What is Digital Banking?

Given so many aspects of our personal lives have gone digital, it's little wonder that we expect to handle various aspects of our small businesses the same way. Banking is a prime example. With just a screen tap or mouse click, checks can now be deposited, money transferred, and bills paid via the internet any time of the day or night. Talk about convenient.

In fact, 41% of small-business banking customers are choosing to handle their banking digitally, either online, via mobile, or using an ATM, according to "Small Business Insights: Expansion and Opportunity," a January 2022 report by Raddon Research, which surveyed 1,200 small businesses. Thirty percent also said their decision to use a particular bank is influenced by its availability of technology resources, the research shows.

Banks are benefitting from this transformation, too. For example, digital banking has helped financial institutions reduce their operating costs, expand their customer base – largely among Millennials and Gen-Zers – and improve customer satisfaction. If accounts experience suspicious transactions or low balances, banks can quickly notify customers. Digital banking has also improved the speed of business transactions and, in turn, business’s cash flow.

All told, digital banking is often considered a win-win for banks and small-business owners alike. Whether you’re just starting to wrap your arms around the topic, want to figure out how to choose a digital bank, or are feeling a little unsure whether digital banking is secure, consider this article your primer.

Given their low overhead costs, digital banks are typically able to pass some savings along to customers by providing higher interest rates on savings accounts.

Digital Banking Defined

When consumers and businesses bank digitally, their transactions are conducted using internet-connected devices, such as a computer via a web browser or a smartphone via an app. Digital banking eliminates the need to visit a physical branch and puts an end to all those paper checks, deposit slips, and hard-copy receipts.

Digital banking products and services include:

• Checking accounts, including online check deposits and orders for new checks
• Savings accounts, certificates of deposit (CDs), and money market accounts
• Money transfers between linked accounts
• Online bill payment and budgeting
• Balance inquiries
• Credit card applications and payments
• Personal loans, mortgages, and auto loans
• Peer-to-peer transfers
• Investment products
• Wire transfers

Traditional vs. Digital-Only Banks

Perhaps it’s no surprise that digital banking grew in popularity during the COVID-19 pandemic, when many bank branches temporarily closed and customers sheltered at home. Indeed, about a third of 3,000 U.S. consumers increased their online banking usage as a result of the pandemic, according to a March 2021 study by the Deloitte Center for Financial Services. In addition, banks experienced an all-time high number of both mobile logins and check deposits, the research found.

Customers can conduct their digital banking in three ways. The first is through traditional brick-and-mortar banks, which offer online banking services for transactions like check deposits, money transfers, and bill payments. They still have branches for in-person visits.

Secondly, digital-only banks provide typical banking services but only online, minus any physical branches. Transactions are conducted through a variety of digital means: using a web browser, mobile app, and email.

A third type of digital banking is a subset of digital-only banks called neobanks. (Some consider the terms interchangeable.) Neobanks are created by financial technology (fintech) companies, which usually partner with traditional banks to provide their services, mainly via mobile apps. 

Pros and Cons of Digital Banking

Digital banking has a variety of pros and cons. In the plus column:

• Convenience: Digital banking is not limited to bank hours. It’s accessible 24/7 as long as the customer has an internet-connected device.
• Higher interest rates: Given their low overhead costs, digital banks are typically able to pass some savings along to customers by providing higher interest rates on savings accounts.
• Fewer fees: Additional savings may come in the form of low or no account-maintenance fees, and many don’t require a minimum balance or a certain deposit to open an account. 

Here are some digital banking cons to consider:

• Learning curve: Starting with opening an account, it may take a little time for tech newcomers to learn the digital banking ropes.
• No physical presence: Should a question or problem arise, a digital banking customer may have to place a phone call – and perhaps sit on hold – or initiate an online chat for help. Some may find this customer service process frustrating.
• Cash conundrum: Digital banks primarily rely on ATMs to dispense or accept cash. Some ATMs may charge fees that may or may not be reimbursed by the digital bank.

What to Look for in a Digital Bank

Just as you would research any company you engage with, it’s a good idea to do your due diligence before choosing a digital bank. First, confirm that the bank's deposits are insured by the Federal Deposit Insurance Corporation (FDIC), an independent federal agency that protects bank deposits up to $250,000 for each qualifying account.

As you would with a traditional bank, it’s important to examine digital banking service fees, such as monthly maintenance fees charged on accounts. The good news is that fees are often lower than those charged by a traditional bank – if there are any fees at all. Also check to see whether the bank has minimum balance requirements, charges overdraft fees, and works with Zelle, Venmo, PayPal, and other peer-to-peer payment services.  

Similar to shopping for a mortgage to find the best deals, it’s smart to shop around for a digital bank that offers higher interest rates on savings accounts, CDs, and money market accounts. Some banks allow you to set up buckets for different savings goals. For example, if you want to create a separate emergency fund and vacation fund, you can allocate money toward each of those buckets, and they can coexist in one savings account. 

It’s also important to determine how you can deposit and access cash. Ask whether the account comes with an ATM card, whether the digital bank has its own ATM network, or whether you’ll be reimbursed for ATM fees incurred otherwise. If the bank doesn’t have an ATM network, you may need to deposit cash in a traditional bank account or buy a money order and transfer the funds electronically.  

Cybersecurity Considerations

Cybercriminals follow the money, so it’s important to consider just how secure a digital bank is. Banks bear the responsibility of ensuring the safety of all online accounts. One type of protection is multifactor authentication, which requires users to provide several forms of identification – typically their user names, passwords, and a one-time code emailed or texted by the bank – to gain access to their accounts.

In addition, mobile banking apps are generally considered safer than banking via a browser, and it’s even better if the app accepts biometric authentication, such as a fingerprint, or uses facial recognition.

One security tip: Never click on a link in an email or text that says it’s from your bank. That link may download a virus to your computer, or the message may actually be coming from a hacker who is attempting to steal your private information. Instead, type the bank’s website into your browser or go straight to its mobile app – and do so over a virtual private network (VPN), which helps protect your privacy. Make sure you log out after each online session, too.

In addition, it’s a best practice to change your online banking password on a regular basis and avoid using the same password for any other accounts. Also, be sure you can receive email and texts from the bank, in case it alerts you to transactions that appear fraudulent or unauthorized.

What’s Next for Digital Banking?

Digital banking shows no signs of slowing. Banks are working to become more responsive to customers by using artificial intelligence. Many offer increasingly sophisticated virtual assistants and chatbots that respond to customers’ specific questions or needs. They may even grow smart enough to understand verbal requests and automatically handle digital payments transmitted by smart devices, such as a smart car that pays a parking garage fee.      

The Takeaway

As an increasing number of banking transactions are conducted online, many digital bank customers are benefiting from higher interest rates on savings accounts, as well as lower maintenance fees. Consumers should consider shopping around for a digital bank that provides easy access to cash, offers competitive rates, and employs tight security measures to help keep their money safe.

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