Unlike the traditional banks, which are referred to as brick-and-mortar banks, digital banks operate without a network of physical branches. So, they are also called online or virtual banks. Lately, they are becoming more and more popular because of the convenience of internet banking and the higher interest rates they offer on savings accounts. For those of us who have our accounts with traditional banks, the higher interest rates offered by digital banks may sound too good to be true, but they are quite real. Digital banks can offer higher interest rates to customers because they have a relatively lower establishment, overhead and infrastructural costs as they don’t have physical branches.
Secondly, digital banks are a new phenomenon, whereas traditional banks have been around for many decades. So, people usually perceive traditional banks to be safer and more stable for depositing their hard-earned money than digital banks. So, it is relatively easy for traditional banks to attract deposits. Hence, they don’t need to offer high-interest rates to get customers or deposits. Meanwhile, digital banks may find it challenging to attract deposits from traditional banking customers as they don’t have physical branches or known points of contact. So, digital banks will have to offer higher interest rates as incentives to entice customers and attract more deposits.
Furthermore, digital banks have been witnessing increasing demand for loans from micro and small business owners, individuals, and corporate borrowers. As such, their loan portfolio is growing very fast, which means their appetite for deposits is also increasing equally fast. In other words, when a bank’s loan portfolio grows, that bank will need to grow deposits at the same pace or much faster. To aggressively lure depositors and customers and ensure that their ability to attract deposits in the future will keep pace with the growing demand for loans, many digital banks have to invariably provide higher interest rates on their savings account compared to the interest rates offered by traditional banks.