Reader question: “what’s the difference between banks?”

Banking is among the first major financial decisions every new business owner makes. It’s a relatively straightforward need (you just need somewhere to put the money, after all). But, at the same time, it’s an unassumingly complicated decision. You have endless options and, at first glance, they’re all essentially the same. They all offer bank accounts, have sad interest rates, charge too many fees, and, the important differences aren’t exactly obvious. It’s a paradox of choice which results in using whatever bank your personal accounts are at.

The good news is that for small marketing agencies, consultants, and other service businesses, banks are essentially interchangeable. They’re heavily regulated, roughly comparable, hold your money equally well, and you’ll probably never need any unique offers that set banks apart. But, you may run into issues (like poor service or outdated tech) that’ll frustrate you enough that you’ll want to change. And, you should understand the options before switching.

Types of banks:

You can roughly group all your banking options into a few buckets. You can’t really go wrong with the first three. You’ll just want to avoid the last two.

• Large traditional banks – Large banks (eg, Bank of America, Chase, etc) are the most accessible and offer a little bit of everything (eg, deposit accounts, CDs, credit card processing, term loans, credit lines, IRAs, etc). There’s nothing necessarily wrong with them. Some people just feel lost in the shuffle, find support lacking, and their niche products leave something to be desired (for example, there’s better credit card processors and IRA custodians like Stripe or Vanguard).
• Local banks & credit unions – Local banks and credit unions are a mixed bag. Many local banks offer the same wide range of services as traditional banks with better support. But, as you get smaller, expect certain services or features to get less attention because there’s fewer clients using them. That can become a very annoying problem with smaller banks’ integrations with accounting software. If something breaks, they may not be as quick to fix it.
• Neobanks – Neobanks are the newest evolution in banking and usually offer their accounts thru partnerships with traditional banks. They don’t have physical branches and don’t offer loans, but are more tech-forward and usually have lower fees.
• Cryptobanks – Crypto banks (like the now-defunct Celsius or Voyager) aren’t banks. They don’t have FDIC or NCUA insurance and, if a cryptobank collapses, there’s a good chance you’re out of luck. Don’t hold necessary funds (like operating or emergency funds) at a cryptobank.
• Under your mattress – Please don’t do this. Besides the obvious risk of all your money burning in a fire, large amounts of physical cash make accounting very difficult, will probably make your financials useless, and increases your risk of fraud.

(Note: FDIC and NCUA are federal agencies that insure deposit accounts. Simply – if your bank goes bust, the federal government will step in and repay you up to $250,000 per account.)

What to look for in a bank:

There’s minor differences between banks, even within the same category. Those differences may not matter to you and your business. Or, they could be a huge headache. Before picking or switching banks, note which features are important and pick a bank that jibes with how you run your business.

• Credit lines and loans – Credit lines and loans are the most meaningful differentiators. Some banks (like neobanks) don’t offer loans. If you need frequent and easy access to a credit line, that’s probably a dealbreaker. And, shopping around for a better interest rate on your loans can save big money. If your business makes heavy use of loans, it’s absolutely worth looking for a better interest rate or smoother process.
• Bank fees – Bank fees add up. $20 a month per account or $30 per wire transfer doesn’t sound like a lot, but it can quickly become a problem, especially when you have several accounts (like if you’re following Profit First) or send/receive a lot of wires. Some banks aggregate your account balances when calculating fees and there’s been a recent wave of no-fee banks, but many banks still calculate fees on a per-account or per-transaction basis. Read the fine print on your bank’s fees.
• Account permission levels – Account permission levels are the most important, unsung banking feature. You shouldn’t casually give out full account access willy-nilly. Don’t give it to your employees. Don’t give it to your accountant. Don’t give it to anyone. Full access is full access and creates new opportunities for fraud or a third-party breaking into your account. Banks with permission levels will let you restrict the access of other users (for example, you can give your accountant a read-only account that won’t let them transact).
• Tech friendliness – Banking tech and integrations have come a long way, but you still need to make sure your bank plays nice with your financial tech stack. The primary integration you need to worry about is bank feeds. Bank feeds are how modern accounting is done. Your accounting software uses them to import all your transactions from your connected bank and credit card accounts. Smaller banks tend not to have the most robust bank feeds. If your bank feed regularly breaking pisses you off, you’ll want to look for a bigger bank or one with a ‘direct feed’.
• Access to data – Most banks will give you access to years of bank statements, but some are stingy with direct transaction exports and CSVs. And, fixing accounting records without a CSV is a royal pain (and, that’s why I don’t recommend TD Bank 😤).

What’s the best bank?:

There is no best bank. There’s only the bank that works best for you and your business. That said, I’m partial to certain neobanks like Relay Financial or Mercury. They don’t have account fees so clients can easily open tax savings accounts without juggling account minimums and they have various account permission levels for better internal controls and security. But, they aren’t the answer for everyone. For example, I still have a few clients that need in-person banking or easy access to credit lines and they stick to banks with physical branches.

(Note: not all neobanks are created equal. Some don’t have read-only access or security permissions. For example, Novo only has full-access accounts.)