Should the self-employed consider using digital banks? (2024)

Digital banks like Starling Bank and Monzo are becoming more popular, as customers choose to manage their money through app-based banking rather than visiting a branch.

But what is digital banking, how does it work, and what are the benefits and drawbacks for businesses?

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What is digital banking?

Digital banking gives businesses the ability to manage money through their phone, with apps that have real-time updates on spending, plus features for budgeting and saving.

According to Statista, smartphone usage has increased across all UK age groups since 2012. Only nine per cent of people aged 55 to 64 used a smartphone in 2012, but this increased to 87 per cent in 2020.

This has made app-based banking more viable. Lockdown and coronavirus restrictions have also forced people to become more comfortable with managing their money from home.

And as traditional banks took time to develop their own digital banking apps, a number of technology start-ups rose to plug the gap.

While traditional banks aren’t going anywhere, digital banking is making it easier for lots of businesses to manage their finances. Self-employed people who want to embrace new technology can enjoy features like:

• real-time spending and income notifications – rather than waiting for transactions to show on your statement, you’ll get a ping when you make a purchase, or when an invoice is paid. This helps you to budget and spot fraud
• integration with other apps – you can integrate accounting apps like Xero and QuickBooks, for example, so all of your transactions feed into your other software (with Starling, this happens in real time)
• automatic spending categories – digital banking can automatically categorise your outgoings according to HMRC’s own categories
• you don’t need to use card readers – with traditional banks you often need to use card readers to authorise payments or sign in to accounts – digital banks let you do this securely via the app

While digital banking can include banking using a traditional bank’s app, here we examine digital-first banks. These are challenger banks that don’t have any branches – everything is done digitally.

How do digital banks work?

As mentioned, digital banks don’t have traditional branches. Instead all your money management (including customer support) is done through an app or your computer.

While plenty of people still like to speak to people in-branch, 24/7 app-based banking can suit the self-employed. For example, a traditional bank’s opening hours aren’t always easy to work around.

You can do things that you’d usually need to do in-branch, like paying in a cheque, through an app. With Starling, for instance, you can deposit cheques up to a value of £500 by taking a picture of it (for cheques that are more than £500, you just pop them in the post) and submitting it via the app.

Even applying for an account is done through an app, meaning you can get started in minutes.

Are digital banks safe?

Yes – digital banks operate under exactly the same rules and regulations as high street banks.

We’ll cover two key questions around banking safety:

• is my money protected if my bank collapses?
• is my app safe and secure enough to prevent fraud?

Is my money protected?

There’s a scheme called the Financial Services Compensation Scheme (FSCS), which protects deposits of up to £85,000.

This scheme applies to UK-authorised banks. So, as long as your bank is authorised, FSCS will automatically compensate you if your bank fails.

The good news is that you have a choice of online only banks that are now authorised banks. This includes Starling and means that you get the same level of compensation as if you were choosing HSBC or Natwest.

Being an authorised bank also means you should have access to the same range of services you’d usually expect from a bank.

Not being a registered bank doesn’t mean your money isn’t safe. Money apps that aren’t banks still need to be regulated by the Financial Conduct Authority (FCA) and services usually need to have an electronic money licence. This requires them to ring-fence your money so that if they’re in trouble, they can’t access it to pay their own debts.

Examples of apps that aren’t UK-registered banks include ANNA, Revolut, and Monese.

Is my app safe and secure enough to prevent fraud?

Yes – as digital banks are technology-based, their anti-fraud measures are usually sophisticated.

You still need to be careful, though. Scammers might pretend to be from any financial organisation, so make sure you can spot the signs of fraud so you don’t lose money.

In terms of general app security, apps usually have multiple levels of protection, including PIN numbers, passwords, and even biometrics (like your fingerprint and facial recognition). Real-time updates mean you can instantly spot if someone has made a fraudulent transaction. And 24/7 support also means you can get in touch quickly if you think something has gone wrong, and you can often lock cards in the app if yours has been lost or stolen.

But again, it’s important to be vigilant. Most people do this anyway, but protect your device itself with PIN numbers and passwords to stop people getting past your lock screen.

Make sure you keep your apps updated, as updates often have new security fixes and features. And use antivirus software, even on your phone. Not only will the software scan for threats, but it can usually track and give you control of your device remotely if you lose it or it gets stolen.

Digital banking vs traditional banking for businesses

Can’t decide whether digital banking through an online-only app is right for your business? Keep in mind these advantages:

• it’s quick (and secure) to apply for an account, with customer support via in-app chat, email and telephone if you get stuck. Starling in particular offers 24/7 customer support from their UK-based team by phone and in-app chat
• you can manage your business’s finances 24/7, helping you stay on top of business performance
• many digital banks don’t have monthly fees, don’t charge to use your cards abroad, and it doesn’t usually cost much to access more advanced features like foreign currency accounts
• there’s automated spending categorisation, making bookkeeping and accounting easier (as well as making it easier to keep money aside for costs like your taxes)
• you can integrate accounting, communication and payment apps

In terms of disadvantages, it depends on how you manage your business and its money. If you like the in-person advice bank staff can offer you, you might not want to go completely digital just yet.

But as it’s free to apply for lots of these services, it might be worth trying an online only bank to see whether it can help you keep better track of your business’s money.

We’ve produced this article in collaboration with Starling Bank.

Photograph 1: Ranta Images/stock.adobe.com

What are your experiences with online only banks? Let us know in the comments below.