Why Digital Banking Is the Future

We live in an on-demand world. We expect everything instantly, whether a WiFi connection or a wire transfer. More than ever, institutions are surging to meet the demand for fast and friendly financial services with digital banking.   

Digital banking, also known as online banking, represents the next step in banking. It involves financial institutions moving their banking products and services to a digital space where customers interact with them and handle their financial transactions online. The shift makes sense considering that 91.7% of the world’s currency is now digital.   

Still, are you wondering why digital banking is the future? We can answer that. Be sure to see an in-depth look into the best online bank apps and what they can do for your banking experience.  

The Future of Banking

Digital banking makes your life easier. Whether you use a desktop account or a mobile app, you can control your finances from a single, centralized location. The digital-first approach represents a seismic disruption for traditional banks, which must adapt to the ever-changing landscape.  

Consider Triodos Bank, which opened in 1980 in the Netherlands and has transformed in the digital era. The bank stands out as one of the world’s foremost sustainable banks. As the bank strives to make people’s money work for positive environmental and social-cultural change, it offers products and services that did not exist a decade ago.   

Triodos Bank is one of many organizations pushing the finance sector into uncharted territory. You will find even more banks, credit unions, and fintech companies competing against each other. These organizations must find creative ways to appeal to audiences, especially Millennials and Gen Z. 

However, Triodos isn’t the only innovator. Some other financial progressives include mobile-only banks such as Monzo, Tandem, and Starling. Aldermore also has a lending program that caters to entrepreneurs and small business owners.  

Consumers are the ultimate beneficiaries of this transformation. Due to the high-cost of acquisition and increasing competition, financial institutions have to continually put their customers first. Digital banks reward customers with a range of products and perks so they can keep them loyal for years.  

Digital banking has seen a steady rise in popularity over the past decades. As of 2020, nearly half the U.S. population is using a digital bank. According to Statista, the U.S. has 161.6 million current digital bank users, 20% more than in 2014. Thus, digital banking isn’t a fad, but it’s here to stay.  

The Future of Currency

So, how did we get here? Why are many banks going digital? There are a lot of reasons, including the desire for more convenience and speed. It’s also impossible to overlook the consequences of cryptocurrency.  

Cryptocurrency is a virtual currency, which means that you can’t trade it in for physical dollars or coins. Instead, the digital asset sits in a computerized database with a ledger of all known crypto transactions.  

Even if you’re not familiar with cryptocurrency, you’ve probably heard of Bitcoin. An individual (or group of people) named Satoshi Nakamoto created the open-source software in 2009. It has inspired hundreds of other cryptocurrencies, such as Litecoin, Ripple, Ethereum, and Libra.  

Some of the benefits of Bitcoin include: 

  • User anonymity
  • Private keys
  • Strong cryptography
  • No transaction fees
  • Greater access to credit
  • Easier international trades 

Large financial institutions initially dismissed Bitcoin. JPMorgan Chase CEO, Jamie Dimon, even called it a “fraud.” In 2019, JPMorgan Chase pivoted on its position and released the first U.S.-bank-backed cryptocurrency. Other banks with their own cryptocurrencies include UBS, Credit Suisse, Youth Bank, and BNY Mellon.  

Whether or not you use cryptocurrency, the digital asset marks a quantum leap forward in the finance sector. At the time of its initial release, Bitcoin provided users with benefits that they couldn’t find elsewhere. Today, digital banks are closing the gap with cryptocurrencies, providing people with more competitive and diverse products than ever before.  

Benefits of Digital Banking

Lower Fees

Digital banks don’t have physical branches. This means they don’t have to purchase real estate or handle branch maintenance. Online banks can pass these savings along to customers in the form of lower fees. For instance, many online accounts do not have monthly service or overdraft fees.  

According to a 2019 study from NerdWallet, the average brick-and-mortar institution charges $35 for overdraft fees. That’s on top of a $10 monthly service fee if you do not maintain your account’s minimum balance. Online banking’s low-free approach allows you to save more of your hard-earned money.  

Competitive Interest Rates

Digital banks provide more savings by offering customers better interest rates than traditional banks. The average online bank has an annual percentage yield (APY) of 1.50%. That outpaces the national savings rate of 0.05% for brick-and-mortar institutions. 

A few fractions of a percentage point might not seem like a big deal. We beg to differ! Imagine that you deposit $10,000 in a traditional bank with a 0.05% APY. You’d earn $5 over the next year. On the other hand, an online bank offering 1.50% would net you $150 on your deposit.  

Traditional Services

You don’t have to give up all the traditional services you’ve known and loved just because you have an online bank account. Many online organizations offer one-on-one consultations and ATM access. For instance, members at Allpoint and MoneyPass can use ATMs across the country without paying fees.  

Online banking offers the same degree of security as its traditional counterparts, too. You can rest assured knowing that digital banks offer fraud monitoring and encryption services. Make sure that your chosen bank also insures your money with the Federal Deposit Insurance Corp.  

Greater Efficiency

Digital banking makes your life easier. You can monitor your balance, check your monthly statement, or send money without waiting in line. The speed lets you spend your day on more important things. 

Pepper, a mobile banking startup, found that 44% of people use online banks instead of traditional ones because of the increased efficiency. Its Change in Banking report also found that 24% of users wanted greater control of their finances, while 22% prefer intuitive mobile apps. Other reasons that people go digital include more personalized service and lower account costs.  

Drawbacks of Digital Banking

No Branches

If you’re a fan of good old-fashioned customer service, you may balk at online banks. They don’t have physical locations so you can’t meet your account manager in person, nor can you sit down with them to discuss your financial future face-to-face.  

Even though you can’t go to a physical location, digital banks offer ways to stay connected. For instance, you can call or email your financial institution if you have pressing questions. Most online banks also offer video-based consulting services so that you can see the bank’s representative when you talk. 

Fewer Deposit Options

According to Next Gen Personal Finance, 82% of employees receive their paycheck via direct deposit. If you’re in the minority of people who receive pay via cash or a check, you’ll have an uphill battle trying to deposit it online. Digital banks offer relatively few places where you can deposit physical currency into your online account.  

You may need to find an ATM that accepts deposits or put your money into a brick-and-mortar account before transferring it online. Some banks let you scan checks with their mobile app so that you can electronically deposit them. Other institutions partner with third-party vendors, like Green Dot, that accept cash deposits for a small fee.  

Best Online Banks

Chime Bank

Chime Bank offers a hybrid online-and-mobile banking platform. It eschews many of the typical banking concepts like APY and minimum balances. Instead, Chime provides a new way to save, which is based on your spending activity. 

Every time you make a transaction with your Debit Visa Card from Chime, it rounds up the difference and deposits it into your Chime Savings Account. If you purchase a sandwich for $8.50, for instance, Chime will round up to $9 and put $0.50 in your savings. It also offers zero-fee overdrafts and early paycheck processing on direct deposits. 

SoFi Money

We cheated here as SoFi Money technically isn’t a bank account, but it’s a cash management account. The organization still offers many of the financial services you’d typically find at a bank. 

SoFi Money caters to smartphone users. Download its mobile app, and you’ll have instant access to a checking account with above-average interest rates. You can also manage your deposits, send money, and earn interest.  

SoFi Money has made a name for itself with its rewards program. Every time you make a purchase, you receive a cashback deposit. SoFi Money has additional perks such as member events, third-party discounts, and financial planning resources. It even offers traditional banking products like student loan refinancing and mortgages.  

The Bottom Line

Brick-and-mortar banks aren’t going away anytime soon. The rise of online banking, though, has challenged their stranglehold on the financial sector. Digital banks offer greater innovation and more opportunities for customers, forcing traditional banks to adapt if they want to remain relevant. 

Roughly three billion people worldwide already go with digital when it comes to their banking needs. Experts expect that number to grow as more people become banked. If you want to take advantage of the greater efficiency, lower fees, and competitive interest rates, make sure to check out the best online apps today.  

AUTHOR: CHRIS MULLER 

Chris Muller is a professional personal finance writer who has written for some of the largest financial publications in the world. Chris brings a BBA and MBA in Finance, along with a decade of experience in the field, to help break down complex financial topics into easily digestible pieces through his written content in an effort to assist others in better managing their finances. Chris is currently in pursuit of FI/RE, is an aspiring minimalist, loves craft beer, and is a dad two to kids.

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