6 Traditional Bank Alternatives: Pros, Cons, and Everything You Need to Know

When it comes to managing your finances, a traditional bank may not always be the best option.

With the rise of fintech and the increasing popularity of alternative banking options, there are now more choices than ever before, especially if you’re interested in earning higher APY and receiving better customer service.

Here are six of the best bank alternatives that you should consider.

Credit unions

Credit unions are nonprofit financial institutions owned and controlled by their members. They offer a wide range of services, including checking and savings accounts, loans, and credit cards. Because they’re nonprofit organizations, they’re often able to offer lower fees and better rates than traditional banks.

Their incentives are usually different from big banks: a community that offers financial services because they want to benefit themselves as opposed to banks that cater to stakeholders. One catch is that often only members of certain communities or industries can join a credit union.

Pros

• Credit unions usually offer account holders loans at lower fees
• Their savings accounts’ interest rates are typically higher than big banks
• Credit unions generally offer better customer service
• They’re regulated by the National Credit Union Administration

Cons

• Their services are often limited to members (and their relatives) living or working in certain areas or industries
• They generally have fewer branches.
• Their services are sometimes antiquated
• They generally don’t offer as many products as traditional banks

An example: the Navy Federal Credit Union is one of the largest credit unions that operates nationally, serving employees and relatives of the military, veterans, and the Department of Defense.

Community banks

If you don’t qualify for a credit union, but still fancy community-style, relationship-based banking, community banks may be a great traditional bank alternative.

Community banks are smaller, local financial institutions that try to replicate the services of bigger banks for their communities. Bonus: setting up a community bank account is easy.

Many people (especially business owners) prefer community banks due to their flexible lending criteria and shorter loan processing times. Their interest rates on deposits tend to be higher, and they don’t usually charge monthly fees for their services. The downside is their tech infrastructure tends to be antiquated.

Some community banks include The Farmers Bank, which offers banking services to businesses, and The Home State Bank, which provides commercial banking services like savings and checking accounts.

Online-only banks

If you cringe at the idea of standing in long queues, an online-only bank might appeal to you.

Online-only banks offer many of the same services as traditional banks but with the added convenience of being completely digital. This means you can access your account, deposit checks, and transfer money from anywhere with an internet connection. They also tend to have lower fees, higher interest rates, and better mobile apps than traditional banks.

Pros

• Easy setup with a smooth KYC check
• 24/7 access to most banking operations
• No monthly charges (unless you upgrade to more robust services)
• Generally higher interest rates on savings accounts
• International payments
• Cash back offers
• Budgeting and investing tools

Cons

• Cash deposits can be difficult with no physical branches
• Security and identity theft can be more common in online-only services
• Banking services may be limited, especially for small businesses
• No personal relationship with a bank clerk
• Customer support may be slow
• Difficulty moving funds around in cases of poor internet connections

Some of the most popular online-only banks include American Express Bank, Revolut, and Monzo.

Neobanks

Another traditional banking alternative growing in popularity is neobanks. Due to their heavy reliance on technology, neobanks tend to offer users a wider portfolio of financial products and features than traditional brick-and-mortar banks.

Online-only banks and neobanks are sometimes indistinguishable in operations and services, which sometimes confuses consumers. Still, there are enough differences to include them in separate categories. While the differences can be complicated, online-only banks are FDIC-insured; neobanks aren’t usually federally insured. Neobanks often partner with larger banks to offer accounts to users via these banks. This allows neobanks to extend the larger bank’s FDIC insurance to their customers.

The benefits of a neobank account are pretty much the same as with an online-only bank since neither are governed by the laws of traditional banks—although some neobanks offer more features.

Examples of neobanks include Chime, Statrys, and Wise.

Peer-to-peer lending

Peer-to-peer (p2p) lending platforms, such as LendingClub and Prosper, allow you to borrow money from a group of individual investors rather than a bank. This can lead to lower interest rates and more flexible loan terms.

How it works: businesses or individuals apply for a loan on the platform and members (or investors) provide the loan.

Some of the perks of p2p lending platforms include:

• As a lender, you’ll get higher returns than banks can offer
• And as a borrower, you can qualify for loans that banks would normally deny you

Interest rates on loans also tend to be lower than those provided by traditional banks. If you’re scared about the safety of your funds as a lender, the platform usually assesses members and provides them credit ratings. You can then choose to lend to someone with a good rating.

Prepaid debit cards

Prepaid debit cards, such as Green Dot and NetSpend, can be a great alternative for those who don’t have a bank account or have a poor credit history. They work like a traditional debit card and can be used to make purchases or withdraw cash from an ATM.

Prepaid debit cards have become increasingly popular in recent years as a way for consumers to control their spending and budget their finances. Instead of being linked to a checking account, they’re loaded with a predetermined amount of money.

Pros

• Prepaid debit cards allow you to control your spending by only allowing you to spend the amount of money that you have loaded onto the card. This can help you avoid overspending and sticking to your budget.
• Prepaid debit cards do not require a credit check, making them a great option for individuals with poor credit or no credit history.
• Prepaid debit cards work just like traditional debit cards and can be used anywhere that accepts Visa or Mastercard.
• Prepaid debit cards can be used for online purchases, bill payments, and ATM withdrawals, making them a convenient alternative to cash or checks.

Cons

• Some prepaid debit cards come with a variety of fees, such as monthly maintenance fees, reload fees, and ATM withdrawal fees. It’s important to compare fees when selecting a prepaid debit card to avoid unnecessary costs.
• Prepaid debit cards may not have all the features of a traditional debit card, such as overdraft protection or the ability to write checks.

Prepaid debit cards can be a great way to control your spending and budget your finances. However, it’s important to compare fees and look for additional features when selecting a card. With the right prepaid debit card, you can enjoy the convenience and security of using plastic without the risk of overspending.

Wrapping up

Overall, bank alternatives can be a great way to manage your finances and save money. It’s important to research different options and compare fees, interest rates, and services before making a decision. And always make sure the platform or institution is legitimate and secure.