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Traditional banks are no longer the only option available. In recent years, new banking alternatives have started to hit the market, giving people new ways to store and manage their finances.
However, since technology drives many of these alternatives, new options regularly hit the market. This can make choosing a good alternative difficult.
This article will go over some of the common alternatives available and how people can choose the right one for their needs.
Traditional banks and financial institutions may be the standard for many people looking for a safe place to keep their money, but they’re far from the only options. Here are some banking alternatives to consider that will help people keep their money out of big banks.
| What they are | An option for | |
|---|---|---|
| Local member-owned financial institutions | People who want to be member-owners of their financial institutions |
| Companies that use technology to help people manage their finances | Tech-savvy users who want to manage finances online and through apps |
| Locally based banks offering traditional banking products | A more traditional banking experience |
| Online payment services between two people | People who want to pay or borrow money from others directly |
| Digital-only banks with no physical branches | Those who want an online-only banking experience |
| Online banks with more limited offerings | An online-only experience with more competitive rates |
| Debit cards with balances not backed by traditional checking accounts | People who want the convenience of a debit card without a linked checking account |
| Savings accounts that earn fixed rates for set terms | Building savings at a set rate over time |
| Making payments without physical cards or cash | Those looking to avoid making payments with physical cards or cash |
| Accessing money in paychecks without a bank account | People who want to get paid without a bank account |
| Paying for goods and services with cash instead of credit or debit cards | People who want to keep their transactions private |
Credit unions are community non-profit alternatives to banks that function as cooperative organizations. Each customer who opens an account at the credit union becomes a member of that credit union.
Credit unions answer to the members rather than shareholders, which allows the financial institution to invest its profits back into the credit union instead of distributing them to shareholders.
This allows the credit union to offer:
The pros and cons of credit unions
Credit unions can be a good choice for individuals who want to be more involved in their financial institution and who want a hyper-local banking experience. However, they’re not the perfect choice for everyone. Here are a few of the pros and cons people should know about before opening an account.
Pros
Cons
Fintech companies are technology-driven companies that specialize in using new tools to provide financial services to clients, often across the country. These companies offer services such as:
Fintechs are not FDIC-insured, meaning any money held in accounts hosted by these companies is not protected if the fintech goes under. If the fintech partners with an FDIC-insured bank or credit union for certain products, that insurance will apply to those specific products.
The pros and cons of fintech companies
Fintech companies are on the rise and may be a great companion to a more traditional financial institution. But before opening an account, it’s important to learn about the possible pros and cons of using these institutions.
Pros
Cons
Local banks offer services that are similar to those available at large national banks, but they do so with a more personalized touch. These banks are firmly entrenched in the community and are often owned by community members instead of large corporations.
Most local banks prioritize their communities, and many offer more competitive rates on loans and savings accounts because those rates directly benefit their community. Some may also be more flexible on their loan and credit requirements, making it easier for customers to qualify for different types of financing or loans, like:
They may have shareholders like larger corporate banks, but their focus tends to be on the community rather than on shareholders’ dividends.
The pros and cons of local banks
Local banks may be a great banking alternative for individuals who want to keep their money in their communities. Here are a few benefits and potential downsides to know about before opening an account.
Pros
Cons
Peer-to-peer services, often referred to as P2P services, are an alternative to banks, specifically for people looking to borrow money or make P2P payments to friends and family. These services let users borrow money from other private individuals or pay others as needed. P2P services rely on online systems and mobile apps to connect borrowers with lenders.
However, the services available through P2P payment companies are limited. Most offer people the ability to link bank accounts to send and receive money from others, and allow users to lend money to other users.
Unfortunately, this means the types of loans and amounts of loans may not be as extensive as those available through more traditional financial institutions.
The pros and cons of P2P services
P2P services can be a good choice for borrowers looking for more flexible loan options or those looking to pay friends and family back for purchases. Here are some of the pros and cons to know about before opening an account.
Pros
Cons
Online banks are financial institutions that offer their services entirely online. They typically don’t have physical branches. This means they rely on digital tools like the following:
These banks typically offer FDIC insurance for up to $250,000 per account holder, per account type for funds deposited, making them just as safe as traditional banks. However, because these alternative banks don’t have the overhead costs associated with physical branches, they’re often able to offer lower rates on loans, higher rates on savings accounts, and lower fees.
The pros and cons of online banks
Here are a few pros and cons to consider before opening an account at an online bank.
Pros
Cons
Neobanks are an emerging banking alternative. They're similar to online banks in that they tend not to have physical branches, but they’re closer to fintech than traditional banks. Like online banks, almost all banking is done through an online portal or mobile banking app.
However, unlike other types of banks, these banks may not always have FDIC insurance, meaning account holders may not be able to get their money back if the neobank fails.
The pros and cons of neobanks
Here are some of the benefits and potential drawbacks of neobanks compared to other bank alternatives.
Pros
Cons
Prepaid debit cards let people deposit money directly onto the card rather than into a checking account at a bank or financial institution. These cards are ideal for people who don’t want to open an account at a bank or banking alternative, as well as those who may not qualify for a traditional bank account.
People can use these cards almost anywhere that accepts traditional debit cards, and refill them either online or at an approved retail location, like a drugstore, in-network ATM, or other location.
The pros and cons of prepaid debit cards
Prepaid debit cards offer some unique benefits, but there are some downsides you should consider.
Pros
Cons
A certificate of deposit (CD) is a type of savings account that allows people to earn compound interest on the funds they keep in the account. However, unlike traditional savings accounts, account holders must typically leave the money in the account for a set time or face an early withdrawal penalty.
CDs can earn higher rates than traditional and some high-yield savings accounts. However, to see the full potential of those rates, people must leave their money in the account until it matures or reaches the minimum term specified by the account’s terms.
Maturity options vary from bank to bank, but most offer the following:
The maturity date refers to the amount of time people must leave their money in the account. The money will continue to earn interest for that full time up to the rate specified in the CD’s terms.
The pros and cons of certificates of deposit
CDs can be a good choice for people looking for an alternative way to save without opening a traditional savings account at a normal bank. Before they explore their options, it’s important to know the benefits and downsides of these savings products.
Pros
Cons
Online payment services aren’t a true alternative to banking, but they fulfill a role that many traditional banks do: helping people pay others for goods and services. Online payment services let users pay businesses and individuals through an online portal or digital wallet.
Many alternative banks offer these services as part of their processes. However, these services are limited. They typically only function as a way to pay others. They don’t help people manage their finances or keep track of their spending like an online bank would.
The pros and cons of online payment services
Here are a few pros and cons of online payment services that people should know about before using these apps.
Pros
Cons
Check-cashing businesses are one of the most common alternative banking solutions for people who want access to the money they earn without having to open a bank account. These businesses let people cash their checks by visiting the business instead of going to a bank or depositing the check into an account.
However, these services tend to charge fees for each cashed check.
The fees that check-cashing businesses charge vary, but most businesses charge a set percentage of the check per transaction. The business should disclose any fees to customers ahead of time.
The pros and cons of check-cashing businesses
Check-cashing businesses can be convenient, but it’s a good idea to learn about the pros and cons of these services before using them.
Pros
Cons
If an individual wants to go bankless and doesn’t want to use digital tools found with other bank alternatives, they can always pay with cash.
By paying with cash, people can avoid spending more on credit cards than they can afford to repay. However, when paying with cash, many people find it helpful to have a checking account so they can deposit money and withdraw it as needed to make those purchases.
The pros and cons of paying with cash
Paying with cash offers some unique advantages and disadvantages. Here are some of the pros and cons to know.
Pros
Cons
Though banking alternatives can help people better manage their money, choosing the right alternative for their needs may not be as straightforward as they think. Here are a few factors people should keep in mind when exploring their options:
Different bank alternatives will offer different products. People should consider the types of accounts they want to have access to. If an alternative doesn’t offer that type of account, they may need to look elsewhere.
People should think about how they want to do most of their banking and explore alternatives that allow them to bank that way. If someone prefers doing most of their banking in person, an online or neobank may not be the best choice.
Some bank alternatives may still charge fees on their accounts. This could include overdraft or nonsufficient funds fees, account management fees, and other similar charges. People should make sure they’re comfortable with the fees the bank alternative charges. If going fee-free is a priority, people should look for alternatives that don’t charge fees.
If digital and mobile banking are a priority, people should consider how each alternative’s app fits their needs. People may want to prioritize alternatives that offer contactless payments and virtual debit or credit cards over alternatives that don’t.
By reviewing these factors and considering how each bank alternative fits their preferences and needs, people can choose a financial institution that works best for them.
Finding the right banking alternative can make all the difference in how people monitor their spending, stick to their money management plans, and manage their finances. For some, an alternative banking solution may be all they need to manage their money. For others, a hybrid approach that combines alternative banks and traditional banks could be a better fit.
While PayPal is not a bank, its easy-to-use platform allows users to branch away from traditional banking and easily manage money in one app.
Here are some frequently asked questions about banking alternatives to help people make the best choice for their financial situations.
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