What is digital banking?

July 20, 2020

The way people bank has changed dramatically over the last couple of decades—and especially over the last few months. Traditional brick-and-mortar banking and writing checks to pay bills are becoming obsolete as customers prefer the ease and convenience of digital banking. And digital banking is going through its own evolution.

Digital banking started with the internet allowing people to do their banking online, but now true digital goes further. Today, customers have the ability to access every service banks offer digitally on multiple devices. Add to that the rise of fintechs like Kabbage and payment options like Venmo that can be used almost entirely without a bank and you can see how the traditional banking system has been disrupted.

Read the top 10 digital features you need to know about.

"Add to that the rise of fintechs like Kabbage and payment options like Venmo that can be used almost entirely without a bank and you can see how the traditional banking system has been disrupted."

All of those changes are leading financial institutions to up their digital game and look at things like open banking and APIs that allow them to partner with fintechs to innovate. By doing so, they can create their own mobile payment service that their customers want. Not only will they keep their customers, but they’ll be able to connect with them in stronger ways to grow their customer loyalty. 

How does digital banking work?

Digital banking isn't always easily defined and there's a reason for that. Beyond the fact that it's still evolving, there are lot of pieces for what basically boils down to sending and receiving financial information electronically.

Online banking

Digital banking began when the internet allowed people to do their banking online. Suddenly customers had 24/7 access to do most of what they had to do at one of their financial institution’s branches—account services like paying bills, checking their statements, transferring money, arranging loans, financing loans and ordering checks. Today's online banking does that and a lot more. 

Now, in addition to that, customers can use bill pay, which allows them to receive eBills and set up monthly payments that the bank automatically makes for them. That helps eliminate late fees, improves credit scores and saves time—so there's no need to visit a company's website, login and pay a bill; the bank or credit union can do all of that for customers. People can also direct their banks to take a specific portion of their payroll checks out each month and put it into their savings account, which they can check conveniently from their home. 

Digital banking as it's known today revolves more around the technology of mobile phones and what they make possible. For starters, they allow people to make check deposits using their mobile phones by taking pictures of the front of the check and the back of the signed check. There is a way to make deposits via a computer, but it's not nearly as fast and easy.

Mobile payments

On a large scale, mobile payments are changing much of the way people "move their money." Most mobile payments work in conjunction with a bank—users need to enter their debit card information to sign up for them (although this is evolving as well with companies like Apple offering their own payment cards). 

Not only people using mobile payments for convenience, they're also earning money through purchasing reward programs for every dollar they spend using them. The following is an overview of are some of the top mobile payment apps customers are using.

Apple Pay

With a slogan of "Cashless made Effortless," Apple pay is designed for customers who have Apple phones and Apple Watches. Once set up, they will be able to order and pay for services with a tap of their finger.  

PayPal One Touch

Their slogan "Turn sixteen digits into one touch" does two things at once. It taps into the convenience factor of mobile payment apps (one touch versus entering a 16-digit card number) and incorporates the name of the service. PayPal One Touch also offers extra security and a broad reach to customers. 

Google Pay

Going straight towards a growing trend, Google Pay's slogan is "A contactless way to pay, by Google." With such a strong brand identity, they wisely include their name in the slogan. Google Pay touts their multi-layers of security as an added incentive for users to choose their mobile payment app. 

Samsung Pay

Because of the number of features Samsung Pay offers, their slogan is "more than a wallet." In addition to the convenience their mobile payment app delivers, users can send and receive gift cards and they can take pictures of membership and loyalty cards to add to it.  

The digital wallet

People are more likely to leave their wallet behind rather than their phone for good reason: they can pay for just about anything with it. Equipped with mobile payments like Google Pay and many others including Venmo, which also has a social component to it, people have a lot more payment options than a typical wallet gives them. And it's going to keep evolving. Recently, for example, Bank of America introduced a digital debit card their customers can download on their mobile device.

The POS system

To enable people to use all of their mobile payments, brick-and-mortar businesses will need to update their POS systems so that they have the technology to efficiently accept mobile payments. Particularly during the pandemic, accepting contactless mobile payments is essential and will be even when a vaccine is found. 

The advantages of digital banking

There is a reason digital banking is taking over: the benefits it provides customers is undeniable—especially in an increasingly fast-paced world. 

Always open. Complaining about banking hours is a thing of the past for consumers. With digital banking, customers gain constant 24/7 access to their money and more ways to use and spend it. For people who can’t seem to find an extra hour (when there isn't a pandemic happening) that means not needing to take time off of work to go to a bank or plan a Saturday morning around it. 

"With digital banking, customers gain constant 24/7 access to their money and more ways to use and spend it"

Convenience is queen. With the ability to access, use and spend their money always at their finger tips with mobile devices, digital banking lets your customers pay bills, send money and make purchases on the go. There's no need to be sitting in front of their computer to make online payments or come into one of your branches. They'll still want those options, just much less frequently. 

Faster is better. Another way mobile banking helps your customers save time is that it's an intrinsically faster option. There’s no need for your customers to set aside a chunk of time each day to make payments. With the push of a few buttons, they can accomplish more than they can with keystrokes. 

More options to pay. Digital banking gives customers a lot of payment options. They can choose to use their mobile device to pay when it's enabled with mobile payment apps or they can decide to use their debit card. If they're working on their computer, they may choose to go the online banking route. And if they want to use a mobile payment like Zelle® to send money or split a bill, they can. If they want an in-person experience, they can come to your branch. Digital banking delivers on what many of the millennials and Gen Zs are demanding (more pay options), so they get what they want.

"Digital banking delivers on what many of the millennials and Gen Zs are demanding, (more pay options), so they get what they want."

The benefits of digital for banks

Save money. Banks and credit unions that adopt digital banking can spend less money on infrastructure which can be a big way to save money. 

Be more competitive. During what is a disruptive time in the banking industry, staying competitive is crucial. Working with fintech companies to provide customers with a more digitized banking solution will place your financial institution in a stronger position. 

Attract and keep more customers. When you’re able to give people the payment options they want, you'll retain and attract new customers who are being lured away by disruptive fintech companies.

Challenges of digital banking

There are some things financial institutions need to consider when they make big moves towards digitization. But the overall challenge is trying to do it in a way that improves the customer experience—and it needs to be easy, reliable and safe. 

Your customers are savvier than ever. Giving your customers what they want can be trickier for financial institutions now. That's because you've got customers who understand payments and how they work much more than previous generations. In other words, they're a few steps ahead of you in the digitization world, so figuring out what they want will involve some time and research—but working with a fintech company could help. 

"Giving your customers what they want can be trickier for banks now. That's because you've got customers who understand payments and how they work much more than previous generations."

Consistency across channels. The digitization you provide needs to deliver the same capabilities and experience across every one of your channels—from the desktop to the call center to the ATM. The challenge for many financial institutions is that they don't know enough about the artificial intelligence (AI) that powers digitization.  

Don't go solely digital. If you do some quick online research, you likely will discover articles encouraging you to adopt a completely digital financial institution. That would be a mistake. Your customers still want a brick and mortar option. Take a look at Amazon. They opened brick and mortar retail stores for a lot of reasons. Beyond extending their reach, their customers also want a brick and mortar option (not everyone is comfortable ordering shoes without trying them on). 

Consider open banking and understanding APIs. If you want to really up your competitiveness, check into the possibilities open banking using APIs delivers. This growing trend (now mandated in the U.K.) allows third parties to have access to your customers’ financial information, with their permission, to create intuitive money-moving systems. 

Choose the right fintech partner. Not all fintechs are created equal and they are not one size fits all. Make sure to take the time to find the best one to partner with to help you make the right digital solution for your customers.

Make agility a priority. As you settle on a way to digitize your banking services, keep agility top of mind. There's a decent chance that you may not get it right the first time and will need to make changes. When you can quickly and easily pivot in a different direction, you'll save time and money in finding the right digital banking solution for your customers. 

Listen to a podcast about the current state of digital banking transformation.

"As you settle on a way to digitize your banking services keep agility top of mind."

The difference between digital and online banking

Online banking is simply the ability to use your computer or other electronic device to access your bank account through the internet. You will then be able to do all your everyday traditional banking usually done with a teller. 

Digital banking encompasses every online banking possibility, but also any form of electronic transaction or electronic flow of money between multiple parties with minimal friction: you simply tap with your phone or your card. With facial recognition and biometrics, digital banking is going even further.  

Online banking requires you to have access to the internet to accomplish transactions, but with mobile apps, facial recognition and other biometric means, that’s no longer necessary.

Ready to go further with digital?

With growing demands from your customers for more digital ways to pay, now is the perfect time to digitize your banking services. To help, here's a blog that outlines 8 simple steps for increasing digital banking adoption

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