Why more Americans are turning to digital banks
Bankrate: 77 percent of Americans prefer to conduct their banking online via a computer or mobile app
(InvestigateTV) — From Ally to Discover bank, digital banks are now a mainstream option. But what exactly defines a digital bank?
“Generally it’s used to mean banks that do not have a physical presence,” Matthew Frankel, contributing analyst at The Motley Fool, explained. “They only operate online. Maybe they offer an app. Some might just operate through a website. But they generally just operate without physical branches.”
Frankel pointed to interest rates – and the Fed’s moves – as a big reason digital banking has surged in recent years.
“The difference in yield you can get from an online bank is a lot more substantial than it was when, you know, we were in the near 0 interest rate environment during the COVID era,” he said. “So, that I think that really kind of attracted a lot of people to the digital banking space.”
When comparing banks, a good place to start is the APY, or annual percentage yield.
“I don’t want to turn this into a math lesson but think of this as an interest rate you’re actually getting on your money,” Frankel said. “Basically, your annual percentage yield is if you put money in your bank account, left it there for a year – how much will it grow by. So, if it’s a 4 percent APY, and you put in $1,000, it will grow by $40 by the end of the year.”
Frankel said higher yields often come with trade-offs so comparing rates carefully is key.
“My biggest thing to watch out for, is to obviously compare interest rates. But don’t think that the highest interest rate you see offered is always the best idea.,” he shared.
Before switching, Frankel said to look at more than just the rate. Make sure the APY isn’t a teaser, check the fees and how easy it is to move money, see if there are requirements like direct deposit, and most importantly, confirm the bank is FDIC insured.
He also reminded people to make sure the site is legit – not a fake page designed to steal your money or personal information.
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