Anybody looking to open a digital bank account will naturally want to know the differences between digital and traditional banks. If you want to know what’s the deal with mobile banks as they’re also called, you’re in the right place.
Online banks, mobile banks, neobanks, challenger banks – these are all different names for digital banks. In this digital banks vs traditional banks overview, you’ll find out how they differ in terms of fees, branches, ease-of-use, ATMs, investing, customer service, and more. But first, here’s the short answer:
Digital banks have low to no fees, better interest rates, have better budgeting features, and are generally easier to use. On the other hand, they have no physical branches, fewer financial products, and often fewer ATMs and worse customer service.
Let’s dive in deeper and see exactly what the differences between online and traditional banks are. And then you can make an informed decision whether to join a digital bank or not.
Financial products & services
There’s an impressive number of financial products and services on the market. If you’re not quite sure what they are, here’s a list of some that are available:
- Checking account
- Savings account
- Credit and debit cards
- Loans (personal, auto, business, home equity)
- Cashier’s checks
- Certificates of Deposit
- Wire Transfers
- Safe Deposit Boxes
- Investing (stocks, bonds, cryptocurrency, commodities…)
- Foreign Currency Exchange
As you can see, the list is quite remarkable and far from complete. Most of the traditional big banks would have all of these available to their customers, and then some. At the same time, most digital banks refrain from offering even half of the financial services that big banks do.
Your run-of-the-mill mobile bank will offer you a checking account and call it a day. Some offer savings accounts or simply slap an interest rate on your checking account deposit.
Outside of United States, digital banks will more readily offer foreign exchange and money transfer services and even multi-currency accounts where you can hold up to 10 different currencies.
Some digital banks offer credit cards on top of regular debit cards to their customers. Those financial companies are certainly smart as there’s a good chunk of money to be made with ccs. The occurrence is still sporadic though.
By contrast, it would be hard to find a traditional bank that doesn’t offer or even incentivize its clients to get one or more credit cards.
Mortgages and loans of all kinds are also everyday things with traditional institutions. Not so much with online banks. There are some, such as Axos Bank, that do offer most of the financial services that big banks offer. Still, they’ve been founded more than 20 years ago and are one of the pioneers of online banking.
It takes a great deal of experience and money, of course, to launch new financial products. But some digital banks mainly cater to young people, millennials, and even Gen Z (68 million Z’s in the US!). Therefore, there really isn’t the need to offer anything more than a spending account and easy money transfers to other app users.
Offering more financial products isn’t always the better solution. If you need more than just the essential services, you’ll have to weigh your options between traditional banks, of which most already also have mobile apps, and few digital banks that offer more.
The F word. Americans paid around $11.6 billion in bank fees the first three months of the COVID-19 pandemic. That’s no wonder as traditional banks have an overabundance of fees:
- Monthly savings maintenance fee: $1-$10
- Monthly checking service fee: $3-$20
- Non-sufficient funds: $25-$37
- Overdraft: $35
- Transfer from savings: $10-$12.50
That’s not the complete list of fees, of course. Traditional banks and credit unions made $34 billion in overdraft fees in ten years by some estimations. Just kidding. It was in a SINGLE year! They’re so dependent on overdraft fees that this income source constitutes their business model.
For Bank of America and JP Morgan, overdraft fees make up 8% and 7% of their profit, respectively.
Are digital banks following suit? No, not at all. Most digital banks offer free everyday banking services. That means that there’s no monthly maintenance fee, no minimum deposits, free peer-to-peer money transfers, and free ATM withdrawals at tens of thousands of locations.
That sounds great, but how do challenger banks make money then? Well, we already established that the more savvy ones offer credit cards, which are real gravy boats for them. The rest of the pack earns good money on interchange fees.
Interchange fees are tiny amounts of money that Visa or Mastercard, for instance, charge merchants for their service when you use your card (or phone) to buy stuff. It doesn’t matter if it’s in-store or online.
They then share that small amount with the digital bank in question. You might think that few cents or a couple of dollars here and there are that much. But on a huge scale, the amounts add up.
They also don’t have the overhead that traditional banks and credit unions have. Think offices, branches, thousands of staff, etc. That’s how they can get away with not charging fees on most of their products.
Interest rates make me really sad, actually. They’re just depressing. The average interest rate for savings accounts in the US is only 0.06%. I’d rather stuff my sock (or mattress) with money than open a savings account.
BoA, Chase, U.S. Bank, and Wells Fargo all offer only 0.01% APY. They don’t even need our money anymore. It’s mostly down to the FED. They flood the market with cheap money, so the big banks don’t need to attract new deposits from customers.
On the other side of the coin, digital banks do need your money and lots of it. That’s why you’ll frequently see much better interest rates. And that’s even more true outside of the US.
Of course, there are other (a bit riskier) ways to save and invest your hard-earned money.
This is where mobile banks really shine. The ease of use is a significant factor in stealing traditional customers to the dark side. In most cases, even for business accounts, you can download, open an account, and start using it in a matter of minutes.
The apps are straightforward and have many features that regular banks still can’t or won’t compete on. I’m mainly thinking about financial wellbeing in this case, but we’ll cover that below.
Branches are still a big deal for traditional banks and for conventional clientele. Although, it seems that they’re also cutting back on physical locations and staff. Often, there will be a physical branch, but it will be full of banking machines instead of tellers.
This, of course, makes sense, as most of the everyday operations can be fulfilled online, so there’s less of a need to go in-store and sit down with a bank teller. The pandemic only made the condition accelerate even more.
I mean, do you like going to the bank? Driving, walking, or taking public transport to stand in line, doesn’t read like a fun time.
Needless to say, there’s another side to the story. I spent two hours on the line with a bank the other day trying to solve a straightforward issue that I had. The entire phone call lasted two and a half hours, to be more exact. Of that, only 3 minutes were spent talking to a customer service rep. The rest of the time, I was listening to elevator music while going on with my day.
If there were an option to go into a branch and talk to someone in person, I would probably do it. We’ll touch more on customer service below.
Money transfer and currency conversion, aka foreign exchange, is another gravy boat for banks – traditional and online. And, although most banks refrain from charging their customers for sending money in-house, they do charge them for money transfers to other banks and institutions.
Luckily, there are digital banks that specialize in money transfers, offering them at much more reasonable rates than the competition. They’re basically money transfer services with a checking account or wallet attached to them.
One such example, and probably the most known, is Wise, formerly known as TransferWise.
They have bank accounts all over the world that are linked together, making money transfers cost up to eight times cheaper. Especially when there’s currency exchange involved. And they’re just one example.
Using traditional bank-issued cards can be pretty expensive when traveling. You’ll pay fees on every transaction you make in restaurants, hotels, and rent-a-cars. And there’s the inconvenience of notifying your bank that you will be abroad so that they don’t block your card.
Digital banks will frequently wave any fees for transactions abroad and won’t even need to be notified of your absence. That’s a massive plus in my book.
Some of them allow you to hold more than one currency, making it easy to incur no international fees.
Budgeting & analytics
I’ll be honest with you. My big bank has had a mobile app for a long time. Yet, there’s still no breakdown of spending categories, let alone pie charts or anything remotely useful. Most digital banks can run circles around it with their budgeting reports.
You can exactly see where your money is going and where it’s coming from. Easily put limits on a category like ‘eating out’, and get a notification when you’re getting closer to the weekly amount you’re comfortable with spending.
Apart from exactly knowing where you’re bleeding money, you can also make pots, spaces, or vaults, as they’re called. They’re basically sub-accounts that you can label as you want, making categorizing and saving money much more effortless and palatable.
ATMs are still a big deal even though we’re now using our phones and cards to make payments in record amounts. The pandemic has only magnified cashless payments even more.
Yet some people prefer using cash or don’t have a choice not to use it. According to Statista, in the US, 32% of all payments were cash payments in 2018, so pre-pandemic. For instance, in Germany, Japan, Italy, and Spain, that number was more than 80%.
Both digital and traditional banks go out of their way to emphasize the number of ATMs they own or endorse so that customers can withdraw money free of charge. Some of them are also reimbursing you for out-of-network fees if you do use a different ATM.
Although investment and retail banking have been separated since 1933 and the Glass-Steagall law, investing is something that traditional banks readily offer their customers through their separate entities.
On the contrary, you’ll be hard-pressed to find digital banks that offer investment opportunities. From the top of my head, only Revolut, MoneyLion, SoFi, Cash App, Axos, and Ally offer to invest your money in cryptocurrencies, commodities, ETFs, stocks, or managed portfolios. And not every bank offers all of these investment vehicles.
Digital banks are often seen as less secure than traditional banks. But that is often not the case. The truth is, both neobanks and established banks are under constant attack from cybercriminals, hackers, and scammers.
Your data and my data were leaked a long time ago. You can verify this easily if you enter your email on a website like Have I Been Pwned. It will tell you when exactly your data was leaked online.
In most cases, online banks follow best practices of securely logging in their customers, where to store their data, and so on. There hasn’t been a breach of data from a digital bank as of yet.
On the other hand, Capital One was at the focus of one of the most significant data breaches of all time when a hacker gained access to 100+ million Capital One customers’ accounts and credit card applications in 2019.
The data taken contained 106 million credit card applications and 140,000 Social Security numbers. Plus, 80,000 bank account numbers. Yeah, it’s terrible.
Security is a continued battle to protect customer information from bad players. And it isn’t a one-sided battle. As consumers, users, and clients, we have to stay vigilant as well, especially in the face of scammers.
Read more about how digital banks are safe or not safe in our article.
Customer service plays a big role. At least from the customer perspective. Banks’? Not so much as it seems. I’ve yet to find a bank, digital or traditional that has a satisfactory level of customer service. It’s mostly chatbots and robots answering the phone lines.
Even if there is live support, the queues are endless and you’re stuck hours on end on the line going on with your day. At least there’s background music when I’m cooking dinner waiting for someone to pick up the phone.
A bank could be perfect all up to the point when something goes wrong and you need to urgently talk to someone. As this word doesn’t exist in their dictionary, you could potentially lose a great sum of money.
The bottom line
Traditional banks aren’t going away anytime soon. They are still extremely profitable. Much more than digital banks, in fact. That’s because even though they do have much more significant overhead in terms of branches, offices, and thousands of staff, they offer much more lucrative financial products.
Digital banks, in most cases, offer only checking and savings accounts. And that’s not bad. Not everyone needs an abundance of products and services that we won’t be using anyway.
So, although mobile banks and established banks have many differences, they’re both here to stay and cater to their target customer.