Fintech

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September 2, 2022

Digital Banking Definition, Benefits, & Types

Digital Banking enables customers to access banking services via an online mode. Click here for detailed information on digital banking's meaning, advantages & types!

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 per Ipsos-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. 

(Source: Data- RBI, Image- Jefferies)
  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. 

          

(Source: Statista)

Conclusion 

Digital banks promise 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

  1. Are digital banks better than traditional banks?

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

  1. 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.

  1. Is digital banking secure?

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

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