What is digital banking? A beginner’s overview

As technology continues to improve, digital banking has grown while physical bank branches have been in decline. Improvements in digital banking have allowed for greater convenience, more competition, and a variety of financial technology (fintech) companies to develop innovative ways to approach banking. Below, we’ll provide an overview of digital banking, how it benefits you, and where it could be headed. 

What does digital banking include?

When thinking about digital banking, the first thing that comes to mind might be online banking, which is how we access our banking services through a website or an app. It’s essentially the digital version of what you’d do in a bank branch but is generally limited to basic transactions, like checking balances, transferring money, making bill payments, and viewing statements. 

However, online banking is just a piece of the bigger picture of digital banking, which encompasses the digitization of the entire banking ecosystem. 

Digital banking often includes features such as: 

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• Account opening

• Loan applications 

• Investment management 

• Digital wallets 

• Peer-to-peer payments 

• AI-powered insights

• Biometric security 

• Virtual customer service 

Models and types of digital banks

Digital banks come in a variety of forms, including:

• Traditional banks: These are brick-and-mortar banks who incorporate digital services into their offerings. Smaller, regional banks may offer less sophisticated digital offerings or use third-party tools rather than developing their own. 

• Neobanks: Digital-only banks that have no physical branches. They usually aim to offer low fees and user-friendly apps, although sometimes the lack of in-person service can be limited. 

• Banking as a Service (BaaS): Licensed banks may make their infrastructure and offerings available through application programming interfaces (APIs) so that non-banks, such as fintech companies or retailers, can offer financial services under their own brand. 

Benefits and challenges of digital banking

For bank customers, digital banking can offer better convenience, speed, accessibility, and personalization. For banks, it can offer lower costs, scalability, customer insights, and innovation.

It also comes with some potential challenges and risks, though. These can include security threats and fraud risks, privacy concerns, regulatory compliance issues, legacy system limitations, and barriers to some customers adopting the tools and services. 

How digital banking works

Digital banking combines the tools that customers interact with on the front end (like digital wallets and account management) with the technology infrastructure to support it on the back end (like banking software and security).  

Here’s what digital banking includes:

• Front end tools: Apps, online portals, wallets, AI chatbots

• Back end infrastructure: APIs, cloud systems, core banking software

• Security: Encryption, multi-factor authentication (MFA), biometrics, compliance

Future trends and innovations in digital banking

Digital banking is a continually evolving field and may be shaped by innovations such as:

Open banking

• Regulations and technology are giving customers more control over their personal data.

• Through secure APIs, people can connect multiple accounts and services in one place. 

• This can help encourage competition and personalized financial products.

Embedded finance

• The link between banking and technology is blurring.

• Banking services are continuing to move to non-bank platforms, such as shopping apps, ride-sharing services, and social media.

AI-driven personalization

• Banks are using machine learning to analyze spending patterns and predict customer needs, such as alerts when bills are higher than usual, savings recommendations, and real-time fraud detection and alerts.

• Chatbots and virtual assistants are becoming more human-like and available 24/7.

Blockchain and decentralized finance (DeFi)

• This technology may change the way payments are made and lending is done.

• Blockchain technology can help make transactions faster and provide more transparency.

• Some banks are exploring DeFi services and creating tokenized assets. 

Central Bank Digital Currencies (CBDCs)

• Governments are exploring the creation of digital versions of national currencies.

• CBDCs could work alongside digital banking, offering secure, state-backed digital money.

• This could reshape cross-border payment systems.

Banking in the digital age

Digital banking is becoming the new standard for how we manage our money. With greater convenience and personalization, these innovations are giving customers more control than ever. While the future will usher in even smarter tools, the key will still be choosing banks and systems that balance the modern features you need with strong security and trust. 

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