Digital banks have exploded in popularity in recent years taking a fairly big chunk of customers, away from traditional banks and credit unions. But, what is digital banking exactly? Who offers it, and what are the benefits of digital banking?
These are the questions we’re answering today. After you’re finished reading, make sure to check out the best digital banks in the US, UK, EU, Canada, Australia, and other territories around the world.
Digital banking is a service offered through mobile apps or browsers by online-only banks with no physical branches (or just a few). These banks are also called neobanks, challenger banks, virtual banks, and mobile banks.
They are often not banks at all but financial technology (fintech for short) companies that have to partner with an already established banking institution to offer banking services and cards.
Not having tens or even hundreds of branches gives them an edge over traditional banks that have to maintain a staff of tens of thousands of people. With little overhead, online banks often offer accounts with hardly any fees, luring in customers from established institutions that make you pay excessive fees.
Digital banking is offered by both brick and mortar banks (traditional banks) and online-only banks.
Traditional banks use their mobile apps as a mere extension of their physical branches. They often don’t bring any more value or unique propositions to customers.
Online-only banks are much better in this regard and offer more value to users with feature-packed mobile apps. And what they lack in financial services, they more than make up in ease of use, analytics, and speed.
Digital banks are often an excellent choice for transferring money domestically or internationally. To find the best digital banks in the US, visit our digital banking in the US overview.
But, what concrete benefits for the customer do digital banks have? Are they better or worse than traditional banks? Let’s dive in deeper to see what benefits mobile banks bring to the table and some of the negative aspects they might have.
We already mentioned this briefly in our introduction. The fact is that most digital banks offer at least one account that has no monthly fees and is an excellent option for undemanding customers.
A typical breakdown of traditional banking fees would look something like this:
A typical digital bank doesn’t have monthly maintenance fees for their checking or savings accounts, doesn’t offer overdraft, and therefore doesn’t charge overdraft or NSF fees. And money transfers are free if happening in-house or charged a small fee if sending to other institutions.
This is where digital banks and traditional banks vary the most. While established banks are trying to take your last penny with a wealth of fees, digital banks often don’t even have fees for everyday banking operations.
That sounds great, but how do digital banks make money then? This is an easy answer – interchange fees. They are small amounts of money that Visa or Mastercard charge merchants for their service when you use your card (or phone) to buy products and services. It doesn’t matter if it’s in-store or online.
A few cents or a couple of dollars here and there don’t seem like much. But on a large scale, the amounts add up and make a significant revenue source for the banks (digital and traditional).
Online banks also don’t have nearly as much overhead as established banks. Having no branches or staff to manage them means they can earn far less money and still earn revenue.
Read more in our post: How Do Digital Banks Make Money?
Except for not having nearly as many fees as traditional banks, digital banks have a user-friendly banking experience. Millions of people around the world appreciate the fact that they don’t have to go to the bank to open an account, stand in line, or even talk to a bank clerk or a banker.
The internet has made it possible to fulfill all your day-to-day banking needs through an app on your phone while sitting on a sofa. Transfer money across borders, apply for a loan, open a business account, or even take out a mortgage.
Of course, the pandemic played a massive role in speeding things up and even made banking conglomerates rethink their services.
Digital banking apps are easy to use and offer many features that traditional banks simply don’t think are necessary, but they can make life easier for customers.
Did you know that the average interest rate for savings accounts is only 0.06 percent, with many big banks offering even less (BoA, Chase, U.S. Bank, and Wells Fargo all offer only 0.01% APY)?
There’s no point leaving money in a savings account if you’re actually losing it when you factor in the inflation. The FED inundated the market with cheap money that big banks can get a hold of, and therefore they don’t need to attract new deposits from customers.
Digital banks, on the other hand, are all-in on expansion and are trying to lure in customers any way they can, including offering higher interest rates.
For example, Varo offers one of the highest Annual Percentage Yields (APY) in the country – up to 3%.
And opening a Varo Savings Account couldn’t be more simple:
Transferring money to other people in the country or abroad can set you back tens or even hundreds of dollars. And, for what? Moving a few digits on a computer screen?
Luckily, there are digital banks that specialize in money transfers, offering them at much cheaper rates than old banks do. These digital banks are basically money transfer services with a checking account or wallet attached to them.
Wise is the best example we can give here as they are the most well-known digital bank with a cheap money transfer service. They have bank accounts all over the world that are linked together to make money transfers cost up to eight times more affordable. Especially when there’s currency exchange involved, and they’re just one example.
If you’re using traditional credit cards while traveling abroad, you’re definitely contributing to their bottom line by paying fees on every transaction you make in restaurants, hotels, and rent-a-cars. And, of course, you better notify them before you leave the country if you want to use your card at all.
Digital banks use GPS on your phone to determine when you left the country so you can continue using it seamlessly and without the need to call them up.
But you can find plenty of mobile banks that waive any international transactions fees, so you don’t feel surprised when you arrive home from your trip and find a foot-long bill.
This is a major benefit of digital banks. Having a budgeting and analytics tab in your app can show you just how much money you’re spending on a particular category. Whenever you tap your card, the amount you just spent will automatically be categorized.
The categories can include restaurants, hotels, rent, bills, and similar. Plus, you can make your own categories and make budgeting even more tailored for your needs. For this reason, most digital banks can run circles around big banks with their budgeting features.
You can also effortlessly put limits on a category like ‘eating out’ and get a notification when you’re getting closer to the weekly amount you’re comfortable spending.
My big bank still doesn’t have this feature (and many more) in their app, and it will probably be a few more years until they implement it. There are no categories, no pie charts, no setting up limits, or getting notifications. The user interface is just awful.
Most digital banks in the US have a feature that lets you withdraw money from your account up to two days early if you have a direct deposit set up. Now you don’t have to wait till Friday to get paid; as early as Wednesday, you can have access to your money.
On the other hand, traditional banks can take as long as five days to deposit your direct deposits into your account, holding your hard-earned money basically hostage.
There were indeed many times in the past when I could have benefited from getting my money faster into my bank account, and I’m sure I’m not alone. Almost 40% of Americans don’t have $400 in the bank for emergency expenses. Two days can mean a lot in that case.
Anyone that has opened a bank account in a physical branch knows that it’s an uncomfortable process. So, why go through that?
Luckily, opening a digital bank account is much more effortless and can be done in a couple of minutes from your sofa. Even opening a business account is really easy.
For personal accounts, you’ll only need to fill out basic information about yourself, and off you go. Some neobanks don’t even do credit checks. If you have a poor credit history or your credit score isn’t good enough to open a bank account in a conventional bank, you’ll be happy to know that there are other options on the market.
Chime, Varo, SoFi, MoneyLion, Current, and a few others will help you initiate an account with them despite your credit history because they’re not performing credit checks.
Did you ever feel like you were a part of the community with your big bank? Yeah, I didn’t think so. But some, if not most challenger banks, do make you feel like you’re a part of something bigger.
More and more digital banks and payment services are starting to implement features that social media has. For example, when you pay someone over Venmo, you can add a message, gif, and emoji in a social media-like affair. Your friends, but also other people, can see your transactions.
Venmo users not just like it but embrace the feature. So much so that ‘Venmo me’ has entered the dictionary. Over 70 million people use Venmo to receive or send money, to pay bills and services, or to buy cryptocurrency.
Saving money is difficult. If we don’t find a way to do it deliberately, we usually won’t save anything. But what if I told you that your banking app could make saving money a seamless and, more importantly, effortless process? Sounds good, right.
Digital banks make it easy for you to turn on the auto round-up feature. With that enabled, you will save little and often by rounding up your payments to the nearest dollar. The change goes into pots, spaces, or vaults, as they’re sometimes called.
They’re basically sub-accounts that you can label whatever you want to make categorizing and saving money much more effortless and palatable.
Name your vault and add a photo and see it grow from day to day.
Nothing’s perfect in this world, and digital banks aren’t either. Although they offer far more advantages, they do have a few drawbacks, one of which is fairly unique.
As much as not having physical branches is a benefit, it’s also a drawback. Yes, digital banks save money on overhead and can therefore offer accounts with almost no fees. And yes, you can contact their customer support over the phone, chat, or email. You can also open and close an account without going to the branch.
But, in rare cases, people would instead go through the hassle of visiting a branch to talk in person to a fellow human. Sometimes, it’s easier solving problems when you’re face to face with a person, especially when you need to make a case.
I like that some digital banks do have so-called cafes where you can talk to their customer support. The banks still save drastically on overhead, and you, the customer, can speak with a bank representative.
Customer support is a vital component of every business. Why do some (most?) companies, not just digital banks, fail to hire enough people to man the phone lines and computers is a mystery to me. Whatever they save on personnel costs, they lose in bad reviews, bad customer experience, and overall, bad customer satisfaction.
Neobanks are in a unique position in that they often grow at such speed that they fail to hire enough support staff that will follow that extreme growth. Some mobile banks can add hundreds of thousands or even a million new customers in a span of a single year.
Can you even imagine how many people that is? If only a few percent of them run into issues with the app or service, that’s still enormous pressure on the customer support department.
Some companies are opting for chatbots to solve customers’ problems. And, although chatbots can be helpful for more uncomplicated issues, many people will still need a human to solve a more complex issue.
As you can see, digital banks are the future of banking as they have many benefits that make customers’ life much easier. They offer better technology, have fewer fees, and are all-around easier to use.