Choosing a Bank: 'Brick and Mortar' or Virtual?

I recently gave a check to a friend for several hundred dollars. While most would expect to hear a "thank you," his response was, "What the hell is Umbrellabank?"

I explained to him that it was a virtual bank which solely operated online. He asked a lot of questions, including:
"How do you know they are real?"
"Where do they keep the money?"
"Aren't you afraid about keeping your money on a website?"

All of these questions are actually the wrong questions, since they seem to indicate a general misunderstanding about how banking works. There isn't a big vault where you can swim in gold coins like Scrooge McDuck could do. Virtual banks are all FDIC-insured, so there isn't a worry about losing all of your money if the bank shuts down.

Though virtual banking offers a lot of advantages, it is definitely not for everyone. Here are some factors you should consider when deciding between a checking account at a virtual bank or at a traditional brick and mortar bank.

Do you deposit a lot of checks or cash?
While most people usually have direct deposit for their paycheck, those who need to deposit cash and checks often may want to keep a brick and mortar bank account. Virtual banks usually process deposits via mail and ATM. A lost envelope or an ATM error could lead to a major delay in accessing your funds.

If you live paycheck to paycheck and you don't have direct deposit, there will be a small delay between your deposit by mail and the processing of that deposit, which will not allow you to have access to your funds immediately.

Do you plan to move in the short term?
For people who move often, sticking with a virtual bank can save a lot of hassle. No matter where you live, you'll have the same access to your bank.

Do you frequently use ATMs?
Those who travel or use ATMs often will probably benefit from virtual banks who generally automatically reimburse you for any fees you incur.

Do you like to yell at bank tellers?
Some people like the peace of mind of being able to talk to someone in person when they are having problems with their bank account. Brick-and-mortar banks are good for these people. (Though, virtual banks don't have the same reputation of randomly asessing exhorbitant fees, leading to fewer confrontations)

Do you need to keep a low minimum balance?
Many virtual banks have no or low minimum balances but still offer competitive interest rates. If you have plenty of cash but don't think the interest rate is worth it, stick with your brick and mortar.

Do you like to pay bills online?
Most virtual banks offer free bill-paying services, where they will electronically or physically send a check to anyone you choose. Brick and mortar banks often charge for this service.

For young people who are more mobile and tech-savvy, virtual banking is usually a better fit. For the past six years, my bank has provided me with free checks, bill paying, ATM reimbursements, no foreign exchange fees, no minimum balance, free transfers to money market accounts, and very competitive interest rates. I'm honestly not sure how to rate the customer service, because I haven't really had any difficulties.

Brick and mortar banks have a lot of overhead, so they tend to pass on those costs to customers in the form of fees and inconvenience. But for some people, sticking with a traditional bank might make sense. However, there is no evidence that traditional banks are any more safe from identity theft or fraud than virtual banking.

If you're thinking of switching to a virtual bank, browse Bankrate.com's checking and savings account current rates. In addition to Umbrellabank, there are many unfamiliar names in this market, like NetBank and iGObanking, but also some of the more recognized companies, like Citibank and HSBC. Be sure the terms fit your needs, and make the switch.

The real benefit to virtual banking is connecting your checking account to a high-yield money market or savings account, which will be discussed in a future post.
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