Only a handful of industries have seen such a rapid disruption during the last five years that banks have seen. Fintech companies really did a number on the big banks.
And, with the ability to open and use an online bank account within minutes, digital banks were, therefore, a hundred percent prepared for the pandemic, and it’s easy to see why digital banks are the future.
Even though physical branches were essential businesses and were allowed to stay open in most places, few people were frequenting them. Instead, a massive amount of people opted to open an online bank account. Why rub shoulder to shoulder during a pandemic when you can do banking while binging on Netflix.
Are digital banks the future of banking? Startups and established banks agree that online digital banking is the future as you’re hard-pressed to find a bank that hasn’t launched an app and continued to close down physical branches and lay off employees. People are also voting with their wallets and choosing digital-only banks in droves.
What are digital banks?
Let’s start off with the basics. Digital banks have numerous synonyms:
- Challenger banks
- Online banks
- Virtual banks
- Mobile banks
All of these terms are used interchangeably. But what are they, exactly? They are, first of all, financial technology companies or fintech for short. They don’t have a banking license in most cases, so they must use a partner bank to provide all the front-facing services such as checking and savings accounts and debit or credit cards.
More often than not, digital banks will only offer essential financial services and forego mortgages and loans, for instance.
We have to differentiate between digital banks and online accounts or mobile apps that traditional companies have launched.
Digital banks are inherently branchless. They also don’t have thousands of staff.
Now that we know what precisely digital banks are, here are the 6 reasons why digital banks are the future of banking.
1. The pandemic
Covid, pandemic, lockdowns – these are the terms we’re all too familiar with. Many industries were taken aback once the lockdowns started to roll out on a global scale. It was crucial to adapt in a matter of weeks instead of years.
Even the hesitant ones had to go fully online and cashless to not go out of business.
Challenger banks already disrupted the banking industry a few years ago. However, the number of users still hadn’t reached satisfactory levels, and there’s still plenty of room to grow. When the pandemic hit, some, if not most people, either weren’t allowed to go out as much or simply didn’t want to.
No one wanted to be standing in line, surrounded by people, even if social distancing measures were followed. It was much easier to open a digital bank account online and bank as usual.
Granted, your traditional bank also has its mobile banking app. Still, some of them are awfully clunky, lack many features that neobanks readily offer, and aren’t geared to the younger crowd at all.
To recap, the pandemic made people sign up and use digital banks much faster and in more significant numbers than usual, solidifying their role as the future of banking.
2. Ease of use
This is probably the biggest reason why you would sign up for a digital bank account. It’s just so easy to download the app and apply for an account in a matter of minutes. Fast approval times let you start banking almost instantly.
Digital banks allow you to seamlessly send money to friends and family using their email or phone number and the ability to pay bills online and even split bills between roommates.
If there’s one feature that I love the most when talking about online banking, it’s undoubtedly budgeting. This vital feature is made available in most digital banks, as it should be. It’s great to easily see where your money is going and on which category you’re spending the most.
I mean, how are you supposed to curb your spending if you don’t have the complete picture of your spending habits. Sometimes, the best motivation is to see, black on white, the amounts that are being siphoned out of your pocket.
With the added ability to set limitations on spending categories, and the ability to turn on the autosave features, it’s much easier to save up money for the things that really matter.
Now we’re getting to the fun part. The fees. This is where digital banks and traditional banks differ the most. While traditional banks are trying to fleece you of your last penny with an abundance of fees, digital banks, on the other side, often don’t even have fees for everyday banking operations.
The single easiest way to “stick it” to the big banks is to apply for a digital banking account that will save you money and cost big banks money. At the moment, we’re spoilt for choice with digital banks in the US, Canada, the UK, the EU, Australia, and Asia. The biggest digital bank in the world – Nubank, is actually located in South America and has 40+ million users.
So, how do digital banks make money then? Most of them earn the biggest chunk from interchange fees. Those are the small amounts that merchants have to pay to Visa and Mastercard to be able to accept cards. Card companies then give some of that amount to banks.
Both established and online-only banks earn money that way. Still, the old guard also makes an obscene amount of money from overdraft fees and credit cards. Something that most mobile banks don’t offer their clients. Probably for the better.
I already mentioned that digital banks don’t have branches – physical locations where you can walk in and talk to a bank teller or advisor about your money and bank account.
Instead, all the business has to be done through a mobile app or sometimes a desktop browser. If you have any issues or problems that arise with your bank account, mobile app, or even a scam or hack, you’ll have to use chat, phone, email, or consult the FAQ section to work it out.
If something’s urgent and no one’s picking up the phone on the other side, there’s no way to go to a branch and talk to someone in person.
So, that’s the bad side. The good side is that digital banks have no overhead because they don’t have branches and loads of staff. Those are remarkable savings that can and are passed on to the consumer.
Soon enough, even the biggest banks will close down most of their branches and move all of their operations online.
This is obviously a big one. As technology is moving forward year by year, the number of people that were born after the internet was already a common thing is rising as well. Young people, and not only them, are expecting to be able to do most of the things online or through an app.
Shopping, dating, and even court hearings are done online now. So, why not banking? There’s no reason not to, and that’s why digital banks are the future of banking.
There are going to be less and less branches from traditional banks as there’s going to be less demand. With the lack of overhead, will big banks finally offer low to no fees? Something that digital-only banks already offer? No, probably not. They’re too set in their ways to pivot.
If traditional banks won’t adapt – millennials, gen Z, and gen Alpha as some call them (born after 2010) will exclusively bank with digital-only banks.
Challenger banks are getting more mature and offering ample financial products and services. Soon enough, there will be dozens of digital banks that offer pretty much the same things that traditional banks and credit unions are offering – and more.
Some, if not most, neobanks, such as Venmo, have a sense of community around them. More than 70 million people have used Venmo to receive or send money, to pay bills and services, or to buy crypto.
When you pay someone over Venmo, you can add a message, gif, and an emoji in a social media-like affair. This social feed is by default visible to ANYONE on the internet if you don’t turn it off.
And, although some are raising alarms about it, young folks that are using it, don’t seem to be fazed by the lack of privacy. I mean, we’ve all been conditioned not to expect privacy online and have, more or less, surrendered to the notion that we’re being constantly tracked by the big tech companies.
Venmo is the perfect example how a fintech can move in quickly into our lives and even get into the dictionary with “Venmo me.”
When was the last time you felt a connection with your traditional bank? Maybe there still is a sense of community in a small town where you know your bank teller by name and she greets you when you bring in your check. Just hope that they don’t close down the branch.
RELATED: Cash App vs Venmo
The bottom line
I outlined the six reasons why neobanks or challenger banks, or whatever you want to call them, are the future. The future of banking, money transfer, investing, and even communication.
If you want to find the best digital bank in the US, check out our 20 Best Digital Banks In The USA.