Industry insights

The rise of digital banking: How it’s changing the financial landscape

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Demand is a catalyst that drives change. In 2022, a Forbes Advisor survey revealed that 78% of Americans prefer to bank via a mobile app or website. Statista predicts that digital banking customers in the U.S. will reach 217 million by 2025. Based on those numbers, it’s no surprise that digital banking platforms are on the rise.

What you need to know

  • The main difference between traditional banks and digital banking platforms is that traditional banks rely heavily on brick-and-mortar locations.
  • One of the biggest benefits of digital banking is that you have easy access to your account and can manage money from your phone.
  • Digital banking platforms also come with lower or fewer fees because they don’t have the overhead of physical bank branches.

What are digital banking services?

Digital banking apps differ from brick-and-mortar banks in several ways. Online financial services don’t have the overhead that comes with owning, leasing, or maintaining a building. That’s one of the reasons online-only services can offer checking and savings accounts with no monthly fees. Many also provide other services like credit cards and CDs.

Technological advancements have also made banking online faster and more secure in recent years. ACH transfers can happen in minutes rather than days. Wire transfers are cheaper and easier for account holders. Direct deposits often clear a day or two ahead of traditional banks.

Small business owners can benefit from fintech banking services like business checking accounts and business loans. To reduce risk, some fintech platforms are part of sweep networks that increase FDIC insurance coverage. You’ll also get to enjoy simplified online bill pay. If you’re thinking about an online banking solution for your business, be sure to do your research to find a reputable company with the features you’re looking for.

The evolution of digital banking

Online banking platforms have been around for over three decades. According to Coin Telegraph, Stanford Federal Credit Union became the first to introduce an online option in 1994, followed by Wells Fargo in 1996. Early iterations from traditional banks made online bill pay popular. Following this trend, fintech companies—sometimes known as neo-banks or challenger banks—quickly began to form.

The first mobile banking app was introduced in 2007 by USAA Federal Savings Bank. Most banks offer apps today, but it’s important to differentiate between traditional banks/credit unions and financial technology companies that operate exclusively online. Digital financial services are typically more streamlined and faster, which can be an advantage for small businesses.

Today, there are over 350 global providers of online banking services. Those services include digital banking, digital payments, digital lending, investment services, financial management, and financial education tools. Some of these providers are chartered banks. Others are fintech companies that work through partner banks.

Technology driving digital banking platforms

Contactless payments were another huge step forward for online banking. In 1995, the first contactless payment was completed in South Korea. In 2014, contactless payments came to the United States, but it wasn’t until 2018 that the payment method really gained traction. After Covid-19, its popularity sky-rocketed. 

For many businesses, contactless payment is a secure, fast, and easy way to make and accept payments. Bringing in-person payments into the digital realm has made it easier for digital services to appeal to customers. Less need for cash means less need to go to a traditional bank or ATM to deposit or withdraw money.

In more recent years, one of the biggest shake-ups to online banking has been the advent of artificial intelligence. Digital services can use AI to speed up applications and provide faster, streamlined support. There’s still a lot to consider when it comes to using AI to make sure it can be applied safely and ethically. But these language learning models aren’t going away, and online banking services are looking into how they can help build their services.

Benefits of digital banking

Digital banking services can offer several benefits to small business owners that might not be available from traditional banks and credit unions. Most obviously, business owners won’t need to take time to visit a brick-and-mortar location to do their banking. Other benefits for small businesses include:

  • Access: Digital banking platforms can be accessed via laptop, desktop, or a mobile device. This broad range of access options gives business owners the freedom and flexibility to manage their finances 24/7, from wherever they are.
  • Lower fees: Traditional banks charge fees to help offset the costs of maintaining a physical location and large infrastructure. Online platforms don’t have that overhead, so they can often charge lower fees.  
  • Competitive interest rates on loans: You may have noticed that the interest rate quoted by the bank rarely matches the prime rate. Traditional banks and credit unions mark up their rates to cover their costs. Digital banks have lower costs overall, so they can offer more competitive rates.  
  • Higher earnings with better APY: Online banking platforms can offer a better APY on business checking accounts. They often don’t require you to keep money in a savings account to qualify, so you can earn on your checking balances.
  • Personalized customer service: Digital banking platforms have optimized and even automated many banking services. Often, this translates into more time to focus on customer service, giving your business the attention it deserves.

Challenges facing digital banking services

Cloud-based banking has had to clear some hurdles in its development journey. There have been concerns about how digital banking services are regulated and whether they’re secure. In the United States, the Office of the Comptroller of the Currency (OCC) regulates chartered banks, but not all digital banking solutions are chartered. Instead, many are considered financial technology companies and have different regulations.

To provide security to their customers, many digital banking platforms partner with chartered banks to offer their customers access to financial products.

The future of digital banking

As online banking technologies improve, it’s reasonable to expect more growth in the space. The NeoBank Tracker currently lists 350 digital banks. According to Statista, 209 of them were opened between 2020 and 2022.

The business community may see the biggest future impact from taking their finances digital. Digital banking has made cross-border transactions simpler and cheaper. The processing times are much faster and the fees are typically lower. This is helping tear down historical barriers to international business and overcome geographical limitations—which can mean major growth for small businesses accessing a global market.

Digital banking has come a long way, and the future is bright. Advances in AI and banking technologies are making online transactions faster and more secure. Small businesses are also able to do more business both nationally and internationally. Looking to the future of banking, digital platforms will most likely continue to innovate and build better banking solutions that help set businesses up for sustainable growth.

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This content is for educational purposes only and should not be construed as professional advice of any type, such as financial, legal, tax, or accounting advice. This content does not necessarily state or reflect the views of Bluevine or its partners. Please consult with an expert if you need specific advice for your business. For information about Bluevine products and services, please visit the Bluevine FAQ page.

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This content is for educational purposes only and should not be construed as professional advice of any type, such as financial, legal, tax, or accounting advice. This content does not necessarily state or reflect the views of Bluevine or its partners. Please consult with an expert if you need specific advice for your business. For information about Bluevine products and services, please visit the Bluevine FAQ page.

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