Alexa Serra  ·  June 21, 2021 

How are Online Banks Impacting Traditional Banks?

FinTechs and mobile-only banks have become a driving force in the modern banking environment. Traditional banking methods are losing their appeal and are stepping down to welcome modern digital solutions as the new preferred approaches to banking.

FinTechs and mobile-only banks have become a driving force in the modern banking environment. Traditional banking methods are losing their appeal and are stepping down to welcome modern digital solutions as the new preferred approaches to banking.

The digitalization of almost all modern consumer services is becoming increasingly necessary for industries across the globe to deliver relevant value to their users. This phenomenon has resulted in several emerging cross-industry trends that have led to a transformation in the expectations of how customers access said goods and services. These new expectations have forced companies of all sizes to adopt emerging technologies and modernize their businesses to remain relevant. Banking is one of the industries that has experienced these changes the most and has witnessed the whirlwind of digital initiatives that have completely disrupted the industry, especially since the Covid pandemic. Banking users are now demanding digital solutions and are more aware of all they can now do using their computers and smartphones. Henceforth, it’s no surprise that traditional banks keep losing their appeal, and online banks have become the new belle of the ball.

Yes, the pandemic may have accelerated the adoption of digital banking solutions, but mobile banking platforms and FinTechs have been around for a while. What Covid did was bring mobile banking’s benefits to the surface and drive its accelerated adoption. As a result, traditional banking methods are slowly but surely getting outgunned, and digital banking–especially mobile-only banks–are becoming the norm. This way, online banking is reshaping the landscape of the world’s financial services industry, a future where in-person interactions are no longer the status quo.

However, vital questions remain: How are mobile banks impacting traditional physical banks? Will users drop their existing traditional banks altogether and switch to all-digital banking services? What are the benefits of mobile banks? What makes them superior to conventional banking solutions? We’ll try to answer these questions in this article and, hopefully, paint you a picture of mobile banking and its impact on the modern financial world.

What is Mobile Banking?

What is Mobile Banking?

Before we get started, it’s important to clarify that we’re talking about banks that don’t have a physical branch when we refer to mobile or online banks. They are to be differentiated from traditional brick-and-mortar banks–like Bank of America or Chase, for instance–that, while they do offer mobile and online banking options, aren’t mobile-only banks per se.

Online banks, also referred to as neobanks, are full-fledged financial institutions without a physical branch, meaning they operate exclusively online. To access their services, you need an internet connection and a smartphone, tablet, or computer. Mobile banks typically offer the same services you would find at a traditional bank without having to physically go to a branch, stand in line, and deal with tellers, other clients, parking, traffic, etc. With mobile banks, you can easily open an account, make payments, transfer funds, and withdraw cash, all of these by using an app or website on your device. Additionally, most online banks offer debit and credit cards with no monthly fees, easy cash withdrawal from various ATMs worldwide, and simple currency conversions. These features, and many more, are the reasons why mobile banking keeps gaining traction and surpassing traditional banks, which are struggling to keep up with the new normal.

Thanks to technologies such as mobile internet networks, cloud computing, artificial intelligence, Big Data, and blockchain, the banking industry has taken the plunge into becoming a predominantly digital industry. This has forced traditional banks to transform and upgrade or perish. Also, due to these technologies evolving at unbelievable speeds, mobile-only banks are popping up left and right with new features and more services added continuously, broadening the scope of what we can accomplish through digital banking. This phenomenon has skyrocketed the popularity of digital banks, and their usage has increased significantly in the past decade. To drive this point home, in the UK alone, the number of mobile banking users rose from 30% in 2007 to 76% in 2020. This rise in the adoption of digital banking means that most customers are either no longer visiting physical branch locations or have dropped their traditional banks altogether to switch to a mobile-only bank. Consequently, traditional banks are starting to see digital banks as a genuine threat.

Aside from the evident benefits of digital banks, one of the root causes for online banking becoming a disruptive force and changing the face of modern banking is the millennial population. Millennials are very tech-savvy and grew up during the boom of the digital world, so they are more demanding, less loyal, and usually expect their products and services to be digitized, accessible, personalized, and efficient. Henceforth, for millennials, traditional banking is useless and obsolete. Actually, a survey from The Millennial Disruption Index found that 71% of millennials would prefer to go to the dentist than physically talk to their traditional banks.

Furthermore, 73% would be more excited about online financial offerings from Google, Amazon, Apple, PayPal, or Square than from their traditional bank. And, if we consider that millennials are the largest generation group on the planet, we can easily conclude that adoption rates for mobile banking are only going to keep climbing. For traditional banks, this means updating their archaic banking models or be doomed to slowly but surely disappear.

How Are Online Banks Trumping Traditional Ones?

How Are Online Banks Trumping Traditional Ones?

With the rise of digital banking, most traditional banking customers are visiting physical branch locations less frequently. And with the Covid pandemic, in-person branch visits went down even further. A survey conducted by Discover found that 82% of customers used mobile banking services at least once in the last 30 days. That means that most banking users turn to mobile services instead of traditional banks to fulfill their financial duties. This phenomenon highlights the fact that, even though conventional banks have hurried their incursion in the digital world with their mobile apps and a full range of online services, they still haven’t successfully tackled the sharp increase in the adoption of mobile-only banks.

The disparity between outdated legacy systems used by most traditional banks and the modern AI and API-based systems used by online banks is astounding. And while conventional banks are taking their time to catch up with the new mobile banking dynamics, nimble FinTechs and digital banking startups are taking advantage of their competitive edge and are creeping up on their rigid, soon-to-be-outdated rivals.

But why are online banks so appealing to the modern customer? How are they superior to traditional banks? What’s their deal? Here are a few reasons why online banks are leading the digital disruption of the financial sector and impacting the way traditional banks function.

• Online Banks Have Fewer or no Fees.

As we mentioned earlier, the benefits of online banks are manifold, and as you continue reading, you’ll find out about many more. However, the true competitive edge of online banks stems from a significant reduction–or no need at all–in overhead costs. Since mobile-only banks have no physical branches, they can significantly reduce their overhead costs in ways that traditional banks can only dream of. This is one valuable perk that allows digital banks to receive higher profit margins on standard operations and offer a broader portfolio of free services to their customers–which, let’s face it, they love. Traditional banks usually charge a wide range of fees such as minimum balance fees, deposit and transfer fees, overdraft fees, and ATM withdrawal fees, to name a few. However, with digital banks, checking and savings accounts, debit and credit cards, payments, transfers, and deposits are typically free of fees and extra charges, which in traditional banking is unheard of.

Additionally, mobile-only banks usually have lower–or no–minimum balance requirements, no monthly maintenance fee, and no ATM withdrawal fees regardless of where in the world you withdraw money. Discover Bank, for instance, is one of the online banks that offer no monthly payments, no overdraft fees, and no ATM fees, which is highly convenient considering they have over 60,000 ATMs in the US alone. Compare these benefits to the benefits of traditional banks, where international transfers are incredibly costly ad ATM withdrawals often have high fees and poor exchange rates, and we see why people prefer online banks.

The impact of these low–or non-existent–fees, low requirements, and extra benefits that stem from the lack of branch maintenance costs have made online banks very cost-efficient and appealing to customers, especially younger ones. Also, as an increasing number of transactions are carried out online and are automated, online banks need fewer staff members, which is another source of cost-saving benefits. All these factors add to considerable advantages over the traditional banking model, which keeps losing traction and shrinking as the competition from its digital counterparts rises.

People find mobile banks a more attractive and pocket-friendly alternative that offers them more control over their finances without increased efforts or in-person requirements. Consequently, traditional banks are downsizing due to decreased profitability, which is the case of Banco Santander, who announced it would be closing 140 of its branches in the UK. The same goes for banks in Russia, France, Belgium, and even the US, where the 2,769 bank workers are being laid off. Hence, mobile banking has put traditional banks in an “innovate or die” scenario, where they either get on board with the new digital era or disappear altogether.

• Online Banks Are More Convenient

Let’s face it; our finances are usually at the core of most of our decision-making processes. Thus, access to financial services and managing our accounts and cards with ease is almost necessary nowadays. With online banking, this oversight of our financial lives becomes a reality. Online banking customers now have access to their accounts and a wide range of services 24/7, from anywhere in the world, at any time, with the only requirement of having an internet connection. Furthermore, due to the nature of online banking, customers can instantly make deposits, payments, check their balance, and perform all sorts of transactions without being tied to their busy schedule or a branch’s hours.

Most online banks also allow users to set up automatic transfers and payments, set up mobile alerts for payment tracking or account movements, and even offer loans and financing options for cars, homes, and trips. While it’s true that traditional banks provide most of these same services, they’re not available anytime and everywhere, and the fulfillment of most of these services requires in-person visits to branches. If you live near a branch, then you’re all set, but when you have to deal with traffic, public transportation, long waiting lines, and now Covid, traditional banking becomes a hassle. With online banks, you don’t have to deal with any of these obstacles, and you have the entire banking system at your fingertips. These benefits make digital banks an omnichannel haven for customers who, thanks to the ever-growing adoption of mobile technologies, seek more efficient and convenient ways to access goods and services without leaving their homes.

Additionally, the convenience provided by online banks is especially appealing for younger user groups such as millennials, who, as we already learned, is the largest generation on the planet. This fact has impacted traditional banking tremendously because most of today’s population are digital natives, which means they will inevitably gravitate towards anything that provides them the convenience of mobile services. To further prove this point, The Economist states that research shows 85% of millennials in the United States use mobile banking, and they predict that number to be higher for younger generations. As a result, these younger generations will be even more demanding of mobile services, which means the traditional banking model will not be on their radar, which will hasten the already sharp decline we’ve seen in the adoption of conventional banking.

• Online Banks Have Higher Interest Rates

One of the most significant advantages of online banks stems from the fact that they have no overhead costs from physical branches. This fact allows mobile banks to pass some of those savings on to their customers in the form of higher interest rates for both checking and savings accounts. While most traditional banks in the US offer interest rates ranging from 0.10% to 0.50%, online banks offer checking and savings accounts that feature rates between 0.9% and 1%. That’s almost double of what we see in traditional banks, and while a 0.5% increase may not seem like much, the best rates offered by some online banks, like Ally (0.9%) and Sallie Mae (0,8%), can add up in the long run, especially for high-balance accounts. And, if you usually make a lot of debit card purchases, have a lot of monthly direct deposits, and have a decent amount of money on your account, banks like Varo can give you a rate as high as 3.00%!

• Online Banks can Provide Enhanced Security.

Traditionally, there’s an increased sense of security regarding keeping your money in a safe in your bank’s branch. Nonetheless, keep in mind that threats exist virtually everywhere, including inside your bank’s branch. Sure, there’s some comfort from knowing your money is somewhere guarded by armed men and layers of steel instead of having all your information in the cloud, vulnerable to hackers. However, contrary to popular beliefs, online banking can be just as safe–if not safer–than traditional banking. As a matter of fact, traditional banks are just as vulnerable to hacking as any other enterprise because, even if they offer their services via physical branch, most of them still have mobile and web apps and store users’ financial and personal information online. The difference is that online banks have digital origins, meaning they were built in the cyberworld, with security as an integral part of every step of their development process. While traditional banks may have different approaches to security, online banks must operate under industry-wide security standards and regulatory practices that ensure the protection of their users’ data.

Online banks must enforce robust security measures to safely deliver their services and avoid penalties for violating regulatory acts such as the GDPR in Europe or the FDIC in the US. If you choose a bank insured by the FDIC, your accounts are covered for losses up to $250,000. Following these regulatory acts means that banks must ensure the protection, integrity, and confidentiality of all user data at all times. Unlike traditional banks, which had to build their digital products from scratch and learn how to enforce security on the go, online banks were born in the digital world. They’ve continuously operated online and benefited from state-of-the-art technologies that have allowed them to build fast and flexible responses to security threats.

Furthermore, modern FinTech app developers usually take a security-as-code approach that ensures that safety measures are included in every step of the development process, not just at the end. Additionally, most online banks also enforce security measures such as multi-factor authentication, firewalls, and anti-malware protection, Secure Socket Layer (SSL) encryption, token-based authentication (JSON), different types of data encryption methods, blockchain technology, credential confidentiality, and Identity Access Management Tools (IAM) such as Auth0 or Okta. These multi-layered approaches to data safety ensure that online banks will guard your information at all costs so you can access their services with confidence and the certainty that your finances are always secure.

Are Traditional Banks Going To Disappear?

Are Traditional Banks Going To Disappear?

After reading about how the disruptive force that is mobile banking is changing the financial industry’s landscape, a question emerges: Are physical bank branches going to disappear eventually? The answer to this question is tricky. A recent study conducted by N26, a German online bank, shows a steady decline in the number of open bank branches in the US of 6.5% since 2012. This figure is expected to fall to 16,000 by 2030, and the decreasing trend suggests that all branches will close by 2034. Furthermore, the study also shows that 46% of Americans believe that the current banking system needs to change, and 15.7% say they don’t trust banks.

From these figures, we can easily conclude that traditional banking is on its way to oblivion. The current banking system is flawed, and most conventional financial institutions aren’t keeping up with shifting consumer habits. In addition to the pandemic, which was a fantastic driver of this shift in habits, younger generations aren’t exactly branch-friendly. They are digital natives, which means that mobile banking wasn’t a pandemic-driven transition for them; it was the norm. These larger generational groups drive online bank adoption through the roof and bring to the surface evident flaws in the current banking system. Added to this is that many traditional banks are taking too long to abandon their obsolete legacy systems and aren’t leveraging new emerging technologies to effectively challenge their digital counterparts and meet the needs of younger customers. FinTechs and online banks have taken advantage of these unmet needs. They have created a mobile ecosystem with a broader scope of features that gives their users power over their financial lives and redefines what they can do with just a swipe of their finger.

Nonetheless, however pervasive mobile technologies have become in our lives, the truth is the basic need for banking services remains unchanged. People will always need to make deposits, open new accounts, get new debit and credit cards, apply for loans, and purchase goods. And even though you can perform all of these tasks using online banks, there will always be customers who value human-to-human connections when it comes to something as personal as money. In fact, according to a recent study, 73% of surveyed customers still prefer in-person interactions when dealing with the financial aspects of their lives. The N26 research we touched on earlier also shows that 89.2% of Americans prefer to stick to a bank with physical branches. They rank access to cash (53.7%) and in-person advice (50.4%) as two of the top benefits of physical branches over online banks. Furthermore, they found that security was a considerable concern when switching to online-only banks, followed by the lack of human interaction.

So, while we have witnessed a considerable rise in the adoption of online banking, we can’t confidently conclude that physical branches will, in fact, disappear at any point soon. There might be less dependence on physical branches moving forward, but in-person banking will likely remain an integral part of the modern financial industry. We will probably see physical branch locations embracing hybrid strategies that marry the benefits of the online universe with the in-person needs of their customers. This way, traditional banks will supplement their branches with digital tellers, chatbots, virtual assistants, and remote appointments, among others. On that same token, having the best of both worlds is exceptionally beneficial for the industry, especially when we consider that digital-only solutions aren’t the answer for every customer. Some people don’t have constant access to a smartphone, wifi, or mobile internet. And even if they do have access to said elements, some customers aren’t capable or savvy enough to conduct their banking digitally, some distrust the online system, and some simply don’t want to. For this reason, it’s essential to keep the physical, in-person solutions while implementing and improving access to online services.

Top Online Banks

Top Online Banks

  • N26: German online bank founded in 2013.
  • Nubank: Brazilian-based online bank, born in 2013 with Colombian and American founders.
  • Ally Bank: Has its roots in GMCA, the financial arm of automaker giant GM. It rebranded in 2009 as an online-only bank Ally.
  • Chime: Online bank founded in San Francisco, CA in 2013.
  • Revolut: Online bank founded in London, England, in 2015.
  • Varo: Varo is a neobank founded in 2015 in San Francisco, CA.
  • Atom Bank: Atom is a mobile bank founded in 2013 in the UK.



Initially, people built banks merely for the physical handling and safekeeping of money and all money-related transactions. However, we now live in a digital world where we can accomplish almost everything with a mobile device or personal computer using an internet connection. There is no question that the banking sector has been deeply affected by these modern ways of interacting with money. Similarly, there can be no doubt whether banks will have to change and adapt to the new shifts that are driving the industry into the world of modern technologies. These changes brought on by the digital revolution are demanding that financial services become more user-centric and efficient, leading to the birth of online banking as a response to these new emerging needs. As a result, traditional banks are tasked with convincing the population that switching to an online-only banking methodology is not convenient nor efficient. However, while online banking empowers consumers to take charge of their financial decisions, the future of banking likely lies in the combination of both digital and physical worlds.

Hopefully, we’ve managed to convey the benefits and the future of online banking, But if you have any questions or concerns, feel free to contact us! We’re glad to help.

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