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Like many other parts of our lives, banking is becoming increasingly digital. The US has a number of new digital banks, also called neobanks, promising to revolutionize the financial industry through the use of world-class technology and digital services. But are they worth the hype? Learn about what makes them different and if they’re a right option for you.
Like the name suggests, a digital bank operates digitally, usually from an app, rather than from a physical branch or office. A digital bank is a fairly loose term — the correct industry name for these banks is a neobank.
A neobank is a completely digital bank that doesn’t use any existing legacy systems to operate. This means the bank doesn’t use any physical infrastructure or digital operating systems that are already being used by existing financial institutions. The technology used by these fully digital banks is developed from scratch.
What other digital banks have launched in the US?
There are a number of digital banks operating overseas that plan to launch in the US in the future, including:
- N26. This German challenger bank lets you divide your money up into Spaces, or subaccounts, to help you budget and save. N26 launched in the US in July 2019.
- Revolut. This UK-based bank was created with travelers in mind, offering low fees for international purchases, withdrawals and money transfers.Revolut launched in the US in March 2020.
- Glint.This UK-based banks brings an old concept into the digital age. Glint lets you store your money as gold so that it’s less vulnerable to the economic factors than can impact a country’s currency. US customers can already use the app to buy gold, but Glint plans to launch a debit card that allows you to spend your gold or exchange it for US currency at an ATM in the near future.
What are the benefits of a digital bank?
There are several perks of using a digital bank. Among them:
- They understand your habits. Digital banking apps have spending analysis features that evaluate where your cash is going. Look for automatic spending categorization, notifications, alerts and monthly reports.
- You can sync them with your budget. Use the spending analysis to set up budgets and track progress. The app may allow you to set goals and spend limits to make veering off course more difficult.
- Traveling perks. Some digital banks can make traveling easier by holding multiple currencies at once, skipping international ATM or foreign currency fees and locking or unlocking your card if it gets lost or stolen.
- Automated savings. Some digital banks prioritize stashing cash away. For instance, rounding transactions to the nearest dollar and sending the difference to your savings account.
What are the drawbacks of a digital bank?
Digital banks won’t suit everyone’s tastes. Before opening an account, consider these potential pitfalls:
- No in-person help. If you’re looking to navigate a complex financial plan with the aid of a professional, you might want to stick with a more traditional setup.
- Smaller product offerings. While industry giants also offer loans, mortgages and investment accounts, digital banks tend to specialize in checking and savings.
- Compatibility may be limited. Make sure your smartphone can handle whichever digital bank you choose — not all operating systems may be supported.
- Technical reliance. Technical difficulties could derail your ability to access and manage personal finances, which might present too big a risk for some.
What’s the difference between a digital bank and a traditional bank that’s available online?
Many banks in the US appear to be digital banks — they don’t have branches and customers use mobile banking apps to control their money. However, just because a bank doesn’t have branches and offers a range of digital products and platforms doesn’t mean it’s a digital bank or a neobank. These online-only banks are built on existing infrastructure and closely mimic traditional banks, but true digital banks utilize new technology to create innovative banking solutions.
Must read: A bank offering Apple Pay isn’t necessarily a digital bank.
Many banks offer contactless payments via digital wallets like Apple Pay, Google Pay and Samsung Pay, but offering a digital feature doesn’t make them digital banks.
Similarly, if a bank offers a top-notch mobile banking app, Internet banking services, cardless cash facilities and digital savings tools, this doesn’t automatically mean it’s a digital bank either. Remember, a 100% digital neobank is one that doesn’t use any existing banking systems or infrastructure.
Online banks aren’t 100% digital banks
Many people refer to American Express and Discover as digital banks because they don’t have any physical branches. However, these banks aren’t neobanks because they rely on existing banking infrastructure and operate like a traditional bank.
Digital banks need to have the same banking licenses and approvals as existing US banks before they’re able to offer products and services to consumers. These new banks will be regulated by the Federal Deposit Insurance Corporation (FDIC) and the US Securities and Exchange Commission (SEC) in the same way that existing banks are regulated.
Your deposit of up to $250,000 with an FDIC-insured bank is protected by the US government. This means if something were to happen to the bank, your money (up to this amount) would be safe. Note that some of the digital banks mentioned in this guide are not yet considered banks and haven’t yet been licensed or FDIC-insured.
How do I sign up for a digital bank?
The sign-up process varies between providers. You can generally start by downloading the provider’s app to your smartphone. Then, verify your identity by providing an ID such as your driver’s license or passport. You’ll also need to send personal details such as name, address and contact information. Some apps will send you a physical card, while others allow you to start spending instantly with a virtual debit card.
For new digital banks, you may need to join their waitlist by visiting their website. Once their product launches they’ll send an announcement to those on the waitlist first.
What is app-based banking?
App-based banking is any sort of financial institution or tool that you control primarily through an app. There are several advantages to app-based banking:
- Banking access in your pocket
- Many companies offer 24/7 access to banking support
- Instant spending notifications
- Many banking apps offer ways to automatically save money
Things to know about app-based banking
Using your phone as your main point of contact with your bank can save you time and give you more control over your finances, but there are a few things to be aware of.
What are the different types of app-based banking?
App-based banking encompasses a lot of different financial products, including:
Digital banks. Digital banks rely on new, innovative technology and are generally app-based.
- Traditional bank apps. App-based banking doesn’t only apply to neobanks, it’s also becoming increasingly possible to bank on your smartphone with traditional banks such as Chase and Bank of America, both of whom have highly-rated mobile apps where you can control your money.
- Apps that help you save. One of the most common reasons for people heading away from traditional banks and towards app-based banking is how easy app-based banking makes it for people to save money. This includes everything from budgeting apps like Cleo to cashback apps like Ibotta.
- Prepaid card apps. Companies like NetSpend let you control a prepaid debit card from an app so you can track your transactions and see exactly how much money you have left.
- Investment apps. Apps like Robinhood and Acorns let you invest in stocks from your phone so that you have more control over your finances.
Digital banks are getting a lot of hype right now, and for good reason. They often cater to specific niches and groups and they’re known for offering innovative apps. But before you ditch your current bank, take the time to read through all of the fine print to make sure the bank you’re interested in is as good as it sounds.
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