The Rise Of Digital Banks

“Banking is no longer somewhere you go, it’s something you do.”

― Brett King, Futurist and author of Bank 4.0 and Breaking Banks

In the last decade, the banking and financial services industry is seeing massive shifts with consumer mindsets, new technologies and innovation. Digital banks are the new players in the financial services sector today and growing globally.  Digital banks are also known as “Challenger Banks” or “Neo Banks”. They provide digitisation and delivery of banking services more efficiently with the latest state of the art technology infrastructure.

Digital banks, however, do not have a physical bank branch to operate. The services are part of an integrated end-to-end digital platform. They provide branchless and seamless end-to-end processing of banking operations which are initiated by customers from mobile phones via a mobile banking app. Customers save a conducive amount of travelling time and are able to manage their finances at their convenience. The current conventional banks offer online banking services which are the digitising of existing programs and services undertaken by financial institutions to the internet and mobile channels.

Digital banks do not have to rely on old legacy systems and processes to operate, unlike conventional banks. Digital banks operate using the latest technologies such as Artificial Intelligence (AI), Blockchain, Biometrics Security and Cloud. A key requirement for a digital bank is the implementation of e-KYC (Electronic Know Your Customer) feature, which is the process of onboarding and verifying a customer via the mobile banking app without physically being at the bank branch. Together with other security features such as biometrics and security PIN, customers are able to open accounts and perform online transfers.  The processes, compliance requirements, policies and technology differ for digital banks as compared to conventional banks. In which case, it provides lower operating and resource costs.

When you think of how digital banks work, you can think of a digital wallet or an e-wallet app with financial service and features.  The access, process and experience is simplified.  Some examples of banking services offered by digital banks include account opening, deposits, Peer-to-Peer (P2P) lending, remittance, credit card facility, bill payment services and loans.

Digital banks can address some of the challenges that conventional banks have been facing. This includes providing banking services to the underserve or unbanked segments such as the SMEs, micro-SMEs and lower-income groups. Emerging markets in Southeast Asia, Africa and Latin America are a huge opportunity for digital banks.

Challenger Banks are emerging across the globe, FT Partners, January 2020

The rise of digital banks began in Europe and the UK when regulators relaxed the barriers for entry and introduced open banking standards or open APIs and PSD2 (Second Payment Services Directive). Globally, many other governments are supportive in relaxing policies and changing financial regulations to make it easier for banks, fintech’s and start-ups to offer digital financial services to consumers. Other key drives include a change in consumer behaviours, growing adoption of smartphones, internet access,  social media, increased investment in fintech, growth of the e-commerce industry and the rising adoption of mobile payment solutions. 

The chart below from FT Partners Research – The Rise of Challenger Banks, illustrates the top global digital bank user base, with Brazil’s Nubank having the most number of users at 15 million, followed by South Koreas Kakao Bank with 10 million users. 

Conventional banks are also launching their digital brands, acquiring or partnering with fintech firms to provide Banking-As-Service (BaaS) or open banking services which are third parties that offer banking services. For many conventional banks, it is an arduous task to innovate and reinvent, as they are faced with challenges with their organisational culture and structure.

Technology giants Amazon, Apple, Facebook and Google, are currently offering financial services with conventional banks or financial service providers. For example, in 2019, Apple launched its Apple Card, a digital and physical credit card in partnership with Goldman Sachs. Facebook Pay, is also another integrated payments platform that allows its users of Facebook, Messenger, Instagram, and WhatsApp to send and receive money to friends and make online purchases.  Eventually, these tech giants will move towards becoming a licensed digital bank in the future.

In the local scene, the use and adoption of online banking services are increasing. A survey conducted by, a global financial comparison platform, indicates that about 21% of Malaysian adults have been using a digital-only bank. Malaysia is expected to grow 16% by 2025 in the adoption of digital banking, ahead of Philippines and Singapore. The figure below demonstrates the percentage of the population for selected countries with an online-only bank account. 

Bank Negara Malaysia (BNM) is finalising the policy documents on digital banking framework. It is set to issue five digital bank licenses in the coming year. BNM has invited the industry to provide feedback on the framework. Interested applicants must have innovative business models and able to serve the underserved and unserved market segments, including the SME market. Many parties have expressed interest in applying for the license with most of them coming non-bank entities, corporates and fintech players. Some of the interested parties are  Axiata’s Boost, Sunway, Grab, TNG Digital, BigPay. Green Packet and MoneyLion. Furthermore, banking groups such as Affin Bank, CIMB Group, Hong Leong Bank and Standard Chartered Bank have all expressed their interest in the licence as well.

To be successful, digital banks have to offer a strong value proposition while offering consumer-centric services and solutions. The next five years will be an exciting time for the industry. We will see the rise of digital banks but only time will tell if they will be as successful and profitable as conventional banks.

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