Can Traditional Banks Survive in a Digital World?

Banking used to mean heading to a local branch like Chase and waiting in line to speak with a teller — but the rise of digital banks has significantly changed how we manage our money.

Online banks like SoFi, Ally Bank, and Axos Bank have quickly come onto the scene, competing with brick-and-mortar banks with competitive interest rates and low bank fees. They also come with the convenience of 24/7 access to your money via a few clicks on your smart phone. 

It begs the question: Can traditional banks survive in a digital world?

Traditional Banks vs. Online Banks

Traditional banks like Wells Fargo and Bank of America are among big-name financial firms that have long been the go-to for banking. These billion-dollar empires have been trusted for decades to help Americans manage their finances.

While online banks may not have the years of customer loyalty that traditional banks can boast, they do have competitive infrastructures. Their costs don’t include maintaining brick-and-mortar locations and hiring employees for those in-person branches.

“Generally, online banks tend to offer lower fees compared to traditional banks,” explains Dennis Shirshikov, professor of finance at the City University of New York. “This is largely because online banks do not have the same infrastructure costs — such as maintaining branch networks — which allows them to minimize charges like monthly maintenance fees, ATM fees and overdraft charges.”

The Benefits of Online Banks

Online banks are often more affordable. Their lower overhead costs usually result in higher interest rates on products and low or no fees when compared to traditional banks, which are often forced to charge fees like maintenance and overdraft fees to make up the cost of operations. If you’re saving via accounts like high-yield savings accounts or certificates of deposit (CDs), the higher interest rates at online banks can often help you grow your finances much more quickly than traditional banks. For example, Ally Bank currently offers a 4.2% rate on savings accounts, and Chase offers 0.01%.

One of the other main benefits of online banks is that they can empower the customer with mobile tools. Now, customers can use features like mobile check deposit, online bill pay and fund transfers all with the tap of a button. Online banks are also able to provide banking for customers who live in more rural areas where brick-and-mortar locations are not as easily accessible. 

Online banks can also often leverage online data to better serve their customers. They are well-versed in digital tools that can change the face of personal banking and offer customers a more personalized experience. AI technology company Kizen notes that the use of AI, combined with special CRM programs, enables banks to first identify and then better serve their customers’ needs. Because of this new focus, custom reporting and personalized insights are just a few of the features available when you bank online.

Online Banks Aren’t Perfect

As convenient as they are, there are still drawbacks to online banks. With online-only banks, customers are limited to online service, so they cannot enjoy some of the in-person services of a brick-and-mortar location. For example, you cannot just go to the local branch if you need a notary; instead, you may have to use an external service that is local to you. There may be additional limitations when it comes to depositing and withdrawing cash.

Michael Ashley, a banking consultant who has worked at CitiBank and Wells Fargo, says he believes the main advantage of traditional banks is their physical presence since they offer face-to-face interactions and personalized attention, which can be invaluable for customers seeking more complex financial services or advice.

“Traditional banks also typically provide a wide range of services beyond basic banking, such as investment advice, retirement planning and loan services,” Ashley adds.

Online banks can also come with cybersecurity concerns. In 2019, for example, a single individual stole the personal information for approximately 106 million Capital One customers via credit card applications.

Despite the risks, online banks continue to grow in popularity. A study by GOBankingRates found that more than 75% of Americans prefer online banking to traditional banks. This is even the case among older generations, who tend to be less tech-savvy, and yet 67% of seniors prefer an online bank or app. 

Traditional Banks Are Catching Up

To combat the popularity of online banking, traditional banks have been forced to either adapt or risk losing their consumer base, especially among the younger demographic that is particularly mobile-dependent. 

More and more, traditional banks are beginning to embrace the digital tools and support touted by online banks. Mobile account management is common with most banks, and customer service extends to online support, too, merging the best of both worlds with online and offline support. 

Traditional banks are also offering digital features that used to be exclusive to online banks, like mobile wallets, payment apps and personal financial support. At TD Bank, for instance, customers benefit from mobile check deposit, online bill pay and money transfers with accessibility for both Apple and Android smartphones and tablets. TD Bank employs high security standards to help ensure that customers’ information is safe, and its TD for Me feature delivers security alerts if a threat is detected.

With both mobile and in-person services, traditional banks are able to surpass the capability of online banks by offering a hybrid solution many customers find attractive.  

“Traditional banks are increasingly adapting to the digital age by investing in online and mobile banking platforms to remain competitive,” Ashley says. “The future success of traditional banks will depend on their ability to balance traditional services with innovative digital solutions to meet evolving customer needs and preferences.”

The Future of Traditional Banks

As the world increasingly looks to an automated future, it is only natural for the banking world to follow suit. Many online banks are well prepared to face a digitally run future with lower fees, higher interest rates, accessibility and convenience. 

However, some online banks lack the financial backing and breadth of services available from traditional banks. There are still many consumers who prefer face-to-face banking and its benefits, like cash deposits and same-day service for card replacement. The best bank for you is one that fits your needs.  

Sources

Federal Reserve. (2024, April 29). Federal Reserve Statistical Release. Retrieved from https://www.federalreserve.gov/releases/lbr/current/. 

Nasdaq. (2024, April 29). The Future of Banking 2024: What Are the Next Digital Trends for Money Management? Retrieved from https://www.nasdaq.com/articles/the-future-of-banking-2024:-what-are-the-next-digital-trends-for-money-management. 

Ally Bank. (2024, May 11). Online Money Market and Savings Account Rates | Ally Bank. Retrieved from https://www.ally.com/bank/savings-account-rates/. 

Chase Bank. (2024, May 11). Chase Savings Accounts: Compare & Apply Today | Chase. Retrieved from https://personal.chase.com/personal/savings. 

Kizen. (2024, May 11). Banking Technology: How Banks Improve Customer Experiences. Retrieved from https://kizen.com/content/software/banking-technology/. 

TD Bank. (2024, May 11). TD Bank Mobile App – Personal & Business Mobile Banking Features. Retrieved from https://www.td.com/us/en/personal-banking/mobile-app. 

TD Bank. (2024, May 11). Online Banking Security and Protection Measures | TD Bank. Retrieved from https://www.td.com/ca/en/about-td/privacy-and-security/how-we-protect-you/online-security. 

American Bankers Association. (2024, May 11). 2023 Preferred Banking Method. Retrieved from https://www.aba.com/news-research/analysis-guides/2023-preferred-banking-methods.

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