What is digital banking and why do we need it? When traditional banking is combined with the internet and smartphone apps, digital banking is born. Banking services that are available online make banking simpler, faster and more convenient.
Banking On The Go
Imagine you are standing in line at your local coffee shop and you get an automated text message from your landlord.
“Reminder: Rent is due tomorrow! Don’t forget to send it in to avoid late fees. Thanks!”
Without hesitation, you open the banking app on your smartphone and authorize a quick payment via Zelle. The money is debited instantly and your rent is paid. Sweet!
While you’re in the app, you notice your paycheck has been posted and remember that you want to add a few hundred dollars to your savings account this month. With a few clicks, the money is transferred and you are on your way to saving for a new computer.
Both transactions took about two minutes—less than the time it takes to get your cup of coffee.
This scenario and dozens like it are made possible by digital banking. Without the convenience of banking at your fingertips, these tasks could take days to complete.
Four Benefits of Digital Banking
The “bank anywhere” convenience of digital banking is one of its most important benefits. Accordingly, there are many others you may not have considered.
1. Break down barriers to entry for underserved communities
Just like “food deserts,” there are “bank deserts.” These terms refer to communities where access to necessary services like grocery stores, banks, and credit unions is not widely available. The history of service “deserts” is often rooted in redlining and class divisions.
Banks and Credit Unions are hesitant to open branches in communities perceived as low income or high crime. Unfortunately, that means the people who live there must do without these essential services, which stalls progress in the area. For example, in a bank desert, people often rely on cash checking or cash advance services, which are expensive and predatory.
Online banks allows people without their own neighborhood branch to have safe and easy access to their bank accounts and other financial services like loans and credit cards.
2. Move money faster
Quick pay services make it easier than ever to move your money around. Unlike checks which can take several days to clear, banks now offer instant digital deposits and transfers so you can send and receive money right away.
3. Extend banking hours
Most online banking features are available 24/7, so you don’t have to wait for the bank to open to do your business. This is an excellent feature for those who keep 2nd and 3rd shift hours or frequently travel between time zones.
4. Track and safeguard your money
Setting custom transaction alerts lets you monitor your spending and can alert you to fraudulent charges right away. Also, if you lose your credit card, it is fast and easy to cancel it online and prevent bad actors from using it.
Digital Banks vs. Digital Banking
Many traditional banks offer digital banking features. However, digital banking and digital banks refer to slightly separate but related concepts.
- Digital Banking: Online or mobile banking features offered by any type of bank
- Digital Bank: Bank with no physical branches and exclusively digital features
Both traditional banks and digital banks offer mobile banking features that are sometimes called mobile or online banking.
An Accelerated Trend Toward Mobile Banking
In 2019, more than 160 million people were using mobile banking in America, a 20% increase compared to 2014.
In 2020, demand increased further. The no-contact benefits of digital banking bolstered the existing trend and accelerated its growth. Consumers who previously shied away from mobile features warmed up to their convenience and reliability.
For example, April 2020 saw a 200% jump in new mobile banking registrations, while mobile banking traffic rose 85%, according to Fidelity National Information Services.
The growing trust in online banking has paved the way for fully digital banks to take a more significant market share.
Digital Banking in the United States
Fully digital banking has been proliferating in Europe and Asia. However, disruptive counterparts in the United States have been slower to emerge. In some instances, digital banks from other countries have expanded into the U.S. market as American companies are still gaining momentum. For example, the fully digital German bank, N26, launched in 2013 and became available in the United States until 2019.
Fully digital bank growth in the United States has been slower in part because leading brick and mortar institutions have invested in mobile features that accompany their longstanding reputations and fend off digital competitors.
Digital Banking Incentives
To compete, fully digital banks offer incentives to attract new customers. For example, Chime pre-funded stimulus checks to qualifying customers and sent the money faster than traditional banks.
As competition stiffens, consumers are likely to see more incentives and innovative features designed to attract new users. However, rapid growth may also mean new companies will emerge with inferior products. That will make vetting digital bank providers essential to ensuring you entrust your money to a quality institution.
The Future of Digital Banking
Competition in the market presents both advantages and disadvantages for consumers.
Competition will probably increase the value of incentives for consumers and drive advancements in technology that can lead to improved features and security.
More choice means that consumers will need to be diligent in vetting digital banking providers. Selecting a trustworthy provider is necessary to safeguard your money and personal information.
Check out our guide to choosing a digital bank that is right for you.