We're nearing the end of 2025, and I have a dear friend who still refuses to use a debit card because she "doesn't trust them." Anything digital gives her the willies, and she flatly refuses to bank any differently than her parents did in the 1960s.
While she (and everyone else) is free to make their own financial decisions, it's hard to imagine why a person wouldn't at least consider what they're giving up by holding on to old practices. I know for sure that she would never (in a million years) consider a digital bank, even though it could help her make the most of her hard-earned money.
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What is a digital bank?
A digital bank incorporates the banking features you're familiar with -- such as checking and savings accounts, money transfers, debit cards (and more) -- and incorporates additional tools and services.
The primary difference between digital banks and traditional banks is that digital banks don't have physical locations. That's not to say they skimp on services, but they do have extremely low overhead, which gets passed on to you. With a digital bank, you can often expect to earn a higher interest rate on accounts like high-yield savings and money market accounts (MMAs) and pay lower rates for personal loans and lines of credit.
Digital banking incorporates the best of online banking (a service you might be familiar with through your current bank) and mobile banking. While you won't have a physical branch to visit, you'll still have access to and control over your money at all times.
Want to make a deposit? Take a picture of the front and back of the check, press send, and it will go directly into your account. And when you want to withdraw cash, you use your debit card to withdraw the funds you need from an ATM. Paying for purchases is as easy as using your physical debit card or a virtual card (a digital version of your physical card).
Let's say you want more cash than you can withdraw from an ATM. You request a check from your digital bank, it's sent by snail mail, and you cash it at a retailer or bank. It's not unusual for a person to have two bank accounts: One traditional bank with a physical location nearby and the other a digital account. That way, they can link the two accounts and have money sent from the digital bank directly to the brick-and-mortar bank or credit union.
Security
It's natural to wonder about the safety of digital banks. According to the Federal Deposit Insurance Corporation (FDIC), as long as you choose an FDIC-insured digital bank, the FDIC will protect you against the loss of your deposits (up to $250,000 per depositor, per insured bank, and per ownership category). In other words, your money is as safe in an FDIC-insured digital bank as it is in an FDIC-insured brick-and-mortar bank.
An important note about FDIC insurance: Although it's uncommon, there's one issue you should be aware of. Some financial technology (fintech) companies open banks and, by partnering with actual FDIC-insured banks, tell customers that they are FDIC-insured. In 2024, around 100,000 fintech bank customers lost access to their funds when Synapse Financial Technologies, the middleman between fintech companies and their partner banks, collapsed, and it was unclear who was responsible for the funds.
Takeaway: When looking for a digital bank, ask if the FDIC directly insures your possible options or if the banks are insured through a partnership with a bank. While the odds of another collapse are slim, it's not a chance worth taking. You want a digital bank that is directly insured. You can use the FDIC's BankFind tool to learn if a bank is FDIC-insured.
Pros and cons of digital banking
Nothing is perfect, and that includes digital banking. Here's a quick breakdown of some of its attractive and not-so-attractive traits.
Pros
- Since they operate with lower overhead, digital banks are likely to offer higher deposit interest rates and lower loan interest rates.
- A digital bank's 100% online account management gives you real-time access to your banking activity.
- You can instantly send or receive funds through your digital bank, even while traveling in another country.
- You can instantly receive a digital debit or credit card to make online purchases.
- Loan decision times tend to be shorter than those with a brick-and-mortar bank.
Cons
- It takes several days to have a large sum of money mailed from your digital bank account.
- Digital banks provide no in-person customer service.
- Some digital banks are owned by fintech companies that partner with FDIC-insured banks. While there's nothing inherently wrong with the setup, it does complicate the situation if either a bank or the middleman were to collapse.
I never gave digital banking much thought until I learned that one of my colleagues took a hybrid approach, using a traditional brick-and-mortar bank and opening FDIC-insured digital bank accounts when the high-yield savings account rates are too attractive to pass up. Their earnings were blowing mine out of the water, and it suddenly seemed silly for me to ignore the opportunity.
Whether digital banking is right for you depends on what matters to you in a bank and how comfortable you are with the idea of making a change. If nothing else, earning extra interest on your savings could help you plump your emergency fund or put more away for retirement.
