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:
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.
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:
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.
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:
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:
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.
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!
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