Separating your personal and professional finances is crucial when starting a business, and changes in technology are making it more convenient to do so. Not only could you turn to traditional brick-and-mortar banks, but you could take advantage of the resources that digital banks offer.
Opening a business bank account would allow you to clearly track your income and expenses without putting your personal spending in the mix. Managing a business bank account would also help you build your credit profile — you could become eligible to open a business line of credit or credit cards connected to your account.
Whether you choose an online bank or a brick-and-mortar bank would depend on which type fits your needs as a business owner. Keep reading to find out what kind of bank would be best suited for you.
Small business banking: Brick-and-mortar vs. online banks
A key difference between traditional and online banking is the flexibility that digital banks provide, said Barry Coleman, vice president of counseling and education programs at the National Foundation for Credit Counseling. Small business owners could have around-the-clock access to online banking services as long as they have a device and an internet connection.
“This can certainly help busy business owners who are strapped for time by allowing them the option to bank on their schedules,” he said.
Although most brick-and-mortar banks now offer online banking features, consumers still must make some transactions in person, Coleman said, such as cash transactions that require personal identification. When opening a business checking account with Chase, for example, customers must meet with a business banker before enrolling in online and mobile programs. Still, this could be a draw for some business owners.
“Some consumers are simply more comfortable having a physical banking location where they can perform transactions and speak to banking associates in person,” Coleman said.
New business owners could also benefit from the guidance that bankers provide, said Grier Melick, business consultant at the Maryland Small Business Development Center. Establishing a personal relationship with a banker could also be beneficial if you plan to apply for a small business loan. You may have a better chance of being approved for funding if the bank already knows and trusts you.
“Oftentimes, small business owners do not know everything that they need to from a business banking perspective,” Melick said. “Having some direct human involvement can help with that.”
Online banks have lower overhead costs than traditional banks, and those lower costs typically result in higher interest rate yields on deposits for digital banks than branch-based banks, he said. For instance, a high-yield business savings account could have an APY as high as 2% and no minimum account balance.
However, brick-and-mortar banks have the advantage of allowing customers to make cash deposits or withdrawals; an online bank typically wouldn’t offer that feature, Coleman said. However, online banks sometimes belong to free ATM networks, like Allpoint, which would allow you to avoid the withdrawal fees that you’d incur at other ATMs.
Best of both worlds
It’s possible to have accounts at both types of banks, Melick said. For example, the owners of a brick-and-mortar store may start with an account at a local bank branch, then open a digital account when they decide to start selling online.
“Instead of severing ties with the bank, they could open an online account as well to handle their other revenue streams,” he said.
You could be subject to banking fees at both traditional and online banks, Coleman said. However, online banks generally charge considerably fewer fees and you may be able to avoid overdraft, monthly maintenance and ATM fees that come with a traditional bank account.
Here’s a quick look at how the two types of banks stack up.
|Online banks||Brick-and-mortar banks|
|24/7 access to accounts and banking features.||Online banking features typically offered, but some transactions may have to be completed in-person during bank hours.|
|High-yield accounts available.||Lower interest rates because of overhead costs.|
|Customers cannot complete in-person cash transactions or meet with bank representatives.||Customers can make cash transactions, and bank representatives are available for meetings.|
Digital services on the horizon for traditional banks
Online banks are growing in numbers and popularity, Coleman said. Traditional banks have taken this trend as a cue to bolster digital offerings for consumers.
“As a result, we are seeing traditional banking introduce more digital options for providing services,” he said.
The presence of digital financial technology is expanding within the financial services industry, comprising 7% of the total equity of U.S. banks, according to research from consulting firm McKinsey. To keep up, traditional banks must consider ramping up digital efforts in areas such as design, innovation, personalization, digital marketing, data and analytics to provide value to customers.
A few traditional banks rolling out expanded digital services include:
Bank of America
Earlier this year, Bank of America created Business Advantage 360 for customers who have business deposit accounts with the bank. The free tool provides a digital dashboard showing business owners their major expenses and transactions, as well as automated cash flow projections that can be adjusted to account for new sales or other data. Users can also connect with small business bankers through the dashboard.
PNC Bank rolled out a digital business lending platform this year in partnership with OnDeck, an online small business lender. Leveraging OnDeck’s digital loan origination process, PNC aims to provide customers with business financing in as few as three days, a significantly faster timeline than how long it would take to process a conventional bank loan.
Similarly, New York-based Popular Bank announced a partnership last year with Biz2Credit, an online lender serving small businesses. Popular Bank leans on Biz2Credit’s technology to digitally process loan applications outside of regular bank hours, effectively speeding up time to funding.
As the lines begin to blur between online and brick-and-mortar banks, business owners may find themselves with an increasing amount of digital opportunities. However, a demand for brick-and-mortar banking will likely remain. Small business owners who borrowed from an online lender reported feeling less satisfied than those who borrowed from a community bank — 49% vs. 79% — according to a Federal Reserve survey.
“Whether consumers turn to online only banks, or traditional banks that offer online products and services, the availability of online options will more than likely continue to grow,” Coleman said.
Which bank is best for your small business?
Whether you choose an online bank or a brick-and-mortar bank to house your business funds would depend on your personal preference, Coleman said.
No matter which you pick, make sure the Federal Deposits Insurance Corporation insures your bank of choice, he said. Single consumer accounts, joint accounts and business accounts, among others, would be protected at FDIC-insured banks in the event of bank failure. Deposits up to $250,000 should be safe and covered.
If you like having the ability to sit down with a banking professional to discuss your business needs, a branch-based bank could be the better choice, Coleman said. The physical presence that traditional banks provide could add a level of trust and reassurance. Keep in mind, though, that most locations have standard business hours that may not be conducive to your schedule as a business owner, he said.
A digital bank would allow you to complete your banking activities on your own time, said Coleman, though traditional banks oftentimes provide online services as well. He also noted that you may want to avoid using a public WiFi network to make business transactions, as those networks may not be secure and your information could be vulnerable.
A digital bank wouldn’t offer the same in-person service as a traditional bank, Coleman said, but you may not feel like you’re missing out.
“If the business owner already knows what they are looking for in a bank, and the online bank meets their needs, then they may prefer the online bank for its convenience, potential lower fees and higher interest on deposits,” he said.
All business owners should at least consider opening a high-yield savings account for cash that isn’t needed for daily operations, Melick said.
“Small businesses need to make sure that every penny they make works for them,” Melick said. “Oftentimes, the best way it can is through online banking accounts.”