What Is A Digital Bank: Digital Banking Overview, Benefits & Types (2024)

Financial accessibility empowers every individual. With digitization, we have the ability to cover the gap in the last mile. This is the underlying principle behind digital banking. To understand what digital banking is and how it fills a much needed gap in financial accessibility and inclusion let’s go a little deeper, beginning from the basics.

In modern-day or yesteryears, banking has been at the core of every economic activity. Internet penetration made banking easier, however, there was still a lag with limited services at hands-reach.

Digital banking brings all banking services under its umbrella through a digital platform of choice, operational 24/7.

Digital banking has removed the accessibility barrier and is seeing rapid adoption, higher than online banking, owing to its distinct features. Due to its wide coverage of services, digital banking has emerged as a first choice for consumers today. As perIpsos-Forbes Advisor US Weekly Consumer Confidence Survey, 3 in 4 Americans, which accounts for 76%, have used their bank’s application on mobile for common banking tasks like account balance checks and cheque deposits.

This brings us to the question– how digital banking and online banking differ. There is a marked difference between the two— from security features to technology and coverage, they present different banking opportunities.

Digital Banking Vs Online Banking

Digital Banking: It brings all the traditional banking services which can be performed at the physical premises to the customer’s digital device. It covers cashless digital activities like:

  1. Funds transfer
  2. Deposits
  3. Withdrawals
  4. Account balance checks
  5. Bill payments
  6. Investments linked to account checks

Digital banking offers an ecosystem for experiencing seamless banking services with speed, accuracy, and ease. It draws upon different technologies to provide services over several interfaces.

Online Banking:This form of banking refers to using the internet to access your account and carry out essential financial transactions. It is a subset of digital banking which makes use of different technologies to support varying devices and interfaces. This gives power to individuals to perform core functions without visiting the bank.

Types of Digital Banks

There is no doubt that digital banking offers unparalleled advantages to customers. With the growing popularity of digital banks, various kinds of digital banks have come into being. Let’s look at some of the most popular ones making waves today.

  1. Neobank

Neobanks are full-fledged digital banks operating in an entirely digital fashion without any physical infrastructure. They use online platforms such as a website or a phone application to reach out to their customers. With a specialized bouquet of services, they are a class apart from traditional banks, prioritizing convenience and accessibility with niche products in select markets.

Mostly run by fintech entities, Neobanks may tie up with traditional banks to offer some banking products or provide assurance to customers. The focus is entirely on customers and experience, utilizing novel technologies to enhance the interface and thereby the banking experience.

What Is A Digital Bank: Digital Banking Overview, Benefits & Types (1)
  1. Challenger Banks

Challenger banks also operate in the same fashion as Neobanks, albeit with a difference. They also have a physical presence apart from their Neobank-like avatar. Due to the fact that they hold a banking license unlike Neobanks, Challenger banks can offer a wider range of services.

  1. New Banks

These are licensed Neobanks that can offer a full range of services akin to a traditional bank. They operate online- only and do not have a physical presence. Examples include Monzo, Revolut, and Starling Bank, among others.

Types of Digital Banking Payments

Mobile applications:Mobile phone applications are used for accessing banking services.

Online electronic payment: Electronics transactions including transfers, deposits, echecks, or wires.

Mobile wallets:Also known as digital wallets and e-wallets. Apple Pay, and Google Pay, among others are the popular mobile wallets.

Contactless Payments:These include payments made using near-field communication (NFC) technology using debit and credit cards or digital wallets.

Cryptocurrency:Perhaps one of the most talked about, they are based on distributed ledger technology to enable secure digital transactions.

Benefits of Digital Banking

The new-age digital banks offer many advantages of modern banking. Let’s look at their key benefits.

  1. Ease of onboarding customers

Today’s digital identification tools and technologies have given the paperless and cashless economy a readymade solution for vetting the identities of individuals. Selfies, proof of address and identity can be uploaded in a jiffy with a smartphone.

  1. 24/7 access

Digital has given the power to banks to facilitate banking services 24/7. Digital banks, unlike traditional banks, do not have in place restrictions like operation hours. With a few swipes, users can carry out financial transactions at any hour of the day.

  1. Cost savings

Digital banks can save on the costs as the need for physical premises is not there and digital transactions mean a high level of automation and technology- heavy application. This also helps digital banks to pass on some savings to customers or improve their overall service delivery.

  1. Security

Since the reliance on technology is, to a very large extent, digital banks put in place several advanced security features to prevent fraud and misuse. malpractices. They rely on identity verification techniques such as:

  1. Facial Recognition
  2. Fingerprint scan
  3. Voice Recognition

Data and user information security is an important aspect and digital banks are quick to adopt stringent security practices.

  1. Agility

The independent and decentralized structure of digital banks allows them to be more flexible in performing various functions like introducing new services and initiatives.

Disadvantages Of Digital Banking

  1. No bank charter

Digital banks do not have a bank charter but tie-up with traditional banks to insure their products. This, in some cases, does not inspire customer trust.

  1. No human interface

Digital banks do not have a physical presence hence they cannot provide in-person assistance if needed.

  1. Few transaction options

Digital banks offer limited banking services and have less flexibility than traditional banks like no proprietary ATM, and only cashless transactions, among others.

What Is The Future Of Digital Banking?

More and more people are today inclined towards digital banking due to the ease, convenience, and simplicity of digital banks. Moreover, the customer- centric approach and personalized services are major pull factors for digital banks. The supporting government and regulatory policies have also acted as a catalyst for digital banks to play a pivotal role in the cashless economy.

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Conclusion

Digital banks providingidentity verification servicespromise to overcome the shortcomings of the traditional banking system. The rapid adoption by consumers shows that digital banks are here to stay, along with their traditional counterparts. And it is a good thing for consumers, who are able to enjoy the digital banking conveniences afforded by technology.

FAQs

Are digital banks better than traditional banks?

Both have their advantages and disadvantages. A customer can choose either or both as per need.

Can I have an account in both, digital and traditional bank?

Yes, the regulations do not restrict an individual to have more than one bank account.

Is digital banking secure?

Yes, digital banking transactions are mostly secure. Different digital banks may deploy different technologies for various banking services.

I am an expert and enthusiast assistant. I have access to a wide range of information and can provide insights on various topics. I can help answer questions, provide explanations, and engage in discussions on different subjects.

Regarding the concepts mentioned in this article, let's discuss them in detail:

Financial Accessibility and Inclusion

Financial accessibility refers to the ability of individuals to access and use financial services. It is important for empowering individuals and promoting economic growth. Inclusion, on the other hand, refers to ensuring that all individuals, regardless of their background or circumstances, have equal access to financial services.

Digital Banking

Digital banking is a concept that aims to bridge the gap in financial accessibility by bringing all banking services under a digital platform. It allows individuals to perform various banking activities through digital devices, such as smartphones or computers, without the need to visit physical bank branches. Digital banking operates 24/7 and offers a wide range of services, including funds transfer, deposits, withdrawals, account balance checks, bill payments, and investments linked to account checks.

Digital Banking vs. Online Banking

While digital banking and online banking are related concepts, there are some differences between the two. Digital banking encompasses all traditional banking services that can be performed digitally, while online banking specifically refers to using the internet to access and carry out financial transactions. Digital banking offers a more comprehensive ecosystem for seamless banking services, utilizing different technologies and interfaces.

Types of Digital Banks

Digital banking has given rise to various types of digital banks. Some of the most popular ones include:

  1. Neobanks: These are fully digital banks that operate without any physical infrastructure. They prioritize convenience and accessibility, often offering niche products in select markets. Neobanks may partner with traditional banks to provide certain banking products.

  2. Challenger Banks: Similar to neobanks, challenger banks operate digitally but also have a physical presence. They hold a banking license, allowing them to offer a wider range of services compared to neobanks.

  3. New Banks: These are licensed neobanks that can offer a full range of services similar to traditional banks. They operate exclusively online and do not have a physical presence.

Types of Digital Banking Payments

Digital banking offers various payment options, including:

  1. Mobile Applications: Banking services can be accessed through mobile phone applications.

  2. Online Electronic Payment: This includes electronic transactions such as transfers, deposits, e-checks, or wires.

  3. Mobile Wallets: Also known as digital wallets or e-wallets, these allow users to store payment information and make transactions using their mobile devices. Examples include Apple Pay and Google Pay.

  4. Contactless Payments: These involve making payments using near-field communication (NFC) technology, using debit and credit cards or digital wallets.

  5. Cryptocurrency: Cryptocurrencies, such as Bitcoin, are digital currencies that use distributed ledger technology to enable secure digital transactions.

Benefits of Digital Banking

Digital banking offers several advantages, including:

  1. Ease of Onboarding Customers: Digital identification tools and technologies make it easier for individuals to open accounts and verify their identities without the need for physical paperwork.

  2. 24/7 Access: Digital banks operate round the clock, allowing users to carry out financial transactions at any time.

  3. Cost Savings: Digital banks can save on costs by eliminating the need for physical premises and relying on automation and technology for transactions.

  4. Security: Digital banks implement advanced security features, such as facial recognition, fingerprint scans, and voice recognition, to prevent fraud and ensure the security of user information.

  5. Agility: The decentralized structure of digital banks allows them to be more flexible in introducing new services and initiatives.

Disadvantages of Digital Banking

While digital banking offers many benefits, there are also some disadvantages to consider:

  1. No Bank Charter: Digital banks do not have a bank charter and often rely on partnerships with traditional banks to insure their products, which may affect customer trust in some cases.

  2. No Human Interface: Digital banks lack a physical presence, which means they cannot provide in-person assistance if needed.

  3. Fewer Transaction Options: Digital banks may offer limited banking services and have less flexibility compared to traditional banks, such as the absence of proprietary ATMs and limited transaction options.

The Future of Digital Banking

Digital banking is gaining popularity due to its ease, convenience, and personalized services. With supporting government and regulatory policies, digital banks are expected to play a pivotal role in the cashless economy. However, both digital banks and traditional banks have their advantages and will likely coexist to meet the diverse needs of customers.

In conclusion, digital banks are revolutionizing the banking industry by providing convenient and accessible financial services. They offer a wide range of benefits, including ease of onboarding, 24/7 access, cost savings, security, and agility. However, it's important to consider the disadvantages and limitations of digital banking as well. The future of digital banking looks promising, with increasing adoption and advancements in technology.

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What Is A Digital Bank: Digital Banking Overview, Benefits & Types (2024)
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