8 Best Alternatives to Traditional Banking

About 94% of adult Americans take advantage of some sort of traditional banking service. Those include financial services like checking and savings accounts. 

As technological advancements continue, the way we do several things (including banking) is beginning to change. 

Today, you don’t have to work with a traditional financial institution for your banking needs. There are several alternatives, many of which come with lower fees and more perks. Find out which could be a better deal for you.

Best Alternatives to Traditional Banking

Are you one of the 6% of people who don’t take advantage of traditional banking services? Have you been considering alternatives to your traditional bank account because of fees, account minimums, or other drawbacks? If so, you’re in luck. 

There are several banking alternatives to choose from, many of which are tailored to the needs of a specific subset of Americans. 

1. Credit Unions

• Pros: Lower fees, personalized services from responsive staff members, lower rates on loans, and a members-only business model. 
• Cons: Limited financial services available, typically regional rather than national networks, and you must meet accessibility requirements to open an account. 
• Best For: People interested in low interest rates on credit cards and loans as well as minimal fees on checking and savings accounts.

Credit unions and banks offer similar services. They’re both relatively safe places to store your cash, whether you do so in a checking account or a savings account. They also both typically offer loans and credit cards. But they’re not one and the same. 

Traditional banks, also commonly known as big banks, have a fiduciary responsibility to produce profits for their shareholders. When investors are the first priority, customers come second. 

Credit unions, on the other hand, are nonprofit, member-owned organizations. These banking alternatives are created with the sole purpose of providing low-cost, quality banking services, typically to a specific community. 

All credit unions have eligibility requirements. For example, you might have to live in a certain region or be part of a specific group of people to qualify for an account. Chances are, you have a local credit union that serves a relatively small part of the American population in your region. There are also large credit unions, like the Navy Federal Credit Union, a provider that serves more than 12 million people across the US. 

Because members are a credit union’s top priority, they’re known for offering lower fees than traditional banks, but there’s a tradeoff. Even the best credit unions typically have a less diverse lineup of products. Most have smaller fee-free ATM networks and less useful mobile apps than big banks.

2. Online Banks

• Pros: No need for brick-and-mortar facilities, lower fees, higher savings account interest rates, easy banking on the go. 
• Cons: No access to face-to-face customer service, difficulty making a deposit, less diverse product offering. 
• Best For: Consumers who want a low-cost, on-the-go banking solution who typically only deposit funds via direct deposit. 

Like traditional brick-and-mortar banks, online banks are for-profit companies, but they offer a few significant advantages over traditional banking options. There are also a few drawbacks to consider. 

Online banks don’t have to cover the exorbitant overhead cost associated with operating a network of brick-and-mortar locations. These savings are passed down to consumers, typically by way of lower fees on bank accounts, lower interest rates on credit cards, and high-yield savings accounts. Some online banks even offer additional perks, like no overdraft fees.

Online checking accounts come with debit cards that work at ATMs. Online savings accounts are also similar to traditional accounts as well, though usually with higher yields and lower fees. 

As is the case with any financial service, there’s a tradeoff for the perks associated with online bank accounts. These accounts don’t typically have physical branches, making face-to-face customer service impossible. 

Many online banks have fewer account types and value-added services. In most cases, you’re limited to checking and savings accounts. Some may offer access to prepaid credit cards, but don’t get your hopes up for CDs, loans, or other traditional banking services. 

3. Neobanks

• Pros: Access to the latest in financial technology, high-yield savings accounts, low fees, and the potential for additional rewards. 
• Cons: Limited services available, you still work with traditional banks, and there’s no branch network.
• Best For: Customers who are already using or plan to use a financial app that offers neobank solutions and want to consolidate their money management experience. 

Neobanks are typically financial technology companies that offer personal finance apps for budgeting, credit score monitoring, investing, and more. These are non-bank companies that provide banking services through partnerships with traditional banks. 

For example, Chime is a financial technology company that offers a debit card, checking account, and savings account, but it has no license to operate as a bank. It gets around these licensing requirements by partnering with and providing its banking services through The Bancorp Bank and Stride Bank. 

The underlying banks are FDIC-insured entities licensed to provide banking services in the United States. The technology firm is typically a middleman in these services and focuses the vast majority of its efforts on the technology it provides in its financial application. 

Although the accounts neobanks offer are serviced by traditional institutions, they typically come with lower fees and higher yields on savings accounts as a result of the agreements penned between the technology firm and the financial institution. 

However, neobanks come with many of the same limitations as online banks. You typically don’t have access to a network of physical branches and may have difficulty depositing funds. After all, if you don’t have access to a brick-and-mortar location, you may have to search for an ATM that accepts deposits. 

4. Community Banks

• Pros: Personalized services, lower cost, flexible loan standards, better interest rates, high customer satisfaction. 
• Cons: Limited available services, no nationwide network of physical locations, smaller loan limits, and limited hours of operation. 
• Best For: Consumers who want a personalized experience and lower fees than they pay with traditional banks. 

Community banks are relatively small businesses. They may be a single bank, or a small network of banks, that serve a specific regional location. Like traditional banks, these institutions offer deposit accounts like checking and savings accounts, CDs, and others. They also provide loans. 

So, what’s the difference between a community bank and a traditional bank? There are a few, but the biggest is personalized service. 

Imagine walking into your bank looking for a loan to expand your product offering at your bakery and talking to a banker you see every morning ordering a breakfast sandwich. Community banks are small organizations that offer these types of experiences. 

These banks aren’t beholden to Wall Street behemoths and often offer lower fees than traditional banks. Their interest rates on loans are also usually more than competitive. But, the best part is that, as part of the community they serve, the staff at the bank gets to know you personally. This results in more flexibility in lending requirements and a more enjoyable overall banking experience. 

Unfortunately, because they’re small businesses rather than big banks, community banks typically offer a limited lineup of services. You probably won’t have access to a nationwide network of physical locations as you travel either. 

5. Certificates of Deposit (CDs)

• Pros: Higher interest rates on your savings, forced dedication to saving money, virtually guaranteed returns. 
• Cons: Fees for early withdrawals, earnings may not be high enough to outpace inflation, and a lack of liquidity.
• Best For: People who want a safe place to deposit savings for the long term and higher interest rates than those offered in traditional savings accounts. 

CDs aren’t necessarily an alternative to traditional banks because traditional banks offer them, but you can also access them through investment brokers and credit unions. 

CDs are single lump-sum deposits you make with financial institutions and agree not to touch for a predetermined period of time, known as the term. A CD term might be one year, 25 years, or somewhere in between. 

The financial institution pays you a higher interest rate in exchange for your promise not to withdraw funds until the agreed-upon date. Those interest rates are typically incrementally higher as the term of the CD grows. 

CDs are a great option for you if you want a higher interest rate and terms that require you to stay dedicated to your savings plans, but as with all other options, there are drawbacks. The biggest drawback to a CD is that you’ll usually face penalties if you withdraw your money early. Penalties increase with term length, typically from one to three months of interest on shorter terms to a year or more of interest on longer terms. 

6. Money Market Accounts

• Pros: Earn interest like a savings account, but spend like a checking account, enjoy higher interest rates, and a potential checkbook or debit card. 
• Cons: High minimum balance requirements, withdrawal restrictions, and monthly maintenance fees. 
• Best For: People who maintain at least a $5,000 balance in their checking accounts who want to earn interest while enjoying day-to-day liquidity. 

Money market accounts are what you would expect if a checking account and a savings account had a baby. These accounts offer similar interest to what you would expect from the traditional savings account but often come with debit cards and paper checks that allow you to spend money as you would with your checking account. 

Why wouldn’t everyone use money market accounts instead of checking accounts? Well, there are a few reasons:

1. Minimum Balance Requirements. Most money market accounts require minimum balances of between $5,000 and $10,000 to avoid monthly fees. 
2. Withdrawal Restrictions. These accounts may limit you to six withdrawals per month, so you may not be able to access your money as freely as you would in a traditional checking account. 
3. Fees & Interest. You may be required to pay higher fees, accept a lower interest rate on your money, or both if you fail to meet minimum balance requirements. You may also be required to pay higher fees with money market accounts than you pay with traditional checking accounts, even if minimum balance requirements are met. 

Regardless of these drawbacks, money market accounts are a compelling alternative to traditional banking services if you typically maintain a high balance in your checking account and don’t make many transactions per month. Even if you do, it may be worthwhile to hold some of your funds in a money market account. 

7. Cash Management Accounts

• Pros: Few fees, bank and invest with the same provider, fee-free ATM networks, and checking-account-like features. 
• Cons: Rates may be lower than high-yield savings accounts at online banks, high minimum balance requirements in some cases, and no face-to-face customer support.
• Best For: Investors who want to manage their cash on the same platform they manage their investments. 

Cash management accounts are typically offered by investment service providers: online brokerage firms, robo-advisors, trading apps, and so on. They offer investors a way to earn interest while storing their excess using the same platform they use for their investment accounts. 

This provides simplicity because customers are able to manage multiple aspects of their financial lives in one place. 

In most cases, cash management accounts come with a debit card, a checkbook, or both so that you can use your cash for day-to-day purchases. Most providers also offer access to a nationwide network of fee-free ATMs. 

There are a few drawbacks too. Some cash management accounts have high minimum balance requirements and you won’t have access to face-to-face customer support. The interest you earn may also be lower than interest on the high-yield savings accounts you find at online banks. 

8. Peer-to-Peer Lending

• Pros: Easy access to personal loans, earn money by supporting your peers, typically lower rates than traditional loans. 
• Cons: Investments lack liquidity and you may lose your money if the borrower doesn’t pay as agreed. 
• Best For: People looking for loans who would rather work with peers than financial institutions and investors who would like to earn a meaningful return by providing loans to their fellow consumers. 

Peer-to-peer lending services make it possible to lend money to other members of the community and earn interest for doing so. 

If you’re a borrower, you may benefit from less stringent approval requirements and lower interest rates than you pay on credit cards and other unsecured debt. If you’re an investor, you’ll benefit from meaningful returns and the feel-good effect of knowing you’re helping members of your community. 

There are some drawbacks on both sides of the equation as well. As a peer-to-peer lender, investments lack liquidity and you may lose money if the borrower doesn’t pay as agreed. Borrowers may find it difficult to access the money they need if there aren’t enough active lenders on the platform. 

Nonetheless, if you’re looking for a loan or an investment opportunity, consider looking into peer-to-peer options, as the benefits tend to outweigh the drawbacks. 

Final Word

Traditional banking services are an important part of anyone’s personal financial journey, but they may not always scratch the figurative itch. If you feel underserved or underappreciated in your traditional banking experience, consider one of the alternatives above. 

Of course, there’s no shame in taking a diversified approach to your money management strategy. Consider taking advantage of a few of the options above to create a unique solution that fits your needs to a T.