Digital vs Traditional Banking

Welcome back! Figuring out where to open a bank account can be a bit overwhelming. There are over 5400 FDIC insured banks and 5,300 insured credit unions in the United States. Any way you slice it, there are a ton of options! Luckily for you, we’re here to help you start narrowing down that list by talking a bit about the difference between digital and traditional banks.

A digital bank (AKA direct bank, internet bank, virtual bank, etc, etc) is a bank that offers traditional banking accounts and services without having physical branch locations or branded (owned) ATMs. Digital banks became popular with the rise of the internet in the early 90s and are not showing any sign of slowing. A recent report by Research & Markets shows that one in three consumers world wide indicated a willingness to transfer their primary banking to an all-digital provider.

Here are a few examples of digital banking companies. This list is not provided as an endorsement and I do not benefit in any way from providing this information.

• CIT Bank
• Discover Bank
• Ally Bank
• E-Trade Bank
• Capital One 360
• CIBC Bank USA
• Axos Bank
• Simple Bank
• Chime Bank
• nbkc Bank

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Now that we know a bit more about what digital banks are, let’s talk about why you might want to use one.

• First and foremost, digital banks tend to have lower fees and offer better interest rates. This is mostly because they don’t have a network of branches to maintain (which can get costly!), but also partly due to the competition they face from traditional banks. If they are going to persuade traditional banking customers to switch, they need offer an incentive!
• The online/mobile experience for digital banks is typically better than traditional banks. Given that the primary interaction you are going to have is via your computer or (more than likely) your phone, digital banks invest in making sure that you have all the bells and whistles you need to bank without a branch. You should expect the option to deposit checks via the mobile app, online bill pay and internal (checking to savings) and external (checking at Bank A to checking at Bank B) account transfers to be standard. Budget tracking, savings goal setting and expense monitoring are additional services that may be offered.
• All Digital banks are trendy! Remember that report from Research & Market? They say that digital savvy Millennials and Generation X’ers are the most at risk for making the switch to a digital bank. From wanting to give “big banking” the finger to supporting a more environmentally friendly banking alternative (as digital banks tend to be), there are a number of value-based reasons why people choose digital banks.
• Consumers rate their customer experience higher with digital banks than they do with traditional banks. Digital banks are in a better position to be agile and respond to customer’s needs and wants quickly. What they lack in physical presence, they make up for in multi-channel service, whether it be by phone, email, secure chat, or social media.
• Finally, being part of a digital bank can give customer’s a sense of belonging to a (relatively) small community. Digital banks may be better positioned to focus on fostering a sense of belonging with their customer through the use of relational marketing, supported specifically by their interaction with customers via social media.

Banking with a digital only bank sounds great, doesn’t it? Low to no fees, awesome technology, better customer service, being part of the in-crowd and sharing in an inclusive community. What’s not to like?

I’m sure you saw this coming, right? I mean, if digital banks were 100% awesome, why isn’t everyone using them?

• Lower fees and higher interest come at a price. Not having a branch or dedicated ATMs to visit may not seem like a big deal at first, but for me this is a deal breaker. Having a local branch/ATMs nearby is just too darn convenient, and some times absolutely necessary.
  • Unless your digital bank has a partner network or offers fee rebates, you’re going to be paying a surcharge to use another bank’s/provider’s ATM.
  • Depositing cash is next to impossible without a branch or branded ATM.
  • If your debit card is lost or stolen, and you don’t have another account to transfer funds to, you won’t be able to access the funds in your account for everyday purchases.
  • Traditional banks offer many in-branch services that digital banks just can’t offer: currency conversion, coin depositing, and notary services, to name a few.
• In response to the competition from digital banks, traditional banks have stepped up their technology game. Most national and many regional traditional banks are rolling out online and mobile banking experiences that rival those of digital banks.
• People tend to trust traditional banks more than digital banking, despite the fact that the customer experience and rate of return are higher for digital banks:

I know there’s a lot of information to think about, but I assure you that it’s worth it. Sit down and list out how the pros and cons impact you. There isn’t a one size fits all answer. Does your employer offer direct deposit or do you get paid in cash or by check? Do you need to have an account with the latest and greatest startup fintech company? Or would you prefer the option to meet face to face with the bank managing your money?

Thanks for joining me today! If you have any questions, feel free to comment on this post and I’ll get back to you as soon as I can. Next time, we’ll be talking about credit unions vs banks.