The banking industry has evolved over many centuries, with some of the biggest strides taking place in recent years. Digital banking has made our bank accounts, credit card balances, and other financial information more accessible. You don’t have to visit a local bank to check your balance; an app presents the information for you.
Most financial institutions have mobile apps for their customers, but some banks operate entirely online. That means no physical branches and a lot less overhead. This guide will explore how digital banking works and some of the benefits and drawbacks to consider.
What is Digital Banking?
Digital banking is a banking experience that is exclusively through smartphones, computers, tablets, and similar devices. You just need an internet connection to access your bank information. Some digital banks have additional financial services that stretch beyond bank accounts, such as brokerage accounts.
What’s the Difference Between Online Banking and Digital Banking?
Digital banking is an entirely digital experience, while online banking is offered by financial institutions with brick-and-mortar locations. Digital banks also tend to have more advanced technology, such as blockchain and artificial intelligence.
The Evolution of Digital Banking
Digital banking dates back to the 1990s and has since become a popular way to create and manage bank accounts. Initially, digital banking was limited to computers. However, mobile banking became available in 2002. Many financial institutions rushed to create their own apps to remain competitive.
This boom created the term “fintech,” which refers to some companies that aren’t actually banks offering bank accounts. Instead of being FDIC-insured, some fintech companies secure partnerships with banks that are FDIC-insured. These partnerships allow fintech companies to offer bank accounts and similar financial products.
The Types of Digital Banks
Consumers can choose from several types of digital banks, but each option falls into one of these three categories.
Neobanks
Neobanks are fintech companies that offer online banking services. They have less overhead, which allows them to offer more competitive rates and terms. Neobanks often rely on a partnership with an FDIC-insured bank to offer financial products and services.
Challenger Banks
A challenger bank is a financial institution that competes with traditional banks. Some challenger banks have a few locations, but there is a strong emphasis on digital banking instead of local branches. Many challenger banks do not have any physical location. You will have to visit an ATM if you want to withdraw cash from your account.
Traditional Banks Transitioning to Digital
It’s natural for companies to adapt as their industries change. This trend also takes hold of the banking industry, as many banking giants now offer digital banking. Traditional banks have hundreds or even thousands of locations worldwide, but it’s possible to open an account online as well.
What are the Key Features of Digital Banking?
Digital banking offers several perks. These are some of the key advantages that give it an edge over traditional banking.
Online Account Management
Consumers can easily manage their online accounts. It’s possible to see all of your bank accounts, your credit card balance, your investments, and other financial resources in a single dashboard.
Mobile Banking Apps
You can view your bank account statements with a few taps on your smartphone. Downloading your bank’s mobile app makes it easier to log in. You can enter your credentials or use an alternative login method, such as setting up Face ID.
Contactless Payments
Digital banks let you make payments without cash or credit card swipes. You can open up your bank’s mobile app and put your phone next to a scanner. Then, it will pick up your credit or debit card.
Digital Wallets
Digital wallets eliminate the need to carry a physical credit card. You can store multiple credit and debit cards in your smartphone’s digital wallet, and when it’s time to pay for a product or service, you can present one of the virtual cards in your digital wallet.
AI and Chatbots
AI and chatbots make it easier to find answers to your questions. You can ask a question, and a chatbot will recommend some resources that can answer your question. This technology can save you time with contacting customer support. However, you can still speak with a representative at most digital banks if you have any questions that the chatbot cannot adequately answer.
What are the Benefits of Digital Banking?
Digital banking presents numerous benefits for consumers who want to save time and have more flexibility. These are some of the highlights.
Convenience and Accessibility
You can access a digital bank from any device. It’s also possible to deposit checks through a digital bank’s mobile app instead of driving to a local branch.
Improved Usability
Digital banks optimize the user experience, making it easier to access key features. Thus, you can get the most out of your banking experience and readily review your financial accounts.
Cost Savings and Efficiency
Digital banks do not have as much overhead as traditional banks. Many of those savings get passed onto consumers through higher APYs and fewer fees.
Enhanced Security Measures and Control
Digital banks invest in advanced technology to keep your information safe. You can set up multi-factor authentication to add an extra layer of protection to your account. Digital banks also use data encryption to fortify their digital defenses.
Personalized Customer Experience
You can receive personalized financial product recommendations and insights based on your activity, the information you provide in a questionnaire, and other data points the bank uses. A personalized banking experience can lead to more interest and reduce expenses.
Features Beyond Banking
Digital banks offer more than bank accounts. You can also open brokerage accounts, get insurance policies, and speak with financial advisors. Each fintech company offers different features beyond banking.
Challenges in Digital Banking
Although digital banks have been advantageous for many people, it’s important to understand some of the potential downsides before getting started. Here are some details to consider.
Security Risks and Fraud
Fintech companies and any other digital entity are vulnerable to cyberattacks. While these companies invest large sums of money to mitigate the likelihood of an attack, security risks are still present. Some digital banks are also fraudulent. You should read online reviews and check if a fintech company offers FDIC-insured banking before creating an account.
Digital Divide and Accessibility Issues
Not everyone wants a digital-only experience. You also won’t be able to access your bank accounts if you don’t have an internet connection. The fintech company can also have an issue with its server, which may temporarily shut the website down, although this scenario is very rare.
Regulatory and Compliance Challenges
Digital banks must fulfill a host of regulatory and compliance requirements. You should only do business with a bank that has fulfilled regulatory benchmarks.
Technological Dependence
If you have a question, you can’t drive to a local branch and speak with a representative. You’ll have to do everything online, and it can feel lonely that way. Traditional banks have representatives at local branches, which makes it possible to build rapport with them.
How to Choose a Digital Bank That’s Best for You
It’s important to know what you want from a digital bank before considering your choices. Some people want a digital bank that has high-yield savings accounts, while others prefer to view their bank accounts and brokerage accounts from a single dashboard. Regardless of which bank you choose, it’s important to compare rates, fees, and terms before committing.
How to Open an Account with a Digital Bank
You will have to provide basic information like your name, email, address, and Social Security number to open an account with a digital bank. Most banks have a quick form you can fill out to get started.
Conclusion: Leveraging Digital Banking for Your Financial Goals
Digital banking gives you access to several financial resources within a few clicks. You can get higher-yielding savings accounts and brokerage accounts with more perks since digital banks have fewer overhead costs.
Writing your financial goals before committing to a digital bank can lead to a better experience. It’s easier to find something if you know what you are looking for. Listing your goals can also serve as inspiration as you embark on your digital banking journey.
