The rise of a global pandemic has indeed changed the way people bank. However, it’s not just COVID-19 driving people to digital financial solutions; why online banks are dominating is more complicated than this one factor. Technology has allowed even the youngest generations to start managing their money from home, and changing demands are keeping banks on their toes.
The History of Online Banking
While we may only now be reaching the tipping point, the concept of “digital-first” banking originated in the 1990s. A few banks had already tested “remote banking” in New York City in 1994, when Stanford Federal Credit Union rolled out internet banking options to its entire customer base. By 1999, Bank of Internet USA started serving customers. PayPal launched the same year, and its user base grew nearly 10% day over day.
Early incarnations of digital banking involved sending and receiving SMS messages with your bank to check your balance. Soon, telebanking became one of the first ways to self-serve bank customers. Now, mobile check deposits, online transfers, and contactless payments are the norm. It is safe to say that online banking has officially arrived.
Consumers Prefer Online Banking
Following the COVID-19 outbreak, 57% of bank users say they prefer to bank online, with 55% preferring mobile banking options. Some customers say they would use online banking more often if companies would increase online security, expand transaction options, and provide real-time resolution for more online actions.
Even more shocking, an estimated 21% of internet users aged 18 and over already have an internet-only bank account.
More Online Banking Options Available
Online banking is more than logging in and reviewing the transaction history without waiting for a paper statement to appear in your mailbox. Today’s digital options span the entire banking experience, from deposits to spending to applying for a loan.
You can shoot money to friends to pay for your share of the bar tab, tap your credit card against a kiosk device to pay for lunch or scan your latest paycheck to deposit it without setting foot in a branch, or if you are applying for a loan. You even could fax your documents in which mFax has options to do, in compliance with HIPAA and robust security for your data. These reasons alone can help explain why online banks are dominating.
Traditional banking originally depended on a face-to-face relationship with each customer. Banking clients had a personal banker, knew all their local branch tellers by name, and expected hands-on care. Today’s bank customer favors anonymity, convenience, and speed, but they still want a personalized experience.
Opening an Account
Nearly one in three new account openings happen online now, up from 22% in 2019. Bigger banks and digital banks are more likely to allow the process to occur fully online. Once you open one account with a bank, you can usually open a second account online with ease.
More and more banks are allowing mobile check deposit for customers who do not have the advantage of direct deposit. Citibank saw mobile check deposits increase by 84% from April to May 2020 alone. Moreover, digital-only banks that do not have their own ATM networks use mobile deposits almost exclusively for paper check deposits.
Cash deposits at ATMs outnumber cash withdrawals, indicating that customers are comfortable using less cash on the street.
These days, transferring money from one bank account to another in the same bank is as easy as logging in on a smartphone or tablet and sending money from one account to another. It only takes seconds for the funds to become available. You can even set up your account to automatically transfer funds from savings to checking if your checking account runs low.
You used to have to go into your local branch to authorize external transfers. If you have all the correct data for both accounts, this is another simple function to complete online. The money can even be available instantly, thanks to lightning-fast payment processors.
Peer-to-peer (P2P) payments will probably amount to $400 billion in 2020. Payment platforms like PayPal, Square, Zelle, and Venmo make it easy to send money through your smartphone to someone else using minimal information like their mobile number or email address. Traditional and digital banks are also making it more straightforward to send money via P2P through their mobile apps.
Online retail spending spiked in the first half of 2020, with e-commerce spending totaling more than $77 billion higher than anticipated for the period beginning March 1. Contactless purchases also increased rapidly, with Visa customers increasing contactless use by 150% and more than 50% of Mastercard users preferring contactless transactions.
Traditional banks can have a lengthy loan process, and it can take months to get your funds. This slow service can be a reason why online banks are dominating.
Digital loan applications are fast and simple. You can usually get approval in minutes, and the funds will be sent to you within 24 hours. More than half of loan applicants applied for their loans partially or fully online in 2018. That number jumped to 65% in 2019 and will likely be even higher in 2020.
What’s FinTech Got to Do with It?
The rise of financial technology companies confronted traditional brick-and-mortar banks with a significant challenge. FinTechs operate primarily online, offering underbanked and unbanked people the chance to manage their money digitally. Most of the first FinTech companies are payment platforms, like PayPal, but now FinTechs are trying to obtain official bank charters.
While official recognition may be months or even years away, more and more people turn to online banking options to meet changing needs. Traditional banks are partnering with FinTechs to streamline banking experiences. PayPal and Amazon are already offering their users loans, and are both among the top five small business lenders.
Online Banks Will Continue to Dominate
As digital and mobile-first banking continue to grow, we’ll see new and exciting ways of authenticating and accessing accounts. Voice recognition, thumbprint access, and other biometrics options are starting to achieve more extensive use. A biometrics payment card could be the preferred option for more than 50% of users, with many people saying they would be willing to pay extra for such a card.
As we move towards a near-cashless society, digital banking can streamline how we manage our money. As physical bank branches continue to close, virtual banks are on the rise. Millennials and Gen Xers feel most comfortable with internet banking and are more likely to have a digital-only account.
Brick-and-mortar banks are struggling against the influx of challenger banks that have minimal overhead. Because of their low expenses, digital banks are edging into the savings account market by offering interest rates of up to 2.2% for online deposits.
Neobanks like Chime and Simple are poised to expand their customer base, targeting individual consumers and small businesses. Traditional financial institutions are responding by shifting into Big Data management and other offerings designed for the corporate market rather than the average consumer. FinTech and payment processors are still fighting for recognition and ways around federal charter restrictions.
Choosing an Online Bank
Choosing an online bank takes some introspection. Consider the following questions before you open an account:
- Do you get paid by direct deposit, paper check, or cash?
- Can you use online bill-pay, automated payments, or transfers?
- Will you prefer to withdraw money from ATMs, shop online, or go contactless?
Think about how much money you will keep in your account at any given time, whether you need money-market options, and what type of credit you might require. If you think you may need a substantial loan soon to buy a car or a house, make sure that your bank can meet your lending needs. Ask about monthly or annual fees and see if there are ways to get around them.
Carefully research the banking options open to you. Once you’ve identified a bank that can handle all your anticipated needs, you can open an account. Using your account frequently will help you establish your account and put you in good standing with the bank.
This list of online banks can help you narrow down your options.
You don’t have to limit yourself to just one account. In fact, with the financial world in flux, multiple accounts may be your best option.
Online Banking Security
You do not need to fear online banking, but you should be conscious. Take advantage of your bank’s options for additional protection, such as two-factor authentication. Make sure to use strong passphrases over simple passwords. Try to avoid using public computers or Wi-Fi networks to access your account.
Secure your debit and credit cards, and assign each a different PIN. Pick one card to use for online transactions and limit the amount of funds it can access to cut down on online fraud. Carefully track your spending by checking your accounts frequently.
You may opt to switch to a fully digital bank or settle for a company that offers a hybrid model. In either case, your experience can be fully personalized based on the data you provide. One advantage of virtual banks is their focus on customer-centric offerings, which may mean you can find more of the banking services you want and need.
The Choice is Yours
Now that you know why online banks are dominating, you can decide whether you’re ready to join the banking revolution. What goals do you have? Are you comfortable with a digital-only experience?
Whatever you decide, the demand for fast online service is never going away.
Author: Chris Muller
Chris Muller is a professional personal finance writer who has written for some of the largest financial publications in the world. Chris brings a BBA and MBA in Finance, along with a decade of experience in the field, to help break down complex financial topics into easily digestible pieces through his written content in an effort to assist others in better managing their finances. Chris is currently in pursuit of FI/RE, is an aspiring minimalist, loves craft beer, and is a dad two to kids.