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Digital Banking Explained

Digital acceleration has modernized the banking industry as we move towards a fintech-driven future. Advanced technological infrastructure has helped to introduce digital banks into the industry and helped traditional banks gradually move their business digitally. With the power of digital banking, customers will never have to set foot in a physical bank branch while having the ability to access banking functions from their computer or mobile devices, anytime and anywhere.

what is digital banking

Digital banking is often misunderstood to be the same the online banking however, a digital bank goes beyond that. Simply put, digital banking embraces and leverages technologies to deliver banking functionality across all its delivery channels which can consists of online and mobile banking features.

From a customer perspective, they would only be able to see the existence of the front-end of a mobile or online platform. There are many internal functions and processes like risk control, assets protection and more. Digitalization of the functions makes it a digital bank. Digital banking platforms can rely on process automation, web-based services, and APIs to create digital services.

Digital banking can be defined as the digitization of banking services that circumscribe the functional and operational aspects of a platform, to reduce risk and increase efficiency to offer a positive customer experience.

The Main Players of Digital Banking

players of digital banking

Digital banks can take the form of a challenger bank or neobank. Challenger banks are startups that hold a banking license offered by a banking regulator to provide traditional banking services. They operate in a similar way to a retail bank but leveraged with innovative technology.

Neobanks are entirely digital and cloud-based and limit their customer interaction via mobile apps and web platforms. However, as unregulated entities, they cannot operate like a challenger bank (to offer full-fledged banking services) and are more focused on certain clientele (e.g., SMEs). However, we often see partnerships between neobanks and partner banks to offer more services. In Asia, a Vietnam-based Timo partnered with its local bank, Viet Capital Bank in which the local bank holds the license while Timo provided the digital front-end.

These two entities can overlap in certain situations. Neobanks are often the ‘babies’ of challenger banks as they start off as unregulated FinTech startups before regulators approve their licenses and they can move on to becoming a challenger bank. The main differentiating characteristics of both are that challenger banks are mostly online while neobanks are fully online.

Digital Banking in APAC

payment phone

Asia-Pacific (APAC) is home to about 50 digital banks with most of them being new to the market, established between 2016 to 2020. Digital banking in APAC has spiked along with the fight for digital consumers. Among the 250 digital banks globally, 20% of them are based in APAC with operations globally. Generally, digital banks in APAC are backed by corporate bankers, joint venture partners (local banks, global banks, technology companies and more). For example, digital banks in APAC like WeBank (China), MYbank (China), Kakaobank (Korea) are backed by Tencent, Alibaba, and Kakao respectively or K Bank (Korea) and SBI Sumishin (Japan) who are both backed by telcos.

Local banks are also looking to join the game as well, with DBS launching digibank in India and Indonesia. Many Asian banks are planning to launch their fully-digital bank in foreign markets to compete with the local banks with extensive branch network.

Digital banks in APAC offers:

  • Diversified and personalized offerings
  • Electronic client servicing
  • Comprehensive digital infrastructure
  • 100% delivery via digital

However, only about 5% of digital banks are in the profitable stage currently. Even though the market is massive and ready for growth, digital banking is still a challenging sector for FinTech firms. FinTech companies must navigate the country’s complex regulatory landscape while working to build consumer trust.

The Future of Digital Banking

Digital banking rose in popularity in APAC in 2015 when China granted internet-only banking licenses, and other countries followed its footsteps. Recently, APAC has seen a new level of maturity with penetration rate approaching 90% in the region. Drove by emerging markets and technology adoption rate accelerated by COVID-19, APAC saw a jump in digital banking penetration from 65% in 2017 to 88% in 2021.

Digital banking in APAC is expected to grow even faster and bigger with the huge consumer demand of digital banking alternatives. However, along with the growth, it is also expected to have stricter governmental regulations and restrictions on the players of digital banks.

Digital banking licenses in Asia has helped to unlock access to banking markets for non-banking firms. In Singapore, Monetary Authority of Singapore (MAS) awarded four digital banking licenses, Philippines has started to issue digital banking licenses and Malaysia is expected to issue five in 2022. As digital banks emerge in APAC, it will help to foster a vibrant and accelerated technological infrastructure in APAC.

There are three main digital banking trends that we are expecting to see soon:

  1. Opening banking
  2. Security and privacy of data
  3. Artificial Intelligence (AI) and Machine Learning (ML)

Open Banking

Open banking is expected to offer customers more service options via 3rd parties and giving them more control over the way their data is used. In a recent survey, customers are seen to be inclined to an open banking service as compared to their current bank. This suggests a strong opportunity for digital banks to expand to open banking and increase their competitiveness in the market.

Security and Privacy of Data

In APAC, customers prioritize their information security and along with the advancement of the industry, it is expected to see privacy and security as the top of digital banks’ list. This is an area of improvement and continuous effort expected from up-and-coming startups

Artificial Intelligence (AI) and Machine Learning (ML)

AI and ML has shown strong potential for the FinTech industry, especially in automation. According to Goldman Sachs, ML and AI is expected to enable an annual cost savings and new revenue opportunities of $43 billion by 2025. AI is currently the second top area of focus for startups. However, in APAC, AI and ML are still lacking as companies do not have a strong understanding and control over it yet. It is also important to note that AI and ML is also a concern for customers and companies have put in effort to build customer trust within digital interactions.

Jobs in Digital Banking

jobs in digital banking

With the expected growth in the digital banking sector, we have also seen a surge in FinTech talents within digital banking. In January 2021, Monetary Authority of Singapore received up to 21 digital banking license application for 5 available licenses. This creates job vacancies due to the strong need to hire technology professionals to develop and maintain the platform.

The four key job functions that we have identified that will have strong demand for tech talents are:

  1. Front-end Development and UX/UI Design
  2. Data and Analytics
  3. Blockchain and Distributed Ledger Technology
  4. Automation

Front-end Development and UX/UI Design

As digital banks do not have a physical branch, operations are heavily dependent on the platform. This would mean that the customer’s interaction is limited to the platform, thus the strong need for front-end developers and UX/UI designers. These roles will be critical in attracting and retaining customers as they would be building a platform that would deliver the entire customer experience.

Data and Analytics

Not limited to digital banking but the entire banking industry are in demand for data and analytics professionals due to the abundance of customer data available. Data scientists/analysts and analytics/mining engineers will help digital banking firms utilize its customer data in the most effective way and ensuring that customers are targeted with updated and relevant products and services.

Blockchain and Distributed Ledger Technology

Blockchain developers, blockchain engineers are also required to fill the roles in digital banks as digital banks’ operations involve blockchain or distributed ledger technology in their some of their products. These technologies are used to decentralize financial management to a network of computers and manage the huge increase of customer data and information.

Automation

When creating a digital bank platform from scratch, there is a multitude of process in the middle and back-office that must be automated. This will result in an increased demand for cyber security consultants, application engineers and cloud architects/engineers.

What It Means to The Job Market?

Tech professionals are in high demand with short supply as these shortages exacerbated by bigger FinTech firms like Ant Group, Grab, and other tech firms, the anticipation of digital banking growth is certainly not going to make the search for tech talents any easier for FinTech startups. Storm2 is a FinTech recruitment specialist designed to connect startups to their next hire with our global network of professionals that can bring valuable experience to your team. Get in touch with us!