Digital banking has grown in popularity since the first mobile banking app was launched in 2011. Since then, online banking has grown to include fully mobile banks alongside brick and mortar ones with digital banking apps. In 2018, approximately 61% of Americans used digital banking, which is expected to grow to 65.3% by 2022. As the trend grows it’s important to know what to look for when choosing a digital bank.
What is a Digital Bank?
A digital bank (also known as a neobank, internet-only bank, or virtual bank) is any financial institution that offers banking services via online channels, including websites and mobile apps.
Digital Banking vs. Digital Banks
Bank account management that happens via the internet or a smartphone is called digital banking. For example, JP Chase Morgan, which has the second-largest number of branches in the United States, also has 51 million active digital customers and 35.4 million mobile banking customers. This type of banking is often called mobile banking.
On the other hand, digital banking is offered by financial institutions that operate without physical branches. All services are available online or through a mobile app.
- Digital Banking: Online or mobile banking features offered by any type of bank
- Digital Banks: Banks with no physical branches and exclusively digital features
Full-Stack vs. Front-end Digital Bank
There are two types of digital banks: full-stack and front-end only. Full-stack digital banks have a banking license and are FDIC insured. Accordingly, they handle all operations, including financial products and the software used by their customers. Front-end banks do not have a banking license and instead work with partner banks to provide financial services. Front-end digital banks only control the software used by their customers, while their FDIC insured partner manages the financial services.
What To Look For When Choosing A Digital Bank
As digital banking options continue to evolve and grow in popularity, we recommend evaluating prospective services by considering the following criteria:
1. FDIC Insurance
Digital banks should be fully licensed by The Federal Deposit Insurance Corporation (FDIC). Full-stack banks will hold their own license, while front-end banks will have an FDIC-insured banking partner.
The FDIC is an independent agency created by Congress in 1933 to uphold public confidence in the nation’s financial system. The agency was formed in response to the stock market crash in 1929, in which the public rushed to withdraw funds from banks and credit unions that were forced to shutter because they could not cover the funds.
In general, the FDIC insures accounts up to $250,000 per account holder, which means that the federal government will back deposits in the event of theft or bank failure. The agency also examines and supervises financial institutions for security, soundness, and consumer protection.
2. End-to-End Digital Experience
A fully digital bank should offer an end-to-end customer experience. That means all services should be available online for all client types. For example, many digital banks boast account set up in as little as 10 minutes, allowing customers to upload documents and rapidly get verification.
- Open account
- Document upload
- Document verification
- Deposits and transfers
- Loan applications
- Loan servicing
- Automated saving and bill pay
- Manage account settings
One aspect of digital banking that is not entirely online: debit card and check receiving. Digital banks will mail these to customers using the address they provided.
3. Easy Access to Fee-Free ATMs
Digital banks have no physical locations, which means that customers must utilize third-party ATMs for cash withdrawals and deposits. To simplify this process, most digital banks offer fee-free ATM use. Some offer free ATM use at any location or may have a list of partner banks where you can use the ATM without penalty.
4. 24 Hour Availability
Customers expect digital banks to be open for business 24/7. That means apps and online portals won’t be constrained by regular business hours. For more banks, this is easy to achieve for app-based processes like deposits, transfers, withdrawals, etc. However, services that require a more detailed response may not be available on demand.
Servicing for loan applications and other requests that require assistance from a banker or customer service representative requires the bank to have people on-call. Some banks, like Chase, offer 24 hours customer service and in-app messaging.
Digital banking services geared toward an international audience, like N26, greatly benefit from this added feature.
5. Strong Security Features
Financial institutions have access to a treasure trove of their customer’s data. This valuable information is essential for banking systems but is vulnerable to misuse by bad actors. As a result, Digital banks need to have boilerplate security measures in place to build customer confidence and protect data.
- Security features should be embedded in all software and updated regularly.
- Two-factor authentication
- Password protection app
- Banking alerts to monitor transactions
According to online and mobile banking security statistics from Consumer Affairs, most digital bank users trust their digital bank providers; 95% of US account holders trust their banks to protect their personal information on digital banking platforms.
Despite this high level of trust, concerns about digital banking security should be taken seriously. Your digital bank should include the security features mentioned above, and you should follow a few personal guidelines to protect your data further.
- Avoid using your banking app on public Wi-fi.
- Never respond to account verification requests without authenticating them to avoid phishing scams.
- Be careful with third-party finance apps that sync with your bank account.
6. Checking and Saving Account Features that Meet Your Needs
You should choose a digital bank that offers account types that meet your needs.
- Daily Debit customers
If you are looking for a daily use debit account, you’ll want to find an account with no transaction limits or minimums. You’ll also want to choose an account with plenty of free ATMs.
- International Customers and Frequent Travelers
If you plan to use the account for international transactions, you should look for a provider that accepts multiple currencies and doesn’t charge exorbitant exchange or transaction fees.
- Savings Account holders
If you are opening a new account with the intent to save money, you’ll want to find a digital bank with a high-yield savings account. Accordingly, these accounts are likely to come with annual fees and balance requirements.
- Business Owners
Many digital banks offer business accounts that are geared toward small business owners and freelancers. Noteably, these accounts may come with special features to accommodate your needs. For example, the ability to open an account with a Tax ID and assign multiple customers would be necessary for a small business owner.
7. Minimal Fees and Balance Requirements
Just like regular banks, some digital bank accounts come with annual fees and balance requirements. Depending on your financial situation and how you plan to use the account, you’ll want to make sure these are reasonable for you. Free accounts with no minimum balance or deposit requirements are common. Some accounts, such as high-yield savings accounts, may come with more restrictions or fees in exchange for added benefits.
The Future of Digital Banking
To compete, fully digital banks offer incentives to attract new customers. For example, Chime pre-funded stimulus checks to qualifying customers so that customers would receive the money faster than traditional banks.
As competition stiffens, consumers are likely to see more incentives and innovative features designed to attract new users. However, rapid growth may also mean new companies will pop up to share the market and may do so with inferior products. That will make vetting digital bank providers essential to ensuring you entrust your money to a quality institution.