Can digital-only banks save you money? It can, but know the risks too
Posted on 02.05.2023 at 19:30
With the use of digital-only lenders or Neobanks ramping up worldwide, does this mean such banks will outgrow traditional banks in the future?
Dubai: When looking for a bank to handle your finances, you now have more choices on the type of institution you want. Do you prefer a bank with physical branches and its own automated teller machines (ATMs) or an online-only alternative that improves your experience with mobile banking?
“The last few years have seen both savers and borrowers being offered some great features and benefits in both the traditional banking industry and their online-only competitors,” explained Anil Pillai, a UAE-based banking industry analyst.
“For example, most banks now offer some kind of mobile cheque deposit using your smartphone or computer. In the case of online-only banks, this will be the primary way you get money into your online-only bank accounts after the usual direct deposits and electronic fund transfers.”
WHAT IS AN ONLINE-ONLY OR DIGITAL-ONLY BANKS?
With an online-only bank, all banking tasks are handled online via the bank website or app. It does not have a physical or ‘brick and mortar’ infrastructure. Some banks are purely app-based, so account management is handled primarily through their mobile apps.
However, if you’re considering making the switch to online-only banks, ensure you factor in not just the perks, but also the risks when making use of this increasingly popular avenue to manage your money. Let’s look into these aspects in detail.
Digital-only banks offer some benefits that brick-and-mortar banks do not.
Choose online-only banks over traditional banks?
Digital-only banks offer some benefits that brick-and-mortar banks do not. That’s particularly true if you’re someone who does not want the hassle of going into a bank’s branch whenever you need an in-person service.
“With online-only banking, you may get a significantly better interest rate for your savings. Moreover, most online banks demand low or no minimum deposits to open accounts,” explained Jose Paul, an Abu Dhabi-based banker with over two decades in the field.
“There are perks to using brick-and-mortar banks too, primarily because accountholders have access to personal service on demand at convenient storefront branches. Also, depositing cash is much easier. However, brick-and-mortar banks now have apps as well, so they’re getting better.”
With online-only banking, you may get a significantly better interest rate for your savings. Moreover, most online banks demand low or no minimum deposits to open accounts – Jose Paul
How a digital-only bank can save you money
- Lower and fewer fees
A digital-only bank has lower overhead (ongoing or periodical costs to run a business) than a brick-and-mortar institution does. “Lower overhead for digital-only banks make it possible to save money by paying less in fees — or, in the case of some digital-only banks, no fees,” added Pillai.
“In short, digital-only banks run a lean operation. You’re less likely to face fees including those associated with keeping an account open with a low balance, making direct deposits, or paying by checque or debit card. Accounts are more likely to carry no minimum balance or service fees.”
- Higher interest rates
One of the main selling points of online banks is that they tend to offer better rates and higher yields on your deposits.
“Low overhead allows online banks to pass along the savings or special promotions to the customer in the form of higher returns i.e. annual percentage yields (APYs) on savings accounts and some interest-earning savings accounts,” Paul added.
ARE DIGITAL BANKS DIFFERENT FROM DIGITAL-ONLY BANKS OR ‘NEOBANKS’?
Even though both digital-only banks (also referred to as Neobanks) and digital banks offer a similar range of services, they are two separate financial institutions.
While Neobanks or digital-only banks only operate online and have no physical locations, digital banks essentially support conventional banks that lack an internet presence by providing suitable digital services and often operate as a digital banking arm of such traditional banking businesses.
Other risks with using digital-only banks?
“Since digital-only banks most often times lack their own banking machines, online banks rely on having customers use one or more ATM networks that they are associated with. If that’s the case, it would depend on whether or not a bank-linked ATM is available near you,” added Paul.
“Check, too, for any fees you may rack up for ATM use. While many banks may offer free access to network ATMs or will refund any monthly charges you incur, there are sometimes limits on the number of free ATM transactions you can make in a given month.”
Moreover, Paul and Pillai further agreed that some banks may not offer all the comprehensive financial services that traditional banks offer, such as insurance and brokerage accounts. Moreover, traditional banks often offer special services to loyal customers, such as preferred rates and investment advice at no extra charge.
One of the main selling points of online banks is that they tend to offer better rates and higher yields on your deposits.
Bottomline?
Traditional and online-only banks both have their advantages. Basically, you have to decide whether a brick-and-mortar institution’s services and personal touch outweigh the often higher costs, in terms of lower interest rates and more numerous fees, of banking there.
Ideally, as you shop for a digital-only bank, you’ll make it a point to compare its banking fees to those of your current financial institution. Avoiding fees means more money to build an emergency fund, pay off debt, or invest in your future.
Meanwhile, with the use of digital-only lenders or Neobanks ramping up worldwide, does this mean such banks will outgrow traditional banks in the future? Not necessarily, but a hybrid of both the trending category of banking and the traditional type looks more likely.
“Industry experts don’t see the future of banking as ‘digital or brick-and-mortar’,” added Pillai. “Instead they view the bank of the future as one that combines the best of digital banking with the best of in-person banking to seamlessly meet customers in their channel of choice.”
