Digital Banking VS Traditional Banks
As a CERTIFIED FINANCIAL PLANNER™ and a financial coach, I field a lot of questions about banks. Not to toot my own horn (toot toot), but I do have some reliable insights and input about banks in general since I work closely with banks day in and day out. More and more, I'm sure you're seeing online advertisements and commercials for "digital banks." These are the response to banking by a new generation. They aren't necessarily good or bad guys, but they have pros and cons (like anything else). These new online "digital" banks are plentiful. Seriously, there's a specific online bank for just about every job/career field you can think of that touts itself as having the best particular functionality for your line of work.
My goal in writing this post isn't to persuade or dissuade you from using digital or traditional banks, but just to give you a more large-scale picture of the pros and cons of both. With a deeper understanding of new digital banks, you and your financial planner or financial coach will be better suited to create your own financial plan while keeping your banking situation in mind.
What Are Digital and Traditional Banks?
Let's start off nice and easy by defining the differences between a digital and a traditional bank. A traditional bank would be what most people think of when they think of banking. Typically, it's a regional or nationwide business housed in a brick-and-mortar building. Traditional banks have ATMs, in-person employees, and give your kids lollipops when you visit! On the other hand, a digital bank is a newer take on what a bank can be. Digital banks are entirely online and sometimes app-based. While they don't have in-person employees, their apps usually are very easy to use and allow you to deposit checks and direct deposit from your phone.
How Safe are Digital Banks Compared to Traditional?
Indeed this question will vary from bank to bank. While there are base-level regulations on the state and federal levels requiring all banks to have certain cybersecurity levels, some argue these regulations don't go far enough. While some banks go "the extra mile" to prevent cybercrime, theft, and security issues, others don't. Unfortunately, there's really no way to know what safeguards a bank is using unless they advertise them or without some form of insider knowledge.
While it seems relatively intuitive to assume that because digital banks are online that they're more susceptible to online threats, that's no longer the case. A majority of traditional banks have adopted a hybrid model of online and in-person, which creates the same risks and dilemmas for your information. Luckily, banks operate in their own self-interest, which means they protect themselves as much as they're able to from threats online and in-person. Most banks have also responded to online threats by creating specialized positions to assess, monitor, and respond to a changing digital threat landscape.
However, a more insidious form of a cyber attack targets a platform's everyday users. Social engineering, which relies on unsuspecting users, is known as phishing. While any bank could be a victim of a cyber attack like this, it's more likely when a bank is entirely online-based. In my post Fraud, Scams, and Your Financial Plan, I go over some common and trending scams, including phishing.
Banking Fees & Cash
Does your bank have an annual fee? A direct deposit fee? A check deposit fee? Some online and digital banks claim that they're completely transparent with their fees, but what does that really mean? Sometimes it's advertised in a way that implies that there aren't any fees, but that's rarely the case. Instead, it usually means that their bank's fees are published somewhere on their website.
Cash deposits can also be an oversight of digital banking. While some digital banks have it all worked out with ATM partnerships, others leave you high and dry. If you live in a more rural area, you may not be able to make a cash deposit without driving to a nearby city, or you may be required to pay an ATM fee to deposit cash. Either way, this is just another way that you're flushing money down the drain that you could use to save for a trip or put in an emergency fund.
Do Digital and Traditional Banks Differ In Accessibility and Support?
Accessibility to your bank means a lot. If you're having issues with your card, with your account, or have a discrepancy in your statement, how will you deal with that? For many people, the answer is they drive to their bank and talk to someone who can help them understand and resolve their issue. It's an intuitive enough concept, but if you bank digitally, that is one of the luxuries you're going to give up.
On a similar note, support and personalization are related luxuries that you'll give up by moving away from a traditional bank. In a conventional bank, the tellers and staff will get to know you, which means that they'll be more willing to go out of their way when resolving issues. You'll likely get a friendlier experience over time. Some would rather have the convenience of a completely phone-based experience, which isn't necessarily a bad thing; it's just another trade-off.
What About Technology Crashes At A Digital Bank?
Things happen, and technology crashes. It's one of those everyday occurrences of a digital world. Still, it also means that there are times you're not going to be able to access your money or account information. It's easy to look at something like an app being down for a few hours and say, "oh well, it's unavoidable." Still, you never know when a minor inconvenience could turn into an emergency situation. An app or website crash coinciding with an emergency event and no ATM access could pose a severe problem. If you're serious about digital banking, work with your financial planner to make sure you're not setting yourself up for a pitfall with no escape route. While all bank/banking experiences will occasionally have hiccups, what's important is that you have as many options and paths to your money/accounts as possible.
Are There Hybrid Models of Banking?
I mentioned above that more and more traditional banks are adopting a hybrid approach to digital banking. This means that they aren't all-digital nor all in-person. Hybrid banks have in-person institutions, ATMs, as well as apps and websites. With models like this, you have all of the personalization and customer service of a traditional bank mixed with the digital access and ease of use of a digital bank. Models like this also give you unprecedented access to your account and money, which is ideal for emergencies (and life in general).
Your Financial Plan and Institution
Banking comes down to ONE factor… YOU. Everyone needs a banking situation that fits with their lifestyle, and there's just not a one-size-fits-all solution. While online and digital banking might really be the best way for some, it's not ideal for others. Having applications and websites where you can handle your banking is convenient. Still, you're also giving up quite a bit regarding personalization, accessibility, custom banking, and relationships. These are all things that you should keep in mind both with banking and creating a financial plan.
Financial planners and financial coaches can also help you make big decisions, like what bank or banks will work best for you! If you'd like to work with me and create a custom financial plan that will fit your lifestyle or learn more about traditional or digital banking, please feel free to call or email to schedule an appointment with me.
Until next time...this is Melissa Making Cents!
Melissa Anne Cox, CERTIFIED FINANCIAL PLANNER™, is also a College Planning and Student Loan Advisor and Financial Coach in Dallas, Texas.