Banking options include brick-and-mortar banks that you can walk into in your town and online bank options accessible only from your computer. The bank of your childhood might have meant a lollipop for you and a friendly chat with a familiar teller for your mom. But a bank in the cloud could offer a far higher interest rate to help your money work more efficiently for you.
Which is better? Local bank or online bank?
What Is a Bank?
The Federal Deposit Insurance Corporation (FDIC) defines a bank “a business that accepts deposits and makes loans.” The IMF further clarifies its role as acting as an intermediary between depositors (who lend money to the bank) and borrowers (to whom the bank lends money) by taking in money from customers, pooling it, and lending it to other customers who need funds. The bank makes money from its excess cash.
Connecticut’s Department of Banking has a great example of how it all works: “You deposit $500 in YourBank. YourBank keeps $100 of it to meet its reserve requirement but lends $400 to Ms. Smith. She uses the money to buy a car. The Sav-U-Mor Car Dealership deposits $400 in its account at TheirBank. TheirBank keeps $80 of it on reserve but can lend out the other $320 as its own excess reserves. When that money is lent out, it becomes a deposit in a third institution, and the cycle continues. Thus, in this example, your original $500 becomes $1,220 on deposit in three different institutions. This phenomenon is called the multiplier effect. The size of the multiplier depends on the amount of money banks must keep on reserve.”
Interest Rates
Interest rates can loosely be described as money the bank pays you for using your money. As shown in the example above, when you deposit $5,000 into a bank that pays 1% annual interest each year, the bank pays you $50 for the privilege of using your money. If you can find a bank that pays 4% annual interest on that same $5,000, which many online banks are paying in 2025, you’d earn $200 that year. It’s sure nicer when you earn more rather than less!
What Is an Online Bank?
Although you can’t drive more than a few miles in most towns without seeing a bank building, lots of banks have no physical location that you can walk into. Banks like Ally, E*TRADE, and others have offices for their employees to work out but not for depositors to visit. You sign up online for an account with one of these banks, uploading photos of your ID, and entering your Social Security number and birthdate.
Pros of an online bank
Longer hours for you to connect (although your rep will only voice on the phone or an agent on a live chat).
You are likely to earn higher interest rates for your deposits.
Low or no minimum balances.
Easy online opening.
Cons of an online bank
If or need your money right away, you can’t get it; it takes 3 to 5 days to get your money transferred into a local bank where you can then get the cash.
If you have a problem, you have to rely or phone or chat support or emails to get help.
If the internet is down or if you are locked out of your account, there is no physical place to go to fix the situation and access your money.
Local Banks with a Physical Building - A “Brick-and-Mortar” Bank
Banks that have buildings you can walk into with human beings you can talk to are also called “brick-and-mortar” banks. They convey Mary Poppins-like safety and security with their brick facades and suit-clad VPs. In times of uncertainty, you can walk in and ask for every cent of your money back. Well, maybe a penny less if your balance is 1200.01 once the penny is gone. But you can get your cash in hand just for the asking, unless we are facing a spate of bank runs.
Pros of a physical bank
You can get your money out anytime with no wait.
can talk to and work with a real person.
An ATM with no fee is available right there.
Cons of a physical bank
You will probably face far lower interest rates on money you hold there.
You may face a monthly maintenance fee and minimum balance requirements.
Regulation and Bank Safety in 2025
Historically, American banks have been safe and reliable, except during a few periods of turmoil, including the Great Depression, the recession of 2008, and the more-localized Silicon Valley Bank run in 2023. As we move toward less bank regulation, as called for by the Heritage Foundation’s Project 2025 - The Presidential Transition Report and the Trump administration and requested by state banking associations, it is not unreasonable to expect that as banks are regulated less, they may become less safe for depositors. In that case, people might feel safer having their money in a local bank that they can walk into if any banks begin to fail.
Best of Both Worlds?
Having more than one account might be the best solution. Bank at your favorite local bank, but if you have a substantial amount of extra cash, you could make it work for you at an online bank. Pay attention to what is going on in the economy so that you aren’t caught unaware.
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