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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.
There are a number of digital banks operating overseas that plan to launch in the US in the future, including:
There are several perks of using a digital bank. Among them:
Digital banks won’t suit everyone’s tastes. Before opening an account, consider these potential pitfalls:
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.
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.
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.
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.
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:
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.
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.
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.
This eco-friendly bank plants one tree for every $60 spent. Plus, 80% of its profits go to reforestation.
Use this crypto-enabled prepaid card to spend, save or exchange in digital and traditional currencies.
A digital bank account featuring 2% cash back on purchases, 2% APY on savings and free cash deposits.
This digital bank account features cashback rewards and a built-in envelope budgeting system.
Earn up to 5% cashback and up to 2.15% APY with this high-yield checking account.
A debit card that walks, talks and acts like a credit card.
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Small business owners and freelancers wave bookkeeping goodbye with this all-in-one business bank account.
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A digital bank account made for US immigrants and the unbanked.
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