Ever since the advent of the world wide web, our everyday activities such as grocery, apparel, hardware shopping, ordering food and household services has moved to the digital realm. It’s only but natural that our finances and banking become digital as well. While many brick and motor banks provide online banking services, they still hold an on-ground presence to address the customers on a one on one basis. In the existing financial market is there an advantage in making the service entirely digital? Do digital only or online banks match up to the brick and motors one. Let’s list the pro and cons of digital-only banks to make a comprehensive conclusion.
Let’s look at the genesis and evolution of online banks. It goes back to 1990s when many brick and motor banks started provided a limited number of services only to save labour and operating costs. This led many banks to establish and improve their online presence by improving their websites to provide services such as fund transfers, the opening of accounts, processing loans and downloading forms and statements.
Post the success of online banking, as the next step of development, many digital-only banks were born. These banks offer all banking services, without any physical presence, which in turn saves a ton of operational costs which in turns gives them leverage to offer higher interest rates, lower loan and service costs.
One of the pioneers of digital-only banking space was Security First Network Bank which was established in 1995 in Atlanta and was covered by FDIC. Though the bank wasn’t a profitable entity until it was bought out three years back, it laid the foundation for the concept of digital-only banks.
Let’s further shed light on the advantages and the disadvantages of digital-only banks.
Internet banking is available around the clock, in case the banking services are not on 24/7 basis, customer service via telephone banking is available 24 hours, 365 days of the year. This opens up the opportunity for businesses and individuals to avail banking services from anywhere in the world where an Internet connection is available. Availability of real-time banking services makes life easier for the customer. This makes banking, faster, easier and better for the customers and is not constraining in terms of their location. Maintaining, updating and monitoring account becomes hassle free and quick, this is a major benefit of online banks.
Since Internet banks are free of infrastructure and overhead costs, internet banks provide better interest rates on savings accounts and offer loans at a lower interest rate. A few banks also offer high-returns checking accounts and CDs, or even no penalty CDs for early withdrawal. They also allow for some accounts to be opened with no minimum deposit or minimum balance requirements.
Most online banks have comprehensive services to make up for the lack of physical presence. Some of these features are not present in the online banking services offered by traditional banks. Services such as financial planning capabilities, investment and forecasting tools, functional budgeting, loan calculators and so on. They also offer zero charge bill payment, online tax forms and preparation services.
Most online banks extend all their services via mobile banking on smartphones, which facilitates mobility and convenience by placing all the services in the palm of a hand.
Most digital only banks do not charge fees on transfers, most of them offer unlimited transfer at zero fees, these include outgoing transfers to direct deposits or online bill payment which are outside the financial institution.
With direct banks, the human interaction is limited over the phone, this does not give you the opportunity to develop personal relationships with your bankers. Knowing the local staff at your traditional bank can bring certain benefits when it comes to applying for a loan or reversing undeserved fees or a service charge. The banker does have some discretionary powers in changing the terms of your account in the event of personal distress or change in circumstances. Also, a banker-customer relationship can be beneficial for people with a business account, as the bankers can help with the capital needed for expansion, cause they understand you and your business better than an executive over the phone.
Most direct banks do not have their own ATMs or alliance with other banks, in such cases, you will be charged for ATM usage. Also, certain complicated transactions are better done with traditional banks as there is human interaction.
Services such as brokerage and insurance accounts for business finance brokers or insurance brokers are not offered by direct banks. These services are available at the traditional banks. They also at times offer loyalty charges or free financial advice to their customers.
Also, certain administrative functions such as notarization and bank attestation are unavailable at digital only banks.
Though direct banks have to abide by the same laws as traditional banks and are protected by FDIC and use advanced encryption software for the security of your account. However they are at time susceptible to cyber attacks such as phishing, malware and hacking and in some instances identity theft.
As you can see, digital-only banks have its advantages and disadvantages, but so does traditional banks; this then becomes the matter of personal preferences and requirements. Not only banks, many financial services such as business, financial brokers, insurance brokers and Kiwisavers are all moving online. Some of the very best Kiwisaver schemes are even moving that way. It is evident that the future is online, it could be worth a while to explore this option.