of your money in one place. And for some people, that could be a deal breaker, because they would want to see their bank account information in one of their profiles on one of these companies. But for me, I don't really tend to use those services as much, so I'm fine with having a bank that doesn't work Plaid, for example.
Liz Weston: Interesting.
Margarette Burnette: That is interesting. That is a good point if your online bank is going to be there or be in the places online that you want to be as you're doing your banking and your personal finance.
Sean Pyles: One thing that stood out to me about our listener's question is that they said that online banks seem to be the way of the future. Margarette, I'd like to hear your take on that. Do you think it's only a matter of time before all banks are online banks, or is it more likely that we'll have some combination of both in the future like we have now essentially?
Margarette Burnette: From what I see, I think that we'll have a combination of both in the future. I do see a lot of more traditional banks partner with others to offer online offerings. I do see traditional banks offering online imprints. They may have online subsidiaries. There are good online accounts out there and more online accounts, but I don't know that they will necessarily replace some of the traditional banking services in the near future. From the examples I gave earlier, I think that we are going to have a combination of both for the foreseeable future.
Sean Pyles: Yeah, that makes sense. Well, Margarette, thank you so much for sharing your insights with us today.
Margarette Burnette: Again, thank you for having me.
Sean Pyles: Let's get on to our takeaway tips. Liz, will you please kick us off?
Liz Weston: Yes. First, know your needs. If you like to bank in person, a traditional bank or credit union could be a good option. But if you want the best savings rates and don't need a brick-and-mortar bank, online banks could meet your needs.
Sean Pyles: Next up, think about a hybrid approach. Both traditional and online banks have their benefits and drawbacks. By taking a hybrid approach, you can get the best of both worlds.
Liz Weston: Finally, shop around. If you're in the market for a new high-yield savings account, take the time to look into a few different banks. NerdWallet's roundups are a good place to start.
Sean Pyles: And that is all we have for this episode. Do you have a money question of your own? Turn to the Nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at [email protected] Visit nerdwallet.com/podcast for more info on this episode, and remember to follow, rate, and review us wherever you're getting this podcast.
Liz Weston: Here's our brief disclaimer: We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances.
Sean Pyles: This episode was produced by me, Sean Pyles, with help from Liz Weston, Sara Rathner, Tess Vigeland and Rosalie Murphy. Rosalie and Kaely Monahan mixed our audio. Jae Bratton wrote our show notes, and a big thank you to the folks on the NerdWallet copy desk for all their help. And with that said, until next time, turn to the Nerds.