Can switching from a traditional bank to a digital bank help save you money? It sure can. From fewer fees to budgeting features, digital banks are setting the pace in the banking space.
Here are six ways digital banking can help you save money.
- Monthly Maintenance Fees
- Overdraft Fees
- Foreign Currency Conversion Rates
- Savings Interest Rates
1. Monthly Maintenance Fees
Monthly maintenance fees are deeply rooted in banking. If you have more than one account type, for instance checking and savings accounts, you’ll be paying a monthly fee for each one.
There are ways how you can avoid these fees. For example, if you’re underage or a student. But also if you maintain a balance of at least $500 or have $500 in monthly deposits.
Knowing that tens of millions of Americans (63%) don’t have enough savings to pay for a $500 or $1,000 emergency or that 56.3% of people have $1,000 or less in their checking and savings accounts combined means that they are still paying for their monthly account fees.
Unless they have a digital bank account. Chime, Varo, Axos, OnJuno, Monzo, Revolut, N26, One Finance, Current, Oxygen, SoFi, and many other digital banks offer at least one account type without monthly fees.
This is true, not only in the US, but worldwide. It’s an unwritten rule of digital banking to have no monthly fees and use them as a way to attract more users.
Some of these banks will have only one account type while others have tiers. The first tier will be free and offer basic, yet sufficient, functionalities. The other tiers will add more features and benefits that are, more or less, needed.
For example, you can get a metal debit card or more free ATM withdrawals per month. Maybe also travel insurance, advanced analytics, and similar things that aren’t essential for day to day banking.
Many mobile banking users still don’t use these accounts as their main accounts. That’s especially true for Cash App, Venmo, and Current users that require you to have a bank account linked to getting the most out of these accounts.
These kinds of financial apps aren’t really digital banks but more money transfer and money management apps used by the younger demographic.
Chime, Revolut, Monzo, Varo, Ally, N26, and some others are what we’d call digital, mobile, online, neo, or challenger banks. And they can indeed substitute your “real” bank account thus breaking out of the shackles of the dreaded monthly maintenance fees.
2. Overdraft Fees
|TRADITIONAL BANKS||OVERDRAFT FEE||DIGITAL BANK||OVERDRAFT FEE|
|Bank of America||$35||Chime||$0|
|Regions Bank||$36||Axos Bank||$0|
|Fifth Third Bank||$37||Ally Bank||$0|
|Truist Financial Corporation||$36||MoneyLion||$0|
Another big money-making scheme of traditional banks are overdraft fees. They cost Americans BILLIONS of dollars each year. To be more precise, it’s around $30 billion each year.
Most, if not all, traditional banks charge an exorbitant overdraft fee of around $36 that you’ll get charged for EVERY transaction you make after you go into overdraft.
Some of the banks limit these transactions to 4 or 6, but some allow you up to 12 in a single day!
That effectively means you could be paying $432 ($36×12) in overdraft fees in one day if you, for instance, don’t have notifications turned on and aren’t aware you’re in overdraft as you continue with your day as normal.
There’s also the so-called NSF or nonsufficient funds fee. Each time your transaction is rejected a hefty NSF fee will get applied to your account.
I once had a couple of NSF fees charged to my account for a single transaction since I tried to pay for it a couple of times, foolishly thinking it would go through. Yikes!
To top things off, there’s also the overdraft protection fee that’s usually between $10 – $12.50 per transfer. You have to opt into this overdraft protection that will kick in when you don’t have enough money in your checking or main account.
The “protection” will then transfer funds from your savings or any other account in the same bank to cover the purchase. It’s less expensive than the overdraft fee at least.
On the other side, you have digital banks. As you can see from the table above, all the popular digital banks don’t charge overdraft fees.
They either decline your transaction (without applying the NSF fee!) or allow you to go into overdraft, typically up to $100 or $200 depending on the state of your account.
You can then return the money you owe in a week or two and you’re back at square one.
To conclude, don’t go into overdraft if you don’t want to pay hefty fees, or get a digital bank account, at least for your day to day needs like paying in shops, or online, splitting bills, etc.
Most people still use their online banking account as a secondary account that they use to spend money on a daily basis.
That trend will change in the future as people start trusting challenger banks more and start using them to get their paychecks deposited. Don’t get me wrong, a lot of people already enabled direct deposits, but still not at a large scale.
3. Foreign Currency Conversion Rates
|Bank||Total FX Fees|
|Bank of America||3%|
Foreign exchange rates won’t concern you if all your transactions are in USD. However, as anyone that ever sent some money abroad can tell you, FX fees suck.
Not only do they seem rather useless, but they are also huge money makers for banks and card issuers.
A 4% FX fee on $1,000 is $40. If you’re doing a couple of them per month, it will add up real soon. For $4,000 that’s $160. Money wasted.
Oftentimes, the banks will add hidden fees as well and the whole process of sending money abroad is kind of confusing. The conversion fee also applies to purchases you make online.
So, if you’re buying anything from Canada, for example, you have to take into account the conversion rate as well.
The most popular digital bank that is most known for its fair foreign transaction fees is Wise. You can open a Wise account from most places and you’ll get bank account details for 10 countries!
That means you can pay and get paid as a local in 10 different currencies (GBP, EUR, USD, AUS, NZD, SGD, RON, CAD, HUF, and TRY). You can also hold and convert money in 53 currencies.
With Wise, the recipient gets $30 to $40 more than with traditional banks
Many digital banks utilize Wise and its fair exchange rates to offer their users cheaper international transfers as well.
4. Savings Interest Rates
Traditional banks are notorious for their extremely low savings interest rates. The average nationwide interest rate on savings accounts is only 0.08% (as of 06/22). That’s $8 per $10,000 deposited.
The simple truth is, that the banks simply have too much money in their reserves. They hold upwards of $18 trillion in deposits. There’s no incentive for them to offer you better savings rates because they don’t need your deposits.
On the flip side, digital banks are typically younger than five years. They need your deposits to keep themselves solvent and to attract more customers with better interest rates. Digital banks also don’t have nearly as many overhead costs as traditional banks do.
Renting physical space for branches and office employees costs an incredible amount of money. There are plenty of other costs connected to this space (electricity, furniture, IT equipment, security…) as well.
Higher deposits also help when attracting venture capital as they show user confidence. People aren’t going to keep cash in an institution they don’t trust.
The average digital bank account savings rate is usually over 1.5%. With some banks having more than 3% or even 4%. Compare that with a measly 0.08%.
Another benefit you get from online banks is that your savings aren’t tied up for a year or even five years. You can freely manage your money however you want and tap into the savings pot whenever there’s a need.
Fuel is a hot topic right now. With rapidly rising fuel prices, it seems that the era of cheap fuel is behind us. With cities being designed around cars and not people, we have to use cars in order to do the simplest errand.
Unless you live in a city center, chances are you’ll be forced to drive to your nearest bank branch.
With an online bank account, there’s no need to drive to a branch because there is no branch. Everything can be done in the app.
Granted, most online banks don’t offer all the financial products that brick-and-mortar banks do. However, that will be changing soon enough as well.
Even in this day and age, most traditional banks’ apps look clunky and it takes forever to do something. They are irresponsive and unintuitive and offering more than the basic stuff is unheard of.
Mobile banks, however, categorize your spending so that at the end of the week or month, you can see exactly where your money is going. This can help shape your behavior and make you aware of your spending.
By spending less money on the things we don’t need we can save a considerable amount of money that can then be invested (usually with the same app!).
Digital, mobile, or online banking. Whatever you want to call it, can help save you considerable amounts of money each and every month.
From direct savings from slashing monthly maintenance fees, to future savings by offering much higher interest rates, digital banks are good for your wallet.