What Is an Online/Digital Bank and How is One Started?
As banking trends and technology continue to evolve, digital banking solutions are quickly becoming a popular option. While traditional banks have adopted online solutions, they’re still not the same as digital banks. Join BMA to discover what a digital bank is, how they work, and how to start one in this fast-growing market.
What Is a Digital Bank?
Digital banking combines online and mobile banking into one convenient option. Online banking allows customers to access their physical bank services through the bank’s website. Mobile banking moves website services into an app, to provide customers banking access at all times.
A digital bank, on the other hand, provides complete online services plus a mobile app to create a complete banking experience.
How Do Online/Digital Banks Work?
Online/digital banks work by cutting out the physical banking location middleman and, instead, providing all bank services via a mobile app. A digital bank is an end-to-end solution that offers customers all the banking options they need to complete their banking transactions on the go.
Some of the Digital Banking Services that are Offered
- Debit accounts
- Credit accounts
- Savings accounts
- Credit card/debit card processing
- Virtual cards
- Personal loans
- Home equity loans
- Business loans
- Payroll and deposit services
- Bill pay
- Transferring funds
- and many more
Digital Banking Trends
As you consider whether starting an online bank is what you want to do, pay attention to the current and future trends in digital banking. Most of your competitors will be offering solutions geared toward these trends or finding ways to improve on the process. Make sure you are planning to include these trends as part of your digital bank offerings to help you stay competitive in the online banking market. Current digital banking trends include:
- Virtual cards — Virtual cards are digital representations of physical credit or debit cards. If these virtual cards are hacked, they can be deleted from the system, unlike when a physical card is compromised.
- Cashless banking — This is the concept of using your smartphone to make purchases at the register instead of using cash. Customers who have a corresponding digital app can simply tap their phone to the payment device and the payment goes through automatically.
- Automated interactions — These include video chats, text messages, or chatbots that automatically connect customers with their bank to get questions answered or handle simple financial transactions.
- Cybersecurity — Digital banks can implement better cybersecurity solutions thanks to innovative technology, including real-time monitoring, fraud detection, and more.
How to Launch an Online Bank?
When it comes to starting a new online bank, many factors go into the process. From choosing the right business model and getting regulated, to creating the right digital experience for your customers — BMA is here to help you navigate your way through it all.
Choose a Business Model
There are different types of business models from which digital banks can operate. These models include:
- Aggregators — This model distributes financial services through a variety of banking partners.
- Open platforms — Open platforms create more banking options through smaller banking platforms, including proprietary, licensing, shared, and joint venture.
- Banking as a service (BaaS) — This is a cloud-based banking model that allows tech companies to operate as a bank once they have appropriate licenses.
- Traditional universal banking — This model is essentially a straight-across solution where a traditional bank creates a digital bank to offer all of its services through an online app.
Your digital bank needs to be licensed (chartered), insured, and regulated to provide you security. Depending on your banking business model, you’ll need different licenses. These could include:
- A banking license — This allows your digital bank to offer all the services of a traditional bank as well as additional services like loans and mortgages.
- A banking charter — This allows your digital bank to provide you with a state or national license, regulatory oversight, and account insurance.
- An e-money license — This allows you to store money in a digital account or “e-wallet”, which allows customers to perform financial transactions through an electronic device.
Additionally, while your bank is an online entity, you may have a founding office that is subject to local, state, and federal laws and regulations. This is something you need to consider if your employees provide digital services out of a physical location.
Focus on Innovation
For your digital bank to compete with other digital banks on the market, you will need to have a sharp focus on the latest innovative banking technologies. Since almost all other digital banks will be offering the same services, constantly be aware of the newest trends and technology that can help set your digital bank apart from the rest.
Research Your Competitors
Just as you should be staying on top of the latest technology for your bank, you need to be mindful of the other digital banks you are competing against. Research different aspects of competitor banks, including:
- Financial Services
- User interface/app progression
- Marketing / Sales strategies
- Identifying features (colors, logos, catchphrases, etc.)
- IT as a Service (ITaaS)
- Security protection systems
- Transaction automation
You should be offering many of the same services as your digital competitors while also finding ways to stand out from them. These could include offering lower rates, additional services, concierge customer service options, customer incentives, automated account opening, an automated lending platform, and other options to encourage customers to choose you over other online banks.
Develop Your User Experience
It is critical that the online banking experience is made easy. If your customers struggle to navigate your mobile app or online website, they won’t stick around for long. Aim to make your user experience intuitive, simple, flexible, fast, and secure to make it a pleasure for customers to use.
A well-designed, user-friendly interface helps instill trust and confidence in your digital bank and increases the likelihood that you will retain customers.
Partner With BMA
BMA’s goal is to help financial institutions start and grow. As you consider creating a digital bank, we offer innovative solutions, professional services, and top-notch customer service to help you get started. Get in touch with our team today to discuss your options for starting an online/digital bank.