NerdWallet's Smart Money Podcast - Is Banking Stable, and Traditional vs. Online Banks

Episode Date: March 27, 2023

The banking system has been feeling less than stable lately. But how worried should you really be? To start this episode, Sean and Sara discuss the concern. Then Sean and Liz answer a listener question about how to choose between an online and a traditional bank.  To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Timestamps: This Week in Your Money segment: 0:00 - 6:21  Money Question segment: 6:22 - 25:13  Like what you hear? Please leave us a review and tell a friend.

The banking system is feeling shaky. In the U.S., two large financial institutions failed in the last few weeks. The FDIC agreed to cover customers' deposits in full, which means all the bank's clients will get their money back. Still, these are the biggest bank failures since the 2008 financial crisis. So this week, we're all about banking. Sarah 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 Piles. And I'm Sarah 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 podcast at nerdwallet.com. Before we tackle this week's listener question, Sarah 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. Thankfully, we are in good hands today.

We've got NerdWallet banking writer, Chanel Bissette, here to help us make sense of all of this. Chanel, thank you for joining us. Thank you. So Chanel, 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? 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. So SVB has invested some of their money in assets and they have lost value. And then SVB decided to sell those assets at a loss to get depositors their money. And then a few days later, it seems like something happened with Signature Bank. What went on there? 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. So 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.

So 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. So the phrase FDIC insurance is getting thrown around a lot lately. Can you explain what FDIC insurance is and how it works? Sure. So if you have $250,000 or less in the bank, the federal government insures 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. So if your bank balance is $250,000 or less, your money will be returned to you no matter what happens to your bank. 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? 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 at 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. And if your bank isn't part of the FDIC or NCUA insurance, then you should get out of there. Sounds like good advice. Well, Chanel, 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? So there have been bank failures that have happened between 2008 and now, even though they haven't grabbed headlines like these ones did. So 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.

So 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. So that's pretty unusual. And most banks are a lot more diversified than that, which ought to make them more stable. 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. So what steps can we all take to guard against this? So 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 count becomes temporarily unavailable or unaccessible, you can still

have money to pay for your bills. Credit cards can also be a good kind of stopgap 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'd 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. Well, Chanel, thank you for talking with us. Yes, thank you for having me. 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 podcast at nerdwallet.com. And now let's get on to this episode's money question segment.

This episode's money question comes from a listener's voicemail. Here it is. 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, and traditional banks give really poor rates, including checking, whereas other banks give up to over 2% for checking accounts. So 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 look forward to listening. Bye-bye. To help us answer this listener's question on this episode of the podcast, we are joined by banking nerd, Margaret Burnett. Welcome back to Smart Money, Margaret. Hi, thank you for having me. 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 banks because traditional banks are also accessible online. 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. And 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. So 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 and savings accounts. And 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. Okay. Well, beyond the high yield savings account rates, what other perks do online banks offer? 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 cashback features, or just make it really easy to save. As far as online checking accounts, they might be more likely to have innovative programs. So if you spend some money, then they can round up the transaction purchase and put the difference into savings accounts. Okay. So with online banks, you obviously can't go in to 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? 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. And so 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. So 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. 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? The number one 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. So it's a lot easier to do when you can see someone face-to-face than online. So 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 at 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. 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? So 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. And the direct deposit might have a certain lot of accounts that have that stipulation and the direct deposit might have a certain minimum. So it might be something like receive direct deposits of at least a thousand dollars each month. Other accounts might have that direct deposit and an additional qualification of making monthly debit card purchases. So these financial institutions really want you to use your account and have this account kind of be your go-to for everyday spending. So 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 kind of an upper balance limit to earn the high APY. And 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, 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. So you still might need to look at a high yield savings account for extra cash, or at least just be aware that there could be an upper limit on that very attractive APY. 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. Yes, absolutely. 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? You know, 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 kind of 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 kind of move into other accounts, such as an online checking account that offers a great rate. And even certificates of deposit, 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. 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 a 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. I think for a lot of people, a type of hybrid method could be a great approach. And in fact, I kind of 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. So our checking account is with a bank that has a branch down the street.

So 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. 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. So that's another reason to look into online banks. Not all of them offer that, but that's one thing to have. And 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 banks, online banks, offer nice bonuses for moving money.

And right now I just have way too many savings accounts. I really need to consolidate. 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, eh, my money's fine where it is. What makes it worth it for you? Well, part of this is research too. I want to know how these different banks work. So I'm using that as an incentive to get me out of my laziness. But you can get a couple $300 for moving a chunk

of change to a bank and 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. I like that excuse. I might have to do it myself. And I do hear from readers that do the same and they're very happy. And it's a nice little feeling to get that deposit in. Oh yeah. For essentially just opening an account. It's like free money. Yes. Well, and until you actually have money there, it's hard to know how well the app works, how well customer service works. And 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. And that was a bit of a shock because it overdrew my checking account and I was not happy about that at all. So I think when you're writing about these banks, I'm sure you agree, Margaret, having some experience with them can really help point out where the strengths are and where the deficits are. 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 and here they are, they've just opened this account, but the bank might turn around and close the account if they can't. So there is some caution

to be used there and it is good to do some research. And 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, or do you have a response to this? But nothing beats knowing for yourself, just experiencing the account for yourself. And we should mention that NerdWallet spends a lot of time and effort reviewing online banks and brick and mortar banks as well, right? Yes, absolutely. We spend several 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. Okay, we'll link to that in our show notes.

One question we hear a lot from listeners is how to find the right online bank. Obviously, the Nerd Wallet 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. So what do you think are maybe the top three things to consider? Well, first and foremost, you want to have an account with federally insured funds. So 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. And 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 charted credit unions are insured.

So 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 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? You're going to want a bank that has good rates with low fees.

So you can just look at the comparisons. And 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. So 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? 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 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 flat, for example. Interesting. That is interesting. And 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. One thing that stood out to me about our listeners question is that they said that online banks seem to be the way of the future. Margaret, 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? You know, 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. So 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. Kind of this from the examples I gave earlier. I think that we are going to have a combination of both for the foreseeable future.

Yeah, that makes sense. Okay, well, Margaret, thank you so much for sharing your insights with us today. Again, thank you for having me. Let's get on to our takeaway tips. Liz, will you please kick us off? 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. 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. 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.

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 podcast at nerdwallet.com. Visit nerdwallet.com slash podcast for more info on this episode. And remember to follow, rate, and review us wherever you're getting this podcast. And 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. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances.

This episode was produced by me, Sean Piles, with help from Liz Weston, Sarah Rathner, Tess Viglin, and Rosalie Murphy. Rosalie and Kaylee Monahan mixed our audio. Jay 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.