Shortly after the collapse of SVB, Mercury Bank moved quickly to assure its clients: it announced "Mercury Vault". Later it went on to explain to clients that actually, it is not a bank: it is a technology business that deposits client money with other banks. Yet some clients who tried to move nominal amounts under $50K from Mercury Bank were asked to provide proof, such as invoices.

The Rise of Digital Banks: What You
The Rise of Digital Banks: What You Need to Know Pixabay

These days, given the heightened fear caused by banking collapses, even standard protocol can set off alarms with bank clients: anything that remotely suggests account activities are limited, could send clients running for the hills.

When considering the recent bank collapses: these were all big banks. Now let's turn to digital banks:

What is a digital bank?

A digital bank is a financial institution that provides banking services primarily through digital channels such as mobile apps and online platforms, rather than through physical branches. Digital banks often have lower overhead costs than traditional brick-and-mortar banks, allowing them to offer more competitive rates and fees. They typically offer a range of services similar to those of traditional banks, including checking and savings accounts, credit cards, loans, and investment products, but with a greater emphasis on convenience and accessibility through digital means. Some digital banks are standalone entities, while others are offered as an extension of traditional banks.

Digital banks continue their fast-paced rise as fintech provides innovative digital tools. They have come to fill the gap of the declining presence of traditional bank branches globally by offering a wide range of financial services, including business banking.

Key findings from the FDIC show that just 4.5% of U.S. households now fell into the unbanked category in 2021, the lowest level since 2009 when the survey began. Meanwhile, the use of mobile banking continues to grow sharply, as 65.3% of Americans now use digital banking services. Furthermore, of the approximately 203 million Americans using digital banking, 27% report using only an online bank.

Since the development of the system known as the Electronic Recording Method of Accounting (ERMA) and its implementation in 1959 by the Bank of America, banking technology has come a long way. Wells Fargo became the first bank to introduce internet banking in 1995, with PayPal launching five years later. In addition, Varo became the first online-only bank to launch in 2017, laying the groundwork for the rise of digital banks.

Key Differences of Traditional vs. Digital Banks

Whereas traditional banks have a physical presence with branches and ATM availability for cash deposits and withdrawals, digital banks offer their services online and through mobile apps. Typically, digital banks have better standard account interest rates, and consumers pay lower fees (if any) for banking services.

Even though consumers cannot access in-person customer service, banking from anywhere makes digital banks very convenient.

However, business owners may find two significant disadvantages of digital banks: limited services and the inability to make cash deposits.

Services Provided by Digital Banks

The two main types of digital banks are challenger banks and neobanks, which have minor differences. Challenger banks have a banking license, meaning they can offer all the services of a traditional bank. In addition, it may have a small physical presence and some ATMs.

On the other hand, neobanks have no physical presence and cannot offer all the services of a traditional bank because they have no banking licenses. These banks often target specific customer segments with their offerings. For example, they may provide payroll and payment services and accounting tools for small business owners.

Although the services of digital banks can differ from one to the other, they generally include the following:

· Deposits, withdrawals, and transfers

· Checking or saving account management

· Financial products

· Loan management

· Paying bills and invoices

· Account services like document and receipt holding

Advantages of Digital Banking for Business Owners

Andie Chang, the founder of TheCreditReview, stresses the value digital banking provides in a fast-accelerating market expected to have 2.5 billion users within the following year.

Digital banking makes business banking easier, especially for small business owners. It allows them to monitor their accounts as needed for incoming amounts, allowing them to see any unusual activity instantly.

For busy people, digital banking has added advantages:

No need to waste time and resources

With digital banking, business owners can conduct transactions from anywhere, at any time, and from any smart device, making this a very convenient form of banking. They also save businesses money on FX rates and through reduced transaction costs.

Digital banking removes the need for printing paperwork or driving to the bank, making it the most environmentally sustainable banking method available.

Convenience through faster money transfers

Besides the security of going cashless, digital banking provides many online banking solutions, including fast money transfers.

When transferring money to vendors at the same bank, the transfer is immediate. If the transfer is to another bank, the money appears in the recipient's account on the next working day. The same applies to payments from customers to the business.

With most digital banks recurring transfers make it easier for business owners to automate certain account payments.

Secure banking

Biometric authentication and multi-factor identification are two ways that have helped improve security precautions across the digital banking sector.

Most importantly, the Federal Deposit Insurance Corporation provides guarantees for amounts up to $250.000 - the same level of protection as that provided to other credit unions by the National Credit Union Administration (NCAU).

Real-time access

Navigating daily transactions has never been easier than with digital banking. People can perform banking tasks and transactions that previously required their presence at a physical bank. Therefore, it has become easier to move money between accounts or to receive a notification if the business has a low balance.

Requirements for Opening a Digital Bank Account

The process for opening an online bank account does not differ much from that at a traditional bank branch. "Generally," according to Andie Chang, "you need the same documentation that's easy to collect and upload."

First, find the bank that suits your needs. Then, consider their banking fees, interest yields, and ATM network availability if you need cash deposits and withdrawals.

You will need to submit the following documentation when opening an EIN business checking account for your LLC or corporation:

· Your business registration papers

· Some form of identification (government-issued ID or driver's license)

· Your nine-digit employee identification number (EIN) – your business's unique identifier available from the IRS

The digital bank will notify you of the application's approval.

Final Take

Right now the banking crisis has faded and the US dollar is firm. However, for global clients to keep favoring the US as their safe haven, one will have to observe the moves of other G20 countries who trade commodities. However at an international level, digital banks offer a secure and convenient environment, especially for business owners juggling their time and resources. They have simplified how people can receive and pay money, allowed faster access, and made it easier for business owners to monitor their accounts. These are the advantages that have contributed to the rise of digital banks.