Why New Online Banks Are Becoming Household Names So Quickly
Point of Interest
Online banks offer a growing opportunity for consumers to take advantage of high-yield savings accounts, low-or-no fees and easier account management.
The banking industry is heavily embracing the growth of technology, and you’re the beneficiary. Online banks are on the rise, offering plenty of perks to customers forgoing the traditional brick-and mortar experience.
In recent years, Google search traffic has continually grown for digital banks like N26 and Revolut. Why? People are starting to realize that digital banks offer perks like higher-interest savings accounts, easier-to-manage accounts and apps that streamline many banking processes.
What is an online bank?
An online bank is a digital bank that utilizes technology and artificial intelligence to streamline banking processes. Some traditional banks are utilizing digital banking processes creating a hybrid experience. Other banks, though, are 100% online and completely digital.
What this means for you as a user: You won’t be walking into a brick-and-mortar storefront to handle your banking needs. Your deposits, payments, investments and other banking processes are done completely online through a computer or a dedicated financial app. Because these banks don’t have the same real estate, employee and infrastructure needs of traditional brick-and-mortar banks, it gives them the flexibility and financial ability to offer more to customers.
Online banks are growing in popularity, but why?
It’s not just Google search trends signaling a rise in popularity of digital banks. According to the Evolution of the US Neobank Market Report, 89% of U.S. banking customers surveyed say they use some form of mobile banking. 70% of those surveyed say that mobile banking is the primary way they access their financial accounts.
According to a Zion Market Research study, the global digital banking market was valued at $6.62 billion in 2018. By 2025, the report expects that number to climb to $8.64 billion. This is good for a compound annual growth rate of 3.8%.
Why the growth? Customers like flexibility, convenience and adaptable products. Additionally, the savings and higher interest rates available online are attractive to customers. As digital banks become more accepted worldwide, more customers will adopt the services either as a portion or as their primary source of banking.
Is your money safe in an online bank?
A common question asked about digital banks is whether your money is safe or not. Because you can’t physically walk into the bank, it raises some concerns. However, some experts say that these concerns are unnecessary, as many digital banks follow the same guidelines and government regulations as the traditional brick and mortar counterparts.
Dr. Tenpao Lee, professor of economics at Niagara University, says, “Digital banks are subject to the same government regulations and FDIC as traditional banks. So, the money is safe. However, digital banks may not offer all services that traditional banks can offer, especially some personal services, such as cash transactions.”
The pros and cons of online banks
Pros of online banks
1. Easy to set up and fund – Getting money into your new digital bank is simple. Account setup usually takes no more than a few minutes and doesn’t require you to leave the comfort of your home or office. Most digital banks offer several different funding options, including debit cards, eChecks, wire transfers or check deposits (mobile or by mail).
2. Higher interest rates – Digital banks typically offer better rates on a lot of their banking products. Why? Most likely, the savings they get from not operating as massive of an infrastructure footprint gives the banks the ability to pass those savings on to you.
3. Helpful apps and technology – Instead of relying on paper statements in the mail or going into a branch to get help, digital banks create user-friendly apps and technologies. These apps give users an easy way to fund, manage and monitor accounts plus almost anything you would normally do inside a branch location.
Cons of online banks
1. Might not offer all services – Digital banks do a great job of offering as many services as possible through digital platforms. However, there are some things that still require the human touch. For example, you’re not going to be able to have a safety deposit box with a digital bank. Additionally, some digital banks focus on only a few account types and might not have all of the investment mediums you’re used to.
2. It’s new – Anytime something is new, there is a learning and acceptance curve you must adapt to. This means that you’ll need to get used to doing everything online and not being able to walk into a branch location. Ideally, once you get accustomed to the systems, the convenience will far outweigh that of a brick-and-mortar bank, but that will take a little time.
3. No face-to-face help – When people get frustrated with online banking or need unique help, branch locations where you can talk to someone face-to-face are helpful. However, you’re not going to get this through a digital bank. You will get access to customer service and phone/digital help, but you are not going to be able to walk into a branch location.
How to choose the right online bank
When shopping for the right online bank for you, several things need to be considered. First, find a bank that you trust. Make sure they are FDIC-insured, have positive reviews from existing customers and have been established in the industry for some time. The conveniences of digital banking are moot if you’re constantly worrying about the safety and security of your money.
Second, make sure the bank offers the services you need. As some digital banks are more limited in the products they offer, you may need to shop around a bit. Keep in mind, though, there is nothing wrong with using different services at different digital banks. For example, having a free checking account at one digital bank and your savings accounts or CDs at another digital bank is completely acceptable.
Additionally, if you need to cover some services at a traditional brick and mortar bank, that’s okay. There are no rules saying you have to exclusively use one or the other.