What is a digital bank?
In layman’s terms, a digital bank is a bank that operates online and provides services to its customers that were previously only available at a bank branch.
What is online banking?
Digital banking involves the digitization of all traditional banking products, processes, and activities that serve customers through online channels.
What exactly are digital banking services?
Most often, these are the following operations and activities (all traditional banking services that are available 24 hours a day, 7 days a week on mobile phones, computers, and compatible smart devices without the need for the customer to be present at a bank branch):
- Obtaining bank statements
- Cash withdrawals
- Transfer money
- Maintaining a checking/savings account
- Opening a digital bank account
- Loan management
- Invoice payments
- Controls management
- Monitoring transaction records
Of course, digital banking software makes all traditional services easier to access, understand and manage.
This approach allows us to test digital banking risk concepts before moving parts of the old legacy business to the new system. Notable examples include Goldman Sachs’ Marcus, RBS’s Bó, and State Bank of India’s YONO, which acquired more than 26 million customers and became profitable within 18 months. The statistics below confirm the assumption that digital transformation will be a top priority for banks in 2021.
Digital Banking Vs. online banking: are they the same?
Although the two terms may seem interchangeable, there are major differences between digital and online banking.
Online banking includes only some transaction functions of the basic banking system. Online banking is usually accessed over the Internet and provides basic banking functions such as account management and access to statements. The capabilities of the online banking system are limited and cannot be quickly expanded to provide additional banking services to consumers.
Digital banking systems are much more flexible and allow banks to add and expand features much faster than traditional systems. Digital banking relies on high levels of process automation, web services, and APIs to provide banks and their customers with high levels of cost efficiency, security, and flexibility. Modern banking solutions enable a fully digital customer journey, generate real-time data flows and accelerate key analyses.
Another term often confused with online and digital banking is mobile banking. It can be defined as a service provided by an existing bank to its customers that allows them to transact through their mobile devices without the need to visit a bank branch.
So of the three terms, digital banking is much broader. It is safe to say that it is made up of a combination of online and mobile banking.
The benefits of digital banking for consumers
As more and more digital banks enter the market, it is important to understand how modern digital banking solutions allow them to offer better and cheaper services than traditional competitors. Here are the most important benefits of digital banking:
Traditional banks invest a lot of time and resources in control and accounting. By eliminating redundant back-office processes, digital banking software significantly reduces operating costs. Digital banking systems take a lot of work out of banks by automating the processes involved in day-to-day financial transactions. Digitization reduces the number of steps and people involved in transactions and reduces the risk of costly financial mistakes.
Integrated KYC and AML protocols enable digital banks and customers to open accounts within minutes from any internet-connected device. ID verification and risk assessment systems allow banks to serve customers quickly and easily and allow non-bank customers to access financial services. A big advantage of personal banking is that it is available 24/7. This means customers can make any transaction from anywhere and access a wide range of services.
Digital banking software enables sophisticated personalization strategies based on artificial intelligence (AI) and machine learning (ML). Banks can offer customers relevant financial options, interactive tools, and educational resources at the right time. Automated budgeting, spending analytics, savings reminders, and many other tools help inform and engage customers.
Digital banks already have many features that established banks simply can’t offer, such as buying cryptocurrencies and gold or investing in the stock markets right in the banking app. Mobile and online banking customers can instantly change security settings and transaction limits and even specify whether or not they want to enable NFC or magnetic stripe payments.
Types of digital banks
Although the terms “neo-bank” and “challenger bank” are familiar to almost everyone today, it can be difficult to distinguish one from the other, so let’s break down all the i’s and explore the main types of digital banks.
Neobank is a digital bank operating online, without a physical presence, which provides its customers with remote access to its services through a mobile application. Many neobanks do not have a banking license and work with an existing bank for operations with a banking license (which means their customers have to create an account with a partner bank). The range of services offered by non-banks is often narrower compared to licensed banks.
The term originated in the United Kingdom and refers to a recently launched bank that “challenges” traditional banking institutions. More user-friendly and cost-effective for the end user, challenger banks target audience segments underserved by large financial institutions.
These are fully licensed neo-banks that provide a full range of banking services, and their only difference from brick-and-mortar banks is the way they operate – which is completely online. Examples of new banks are Revolut, Monzo, N26, and Starling Bank.
As the name suggests, these are non-banking institutions that provide financial services – such as streamlined loans or mortgages – but at the same time do not accept deposits or offer current and savings accounts. Some of the non-banking companies, like Monese, operate under EMI licenses.
Providers of digital banking solutions
According to McKinsey, more than 65% of banks surveyed are exploring the potential of next-generation core banking platforms. The digital banking experience offered by challengers is forcing incumbent banks to review legacy technologies in their core business.
Image Source: SDK.finance