Is Digital Bank A Bank? (Complete Guide)
Banking has been around since the dawn of time, but it wasn't until 2008 in the US when a financial crisis created by dangerous banking practices nearly dismantled the entire economy. This prompted legislation to make banks more accountable for their actions and how they treat their customers.
What is a Digital Bank? Is it a bank? Is this new form of banking safe or risky? Is it just as dangerous and exposed to failure as the previous banks whose practices caused so much harm and corruption?
Digital banks are a new invention that isn't quite trusted by the public yet, while traditional banks have been around for hundreds of years and are therefore more trusted. They're also regularly audited by authorities to make sure they aren't doing anything fishy or corrupt - which means if they fail an audit, their reputation is ruined. No one trusts a corrupt bank.
What is a Digital Bank?
A digital bank is, simply put, a bank that exists once you put money into it. It has no physical branch and is run only online. It holds accounts on your behalf, transfers money between accounts, and allows users to deposit or withdraw cash from the account as needed.
Every digital bank account is the same as a traditional bank account, with a variation on how that money comes into your hands. Instead of going to a physical location to make a deposit, you do it online by transferring funds from another account or sometimes your debit card.
Instead of withdrawing cash from a physical ATM machine, you withdraw what was held in the account.
What Is A Traditional Bank?
A traditional bank is a brick-and-mortar institution with physical locations where you can make deposits or withdrawals to or from your account. You go there in person to do business with them, such as depositing cash, withdrawing cash, transferring money between accounts, etc...
To make a withdraw, you go to the bank and take money out yourself. If you want to deposit cash, you go to the bank and physically deposit it into your account.
Every traditional bank account or savings account is held by that specific bank for you, which means all transactions are done through them (withdraws/deposits) instead of with money you already have held somewhere else.
What Is The Difference?
The main difference between the two is that a traditional bank holds your money for you, while a digital bank sets up an account online and lets you access what you already have elsewhere.
A traditional bank is like having your money in a safe at home underneath your mattress (or in a bank vault). It's safe, secure, and you have everything you need immediately at hand.
A digital bank is like having a safe in your house but not being able to open it unless you have the key. If the lock breaks, there is no other option for accessing what is inside besides replacing the lock - which means finding another key for another safe at another place.
If you put your money into a traditional bank, it's there and it belongs to the bank. If you put your money into a digital bank, that money is sitting in a secure account somewhere else and this account with the digital bank is just a way of accessing it.
The big thing with a digital bank is that there's no brick-and-mortar institution to go to if you have a problem. There are also claims of companies going out of business without warning or explanation, leaving their customers unable to access their money. This lack of accountability is what makes people wary of digital banks.
The good thing about a digital bank is that they're usually slightly cheaper than traditional banks, but the bad thing is that they may not be around for you when you need them - your money isn't really theirs or safe with them.
It's like renting a safe deposit box in someone's office building instead of owning it yourself. It gives the appearance of security without actually having any of your own investment in it.
How are digital banks regulated?
Just like traditional banks, digital ones are regulated by the government to ensure that they are following all of the rules set in place.
By taking money from customers and holding it for them, digital banks fall under consumer protection laws which means they cannot do anything fishy or corrupt.
If they fail an audit their ability to operate is taken away until they resolve the issues.
Every state has a different set of rules for banks to follow, but digital ones have to go by exactly the same ones as traditional ones - just with different accommodations because of their online presence.
Digital banks must also abide by Federal laws, which means that they are under the jurisdiction of the United States.
What Is The Difference Between FDIC & NCUA Insurance?
When you put your money in a traditional bank account, it is insured by either the FDIC or NCUA up to a certain amount. This means that if something happens to that bank and they go under, your money is protected by the government up to the max limit.
If you put your money into a digital bank, it will NOT be insured at all by either of these organizations - which means if anything happens to it, you're out of luck. The safest way to protect yourself from losing what's yours is to only deal with a digital bank that has affiliations with a traditional one.
This protects your money from being lost or mishandled by the digital company itself, which should be considered before depositing anything into an online account.
Is your money safe in a digital bank?
Your money is completely safe in a digital bank, but it's not as secure as it is in your own personal account. You should read the fine print and make sure that you know what the limitations of their terms and conditions are before saying yes to anything.
Only use a digital bank if you intend on either keeping your money there for long-term use or if you won't need to access it for a long period of time.
You should also take into consideration the track record and reputation of the company that you're working with. Is their website secure? Is their information encrypted and tight?
Is there a history of other people having issues accessing their money after putting it in an account? Is the company itself trustworthy and transparent? These are all things that you should consider before trusting a digital bank with your money.
Also, you need to take extra precautions for your safety. Digital banks are becoming more and more popular with consumers around the world. Digital banks are secure and reliable or we need to be more vigilant when we transact with our money via banking transactions.
They all are digitally connected and it is possible that everything in my bank can be hacked by an outsider who may have evil plans on doing me harm. We need to follow every precautionary measure as required. In the end, it is more secure and safe to transact through digital banks for transactions or business-related dealings.
Who owns Digital Banks?
Digital banks are usually owned and operated by traditional banks, credit unions, and other financial institutions. These companies don't really need any special licensing to run these types of accounts because digital banking is essentially just a website that you send money to and then receive it from at your convenience.
Digital bank websites encrypt personal data so that only the people with a digital bank account can access it, and so that no one can take your information without a password to decrypt it. Digital banks have been verified by third-party companies as being secure from data breaches throughout their entire history of business.
Most of the digital banks are privately held or either owned by their founders or either publicly traded companies.
What banks do digital banks partner with?
Digital banks need banking partners in order to provide services like check cashing, wire transfers, and bill payments. What this means is that they do not really hold the money in their accounts but rather use a service provider or third party to do this for them.
What they offer customers is access to their accounts with these companies who are considered financial institutions with their own licenses and licenses. What this means is that they can provide these services for digital banks as well as other types of financial organizations.
When you do an online transaction, this goes through a third party such as another bank or service provider. What's more, it isn't just the customer who benefits from digital banking transactions but also those businesses that partner with a digital bank.
What this means is that they can offer their customers even more services from anywhere in the world using online or mobile channels. What's more, many of these banks have secure platforms which are used to protect customer transactions and information about them.
We have also seen some banks who have a banking license and are operating on their own to give their customer all the services.
Some of the partner banks are the Bancorp Bank, Evolve Bank & Trust, Coastal Community Bank, Metropolitan Commercial Bank, Suton Bank, and the Lincoln Savings Bank, etc.
What are the advantages of Digital Bank?
The following are the advantages of Digital Banks:
- Fast and Easy to Use
A digital bank's website is easy to use, making it a breeze for customers to carry out transactions.
- Lower fees
Like physical banks, some digital banks charge small fees for services such as ATM withdrawals and debit cards. However, most digital banks charge lower rates than traditional brick-and-mortar ones. Furthermore, many digital banks offer free checking and savings accounts, while their physical counterparts charge fees for such services.
- Unlimited options
Digital banks allow customers to access a wider range of financial products, including low-interest credit cards. This is because digital banks can partner with other financial institutions to offer credit card transactions and loans.
- Lower Interest Rates
Digital bank customers can carry out most transactions online. Because the digital bank does not have to pay for extra expenses such as staffing costs, it is able to offer customers lower interest rates on loans. Finally, due to their lower operating costs, digital banks are often able to offer higher deposit interest rates than physical ones.
- Customer Experience
The process for opening a new bank account with a traditional brick-and-mortar bank is lengthy. This problem is solved by digital banking.
- Millennials and digital natives
Digital banks tend to attract younger customers who prefer doing things online. Millennials and members of Generation Z were the first to adopt digital banking, as they grew up in a world where computers and smartphones were an everyday part of life. However, all age groups are able to benefit from digital banking.
What are the disadvantages of Digital Bank?
The following are the disadvantages of Digital Banks:
- Lack of Personal Touch
Digital banks may lack the personal touch that physical bank branches provide. The online-only virtual bank cannot answer basic questions, such as how much money is in a savings account, in person. This leaves customers with no other option than to contact digital call centers and wait on hold for hours at a time.
- Security Concerns
Digital bank accounts are not as secure as physical ones. Digital banking requires customers to rely on passwords and other electronic security measures, instead of tangible ones like locks.
- Limited Accessibility
Some digital banks only offer online services, which means they do not have physical branches for people who prefer to do their banking in person. Finally, many digital banks are only available in major cities, limiting access to customers who live in more rural areas.
Digital banks are online-only institutions that offer basic banking services. They typically charge lower fees than physical banks, but often lack the personal touch offered by their brick-and-mortar counterparts. Digital banks do not have many security concerns, however, they can be limited in terms of accessibility and convenience.