What is Digital Banking? Our Guide to the Future of Financial Services
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Digital banking is the natural development of financial services and banking in a digital world. As more services adopt digital infrastructure for the majority of their operations, customers begin to expect digital services from new products.
Food delivery companies benefited hugely from simplistic interfaces and well-connected delivery services, fitness subscription apps eliminated the admin of joining gyms, and being able to sift through endless music libraries has changed the way we listen to music.
Banking is no different. Digital infrastructure revealed that banking could adapt to the needs of small business owners, families, individuals, investors, and others who wanted more from their banks. Because of this, expectations changed.
In this post on what is digital banking, we’ll go through the whole concept: what it is, how it began, what are its benefits, and what you get when banking with Penta.
What is digital banking in a nutshell
- Digital banking contrasts with traditional banking by eliminating paperwork, in person branch visits, and lengthy sign-up periods
- Digital banking as a concept began in the 1960s with ATMs and credit cards, achieving the status we know today in the 1990s and 2000s as online transactions became more commonplace
- Digital banking encompasses both mobile banking and online banking: the former refers to banking services performed on a mobile device, the latter refers to banking services provided by the internet
- Customers enjoy better customer service, faster operations, and simple interfaces with digital banking
- Banks enjoy advanced technologies, broader customer acquisition, and cheaper operations
- Within digital banking, there are nonbanks, neobanks, and challenger banks
- Penta is a financial service focusing on small businesses and entrepreneurs
What is digital banking?
It’s easiest to understand digital banking by contrasting it with the requirements of traditional banks.
In traditional banking, customers have to go through red tape (bureaucracy) to establish and maintain their banking account:
- Paperwork (filling out forms to provide personal information)
- In person visits to bank branches (for any specialised banking services)
- Pay slips
Digital banking removes the need for all of this. Instead of forms and branch visits, customers use their smartphones and other devices to handle everything. Establishing your identity to open an account can be done via video call and requires only a passport, 24/7 customer services is available on chat features, and the vast majority of services are provided within the apps.
What are digital banks?
A digital bank is a licensed bank that offers online services to its customers once only available from traditional banks.
Not to be confused with neobanks, digital banks can also operate with a physical branch should customers need to visit. Neobanks on the other hand have no physical branches and operate entirely with online services.
Digital banking, online banking, or mobile banking?
These three terms often get thrown around seemingly interchangeably when referring to digital banking services. They do however have important distinctions between them. Using them correctly will help to clarify digital banking further.
Mobile banking refers to the act of making payments from your mobile phone or device. What kind of activity depends on the financial service provider being used. It may be the ability to move money between different accounts, paying client invoices, or receiving information about potentially fraudulent activity on your account. Customer service chat features and ATM finders also fall under the mobile banking umbrella.
Referring specifically to banking services possible via the internet, online banking includes services provided on both computer and mobile devices. So while mobile banking is done on apps, users may visit websites which don’t have an app and still conduct transactions to purchase products or services. This is online banking, rather than mobile banking.
Digital banking simply encompasses both of the above terms. Anything that can be done via mobile or computer, online or offline, falls under the term digital banking. This is why ATMs and card payments were considered the beginning of digital banking: they utilise digital technology, not just internet technology.
Online banking + mobile banking = digital banking
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What are the benefits of digital banking
Digital banking provides huge benefits for both customers and banking service providers. The pandemic forced a total overhaul of financial options for customers and business owners, many of which were revealed to be mutually beneficial for buyer and seller.
Customers enjoy convenience, versatility, and safety with digital banking. Some of the major benefits include:
- 24/7 customer service: without having to keep a branch open all night to field potential inquiries, digital banking leverages shift work and hires globally to provide customer service all the time. Since digital banks are often globally-minded, customer inquiries come in all the time and representatives are there to receive them
- Simple interface: where traditional banking keeps its features managed by representatives working at the branches, digital banking lays out these features in apps. Customers can access all of what their financial service provider offers and it is made as clear as possible simply when opening the app. This gives customers more control over their finances with no prior knowledge required
- Speed of operations: perhaps the most convenient feature of all, digital banking speeds up everything the customer does. Eliminating the red red tape and need to visit physical branches means things that possibly took weeks, with sending letters and meeting approval of various representatives, can be done instantly. Think of how much quicker paying friends for dinner has become, thanks to financial service and banking apps
Banks are not forced to provide customers digital services at the cost of their own businesses. The benefits go both ways. For instance, via digital infrastructures banks can benefit from:
- Broader customer base: digital banks have more reach. With no need to force customers to come into their branches, they can reach customer bases who don’t live within reach of a branch. This also means banks can conduct much cheaper customer acquisition campaigns, instead of the costly decision to build and operate branches in more remote areas
- Cost effective operations: reducing the need for physical branches means cutting out rental costs of hundreds of branches and instead paying for one or more offices; it means cheaper marketing campaigns and faster acquisitions; it means fewer licensing fees and other government costs that come with owning and operating physical branches. Digital banking is the vastly more cost effective option for businesses
- New technologies: fintech is at the forefront of new and developing digital technology. Because there is a demand for more financial services and breakthrough developments in decentralised finance technologies, fintech apps and companies are some of the first to adopt these and benefit from their powerful new features. Customers love to try new things, and digital banking services can advertise these opportunities
Types of digital banks
Just like the different kinds of banking you can do with digital services, there are different types of digital banks. Distinguishing between each means knowing what to expect when choosing the right bank for you or your business.
As mentioned, neobanks differ from digital banks because they only offer their services as an online bank. They have no physical branches which customers can visit. They may have offices, but these are for daily business operations.
Neobanks are also licensed by the government to run as banks, as opposed to financial service providers backed by larger banks.
‘Challenger bank’ is a term used to refer to banks that challenge traditional financial and banking models. The term originated in the UK and was used in opposition to ‘Highstreet banks’ like HSBC, Barclays, Lloyds Banking Group, and NatWest, aka The Big Four.
Opposing challenger banks seek to solve problems presented by traditional banks. Faster response time, less paperwork, and better customer service are just a few of the aspects of challenger banks that earned them the moniker.
Nonbank banks provide financial services but they aren’t licenced as banks under the legal requirements of the government in that region. Usually the case is that they do not offer both lending and depositing services. Nonbanks may offer credit cards but they cannot include deposits as part of that offer.
In Germany, the organisation responsible for handing out banking licences is the Bundesanstalt für Finanzdienstleistungsaufsicht or BaFin. The European Central Bank (ECB) is then responsible for approving crediting and lending services, thus legitimising a nonbank as a bank. Once a nonbank meets the requirements to function as a bank, they must submit their request in writing to these authorities.
Digital banking with Penta
Penta functions as a financial service provider backed by a fully functional bank with a focus on small business owners and entrepreneurs. We offer team cards with adjustable spending limits, flexible loans for startups, and accounting software integration to help balance your books with ease.
As a financial service provider, we are backed by SolarisBank AG. A financial institution with their own banking licence, SolarisBank allows Penta to accept deposits up to a maximum of €100,000, in accordance with the EU standard for banking institutions.
Digital banks are the future of banking in the same way that digital technology is the future of technology. It is the way in which customers are preferring to navigate financial waters and how businesses are preferring to chart their paths to success.
The rise in digital banking adoption demonstrates that financial institutions are ripe for change and digital banking is the way to provide those changes. Hopefully this post on what is digital banking has shed some light on the ways in which banking has changed, and will continue to change in the future.
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Digital banking: Frequently asked questions
The earliest iterations of digital banking came in the 1960s with ATMs and payment cards. By using digitised currency in users’ accounts, transactions and obtaining cash became more widespread and convenient. Adoption of the internet in the 1980s and 90s saw online catalogues and payment methods, giving birth to the term ecommerce and creating a landscape which reflects the one we know today as digital banking.
Since then, smartphones and handheld devices, along with app technology through the 2010s, have vastly accelerated and normalised digital banking. Statista shows that in Europe, 50% of Germans use digital banking services and Norway currently leads in adoption of the trend with 96% of Norwegians regularly conducting transactions online.
Digital banking is important mainly for two reasons: widespread adoption and change to the traditional finance model.
As more users adopt digital banking as their primary mode of finance management, more features are developed and added to the technology, creating more possibilities for users and their finances.
Shifting away from traditional finance models (i.e. branch visits and paperwork), we witness a changing landscape not only for finance but for technology in general.
Digital banking works by using app technology for the majority of its services and features. In order to eliminate the need for physical branches, digital banks must include on their apps all of the things customers might need. Anything else must then be handled by 24/7 customer service teams easily accessible by the user.
Digital banking also removes the majority of paperwork required by traditional banks, via digital authentication methods and acceptance of terms and conditions from the user. Digital banks also use high end security to protect the identities and data of its users.
The impact of digitalisation in general on the economy is massive and ongoing. The same can be said even for digital banking, as it is a hugely revolutionary technology and a total reconsideration of the way finance has worked in the past.
One way in which digital banking impacts the economy is by providing the opportunity for many more businesses to compete in the market. Accessible financial services geared towards small business owners means more entrepreneurs entering the market, developing new products and offering new services. This strengths the freelance economy and creates more competition among small businesses.
Digital banks cannot rely on the same security methods as traditional banks, such as security guards and vaults in which customers’ money is stored. Instead digital banks rely on identification procedures and passwords for customers to keep their funds safe.
Penta’s security includes biometric logins, device binding, 3D-Secure technology, and push notifications to keep track of purchases in real-time. These methods ensure customers are fully up-to-date on all purchases being made from their accounts and that they are the authentic user of their accounts.
Depending on the provider, digital banks make money in a few different ways. They take a small cut on transactions, charge customers for accounts subscriptions and for certain services, while also generating interest on customers’ money.
Digital banks also save money by not having to rent out branches, hire tellers, or pay for security guards and vaults to hold physical money. The labour required to run a digital bank is far less than a traditional bank, because so much of it is managed by computers.