Digital Banking: What Can Traditional Banks Learn From Digital-Only Banks? Here’s What We Know So Far

3 billion. 

That‘s the forecasted number of global users with access to retail banking services through smartphones, tablets, PCs, and smartwatches in 2021.  

No doubt that the global banking sector is rapidly innovating. Both strategic planning and technological advancement are at full scale to meet customer expectations and also to protect the market share. And one primary reason for this disruption is the customer acceptance of digital banks. 

The new–age digital bank’s unique offering has transformed the whole banking experience. Moreover, we can’t ignore the fact that the new era of social distancing has elevated customer acceptance of internet banking for the utter convenience it offers.  

Also, the increasing cost and time associated with operating in physical locations for banks are high on OPEX and seemingly old–fashioned. 

Even before the pandemic pounced on us, millennials, particularly tech-savvy, moved more frequently to digital-only banks for convenience and superior customer experience. 

But, after the confirmation of the novel coronavirus and the aligned implication of lockdowns and social distancing measures, the bank‘s relationship with customers went for a toss. This, in turn, worked in favor of digital banks.  

The primary reason is customers wanted someone who can help them bank even in these unprecedented times.  

Also, we can‘t deny that digital-only banks offer some clear advantages to customers, which are irresistible. From new product offerings, personalized banking, quicker payment processing, exceptional customer experience. The list goes on. 

All that is fine. But why does that affect traditional banks? You ask.  

Well, that’s where we are heading.  

Let‘s start by answering why traditional banks are failing to compete with new–age disruptors. Who are these new digital banks? Is there a difference between them?  

Lastly. How can traditional banks survive this threat? 

Here’s what we know so far. 

 

Why are traditional banks failing? 

 

The future of banking depends on innovation, and banks are struggling to innovate.  

A World Economic Forum survey has revealed that only 28% of Millennials and Generation Z trust their banks to be fair and honest.  

This deficient customer trust level in banks is a clear indicator of the difficulty banks face in terms of change in operating model and innovation in an industry that needs disruption from the last two decades. 

A need for a better customer banking experience across channels has resulted in unprecedented competition within the banking and financial services industry. 

Here are some of the key challenges which the traditional banks are struggling with. 

• Slow digital transformation 
• Impediments of legacy infrastructure  
• Emergence of newer disruptive banking models 
• Higher operating cost of retail banks 
• Poor customer experience 
• Invasion by tech giants 
• Strict regulatory standards 

Banks and traditional financial institutions need to catch up fast with the new age digital financial technology companies. These fintech companies continuously innovate more unique services and targeted products, disrupting the traditional banking experience.  

That said, as we enter a new decade, we indeed see digital banks will be a huge challenge to traditional banks. The reason is the increasing acceptance of customers toward digital-only platforms for their utter convenience. But what is a digital bank? 

Keep reading. 

 

What is Digital Bank (or Digital-only Bank)? 

  

Digital banking or Digital-only bank is part of the broader context for moving to online banking, where banking services are delivered over the internet.  

In simpler terms, when a bank provides its services online, and customers can make transactions, submit requests, and handle other banking activities online, it is called digital banking. 

This is just one definition of a digital bank. And, there are lots of definitions surrounding the same.  

To simplify the digital banks of today, we have categorized them into three types. 

  

Direct Bank   

A Direct Bank (sometimes called a branch-less bank or virtual bank) is typically provided or launched by an incumbent bank or incumbent financial institution offering a new digital-only offering to the marketplace.  

Direct Banks provide a great opportunity for deposit growth and reduce the high costs of maintaining a branch network. Direct Banks based on their modern technology and modern business practices allows  

• Speed to market 
• Reduced acquisition cost and  
• Provide excellent customer experience 

  

Neobank   

Neobanks are financial technology (or Fintech) firms, who do not have a bank charter and typically leverage or rent other banks’ charters.  

The unique selling point of Neobanks is to provide a superior customer experience in a niche market. Other benefits of a Neobank include 

• Transparency with real-time notifications and charges 
• In-depth customer insights with dashboard 
• Easy-to-use APIs 

  

Challenger Bank   

Challenger Banks, for the most part, is exclusively mobile, who have their own charter, and they are challenging the status quo of the incumbent banks in the marketplace.  

The banks distinguish themselves from traditional banks by modern financial technology (or Fintech) practices, such as online-only operations, that avoid traditional banking costs and complexities. Challenger Banks again offers 

• Unique customer experiences and 
• Offer new products and services which go beyond the traditional bank offerings 

  

Data Bridge Market Research report on neo and challenger bank market quotes, “Neo and challenger bank market is expected to reach USD 607.20 billion by 2027 witnessing market growth at a rate of 47.30% in the forecast period of 2020 to 2027.“ 

What makes neo banks so attractive? Here’s what we know so far. 

 

 

What is attractive with digital-only banks? 

  

Neobanks or most digital banks strategically target the unbanked population and tech-savvy millennials with their cost-effective structures (no monthly fees, no withdrawal, or overdraft costs), along with offering personalized customer experiences (budgeting and money-tracking tools, real-time balances). 

A digital–only bank platform provides all the banking services through digital platforms. Mobile, tablets, desktops, smartwatches – all within the internet. In other words, digital banks offer customers a 360° banking experience. All this at customers‘ fingertips. 

Few examples of digital-only banks include Atom Bank in the UK, BankMobile in the US, Fidor Bank in Germany, and ICICI Pockets in India, which offer great functionalities & products. 

Here is the gist of what digital banks offer, which disrupts the traditional financial players. 

• Providing frictionless customer experience across channels 
• Real-time analytics for offering relevant products & services 
• Saves time and effort of both customer and banker by smart automation tools 
• Distributed omnichannel presence 
• 365/24/7 Customer Service 
• Better rates, lower fees 

And, that not all. The list goes on.  

 

Bottom Line 

We understand that 2020 has been difficult, forcing many banks to make big decisions quickly. If you have not taken the threat seriously that digital banks possess, 2021 is the year to consider it again. 

Start by evaluating your current business model with a digital–only bank. Understand where you stand in the industry and make smart technology choices by rolling out services like in-store mobile phone payment platforms, offering an exceptional user experience and analytical dashboards for customers and senior management, or providing faster nonbank money transfers.    

The survival of banks depends on making smart technology choices.  

In case you have already evaluated your focus area and looking out for a technology partner with whom you can bank on. We can help. 

Check out our work here. 

 

Read Next: 

• What is Financial Technology (Fintech) | Evolution of Fintech 
• Trends to Watch: Major Fintech Trends in 2021 and Beyond