Alternatives to Banks and Traditional Savings Accounts
Increasingly, there are more and more alternatives to traditional banks and savings accounts. From fintech to mobile banking and money market funds to cash management accounts, you’ll have plenty of options to consider in the changing world of personal finance. Here’s a look at:
• Alternative banking options, including money market accounts, cash management accounts, and more
• The pros and cons of mobile banking
• Credit unions vs. P2P lending vs. traditional banks.
Alternative Banking Options
Aside from the old-school savings and checking options offered at traditional banks, there are other options that allow you to save and withdraw cash.
Money Market Accounts
Money market accounts (MMAs), also known as money market deposit accounts (MMDAs), are a type of interest-bearing savings vehicle that was developed several decades ago. In general, these accounts offer relatively lower risk for investors than other types of investments because they are insured by the Federal Deposit Insurance Corporation. These accounts would typically offer higher interest rates than traditional savings accounts because the funds can be invested into government securities, certificates of deposit (CDs), and other vehicles. However, in today’s market, the gap is often not so great.
These accounts often combine features of a savings account and a checking account. For instance, if you are an account holder, you may or may not be limited to the number of monthly withdrawals you can make, which is standard with some savings accounts. However, you may also have a debit card, as you would with a checking account, to make transactions more seamless.
It’s worth noting that, even though they may sound alike, money market accounts and money market funds (a type of investment) are very different financial products.
Cash Management Accounts
A cash management account (or CMA) combines traits of a savings account with a checking account, allowing account holders to both save and spend. These accounts are typically offered by non-bank fintechs, such as online investment firms or robo-advisors. Rates can be competitive while allowing the account holder to make withdrawals as needed. This is in contrast to the types of accounts that limit transactions allowed per statement cycle.
Sometimes, checks are provided with cash management accounts. They may also come with debit cards and access to ATMs.
The funds are typically dispersed into accounts at banks where FDIC insurance keeps the money safe.
Alternative Options vs Traditional Savings Accounts
Here’s a quick look at how money market accounts and cash management accounts differ from traditional savings accounts.
Note: As you review these options, if you are interested in higher insurance limits, it’s worthwhile to note that some banks participate in programs that extend the FDIC insurance to cover millions.1
| Money Market Account | Cash Management Account | Traditional Savings Account |
|---|---|---|
| May offer higher interest rates than traditional savings accounts. | Often offered by non-bank financial service providers. They combine the attributes of traditional checking and savings accounts, offering competitive interest rates. | Typically offered by traditional banks, traditional savings accounts may offer lower interest rates than money market accounts and cash management accounts. |
| May allow limited withdrawals each month using check or debit card. | Users can make withdrawals as needed. Checks may be provided. | Federal rules once limited withdrawals and transfers out of the account to six per month. That regulation has been suspended in response to the COVID-19 pandemic, though banks may still adhere to it. |
| Can be invested by the bank in government securities, certificates of deposit, and commercial paper, all of which are considered relatively low risk investments. | Does not allow investing. | Does not allow investing. | Money market accounts are FDIC insured up to $250,000. | FDIC insured up to $250,000. | FDIC insured up to $250,000. |
Fintech
Fintech is short for “financial technology,” a term used to describe financial services with essential, integrated technology. Some forms have become so commonplace that users don’t necessarily even consider them as fintech. An example would be using a mobile payment app. When considering fintech vs traditional banking there may be other products that are more clearly alternative banking solutions. An example of this could be buying and selling cryptocurrency.
Besides mobile apps and cryptocurrency, other fintech examples may include:
• Digital-only banks, meaning ones without brick-and-mortar branches
• Artificial intelligence (AI), such as those used in chatbots to answer customer questions and with robo-advisors to help with investing
• Biometric technologies that make it easier to log into apps while also providing additional security.
Get up to $300 when you bank with SoFi.
No account or overdraft fees. No minimum balance.
Up to 4.00% APY on savings balances.
Up to 2-day-early paycheck.
Up to $2M of additional FDIC insurance.
Pros and Cons of Mobile Banking
Most traditional banks and credit unions offer mobile banking today as part of their services. Basically, mobile banking allows customers to check their balances and transactions online, deposit checks on their phones, and transfer funds digitally.
Because online-only banks typically don’t have physical branches, overhead costs can be lower for them. They may then pass those savings onto their customers, as well as often provide perks beyond those provided in a traditional bank. Here’s a look at some of the pros and cons of online banking:
| Pros | Cons |
|---|---|
| Higher interest rates: Reduced overhead can help online-only banks to provide more attractive interest rates. | Lack of live assistance: Online-only banks commonly have a customer service line without offering personal banking services. This means that a customer will need to set up accounts and apply for loans without the ability to talk through any challenges with a banker. |
| No minimum balance: Traditional banks often require minimum balances in accounts, while many online-only institutions do not. | Limited services: To help keep costs low and be able to provide higher interest rates, an online-only bank will often offer fewer services than traditional banks. |
| Convenience: Mobile banking institutions are open 24/7/365. All a customer needs is internet access. | Limited ATM access: It may be more difficult to find ATMs within the network |
| ATM availability: Online-only banks often participate in ATM networks so that customers can use them at no cost. Or, online-only banks may instead refund ATM fees for a certain number of withdrawals. |
Consumers who bank online should take appropriate precautions to avoid fraudulent activity. Online banking is very safe, but nothing is completely without issues in this era of hackers and scammers. Wise moves include not accessing private information on public Wi-Fi, not checking banking information on public computers, and using debit cards on protected sites only. These steps may help to reduce the odds of security-related problems with online banking.
Recommended: Is Mobile Banking Safe?
Credit Unions vs. Traditional Banks
When you’re looking for a place to open a checking or savings account or find loan products like a mortgage, credit unions can be an alternative to traditional banks. Here’s a look at how the two options compare:
| Traditional Bank | Credit Union |
|---|---|
| Banks are for-profit institutions that are owned privately or are publicly traded companies. | Credit unions are nonprofits typically owned by its members. |
| Banking services are typically available to anyone with a good financial track record. | Services may only be available to members or family members of the community that the credit union serves. |
| Banks may have more branches and ATMs available. | Credit unions often partner with other institutions to make more bricks-and-mortar branches available and to increase the size of their ATM network. |
| Banks may offer a wider array of options for banking products. Other products, such as credit cards, may offer more perks. | Credit unions often offer enhanced customer services and may be cheaper to use than traditional banks. |
Peer-to-Peer Lending vs Traditional Banking
In recent years, peer-to-peer (P2P) lending has sprung up as an alternative to traditional bank loans. It’s a form of direct money lending that bypasses official financial institutions in which investors provide funds to would-be borrowers. Here’s a side-by-side look at the two forms of lending:
| Peer-to-peer Lending | Traditional Bank Loans |
|---|---|
| P2P lending matches borrowers and investors directly—typically through an online platform—without the use of an official financial intermediary, such as a bank. | Borrowers apply for a loan from a bank. |
| Borrowers fill out an application with the platform which assesses risk and credit rating before providing loan options and interest rates. | The bank assesses borrowers’ creditworthiness and determines whether or not to provide a loan and appropriate interest rates. |
| Loans may be more accessible to those with low credit scores or looking for atypical loans | Banks may offer a limited number of loan products and may have few options available to individuals with poor credit. |
| Loans may offer lower interest rates or lower fees due to higher competition between investors. |
Switching Bank Accounts
If you’re happy with your current traditional bank and bank accounts, you may be content to stay put. However if you’re unsatisfied or looking for tools that aren’t available at your bricks-and-mortar bank, then there may be reasons to switch bank accounts. Here are some questions to ask yourself and reasons you might want to make a change.
• Fees: Review what’s being charged, from minimum balance and maintenance fees to significant overdraft fees and more. If they’re adding up at a current bank, it may be worth researching alternative banking solutions to see if fees are similar or perhaps even less than what’s currently being charged.
• Customer service: How long does it take for an issue to be resolved, such as a fraudulent withdrawal? During what hours is the customer service line available? Are you currently being treated as a valued customer?
• Life event: Is a wedding or other kind of partnership in the near future? This may be a time to open a joint account. See if your current financial institution offers the right features for you and your partner.
• Convenience: Is the brick-and-mortar bank branch location inconvenient, perhaps after a move? Do ATMs come with hefty fees? Can you conduct all the transactions you want to with your mobile device?
• FDIC insurance: Is your current bank FDIC-insured or is your current credit union NCUA-insured? Are there any other safety and security concerns with that financial institution? Insurance can provide peace of mind.
• Mobile features: Are more features available at an alternative banking choice that are of interest? This could mean mobile check deposits, reimbursement of ATM fees, overdraft forgiveness, or a more user-friendly online portal.
How Many Bank Accounts Should You Have?
If a person decides to open an alternative bank account, does it still make sense to hang on to whatever traditional accounts they may already have? The short answer is that the number of bank accounts a person maintains is an individual decision. There may be benefits to having multiple accounts, but it’s also more to juggle.
Reasons it makes sense to have multiple accounts can include:
• Having separate accounts for different purposes; for example, one savings account could be earmarked for emergencies, while another might contain funds being saved for a down payment on a house or for college expenses.
• Couples may decide they like the idea of having separate accounts as well as one for joint expenses.
• Freelancers and small business owners may want to separate personal banking from business banking.
Challenges associated with maintaining multiple accounts can include:
• The risk of overdraft
• More banking fees
• More logistics involved to manage them all.
If more than one bank account is open, it can be important to find out how to transfer funds from one account to the other, as needed. If all of the accounts are held at the same institution, most banks have simple procedures to set up transfers, such as ones from a checking account to a savings account. This can often be done by filling out a form. Or, this can often be done through an ATM.
If bank accounts are held in different financial institutions, the information needed to complete a transfer will typically include routing numbers and account numbers. Banks may have slightly different procedures.
Recommended: How Many Bank Accounts Should I Have?
The Takeaway
There are many different ways to manage your money today, including whether you keep it with a traditional bank, a credit union, or an online bank or other kind of fintech. You’ll also have options like a standard savings account vs. a cash management account vs. money market account. Understanding the options available and the pros and cons of each will help you make the best decision for you. There usually isn’t a right or wrong choice, but an option that checks more of the boxes on your wishlist. It’s up to you!
If you’re in the market for a bank that offers competitive interest rates and no fees, take a look at what SoFi offers for online bank accounts. When you open our Checking and Savings with direct deposit, you’ll enjoy a competitive APY and pay no account fees. Plus, we offer a network of 55,000+ fee-free ATMs to make banking that much better.
1SoFi Bank is a member FDIC and does not provide more than $250,000 of FDIC insurance per depositor per legal category of account ownership, as described in the FDIC’s regulations. Any additional FDIC insurance is provided by banks in the SoFi Insured Deposit Program. Deposits may be insured up to $2M through participation in the program. See full terms at SoFi.com/banking/fdic/terms. See list of participating banks at SoFi.com/banking/fdic/receivingbanks.
SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
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