Is the Digital Bank the Future of Banking?
What is a Digital Bank?
Digital Banks or Neo Banks, are a new breed of internet banks that have no physical presence (branches) and exist 100% on digital and mobile platforms. Digital banks are not a mere digital manifestation of the traditional banking experience. Even though they do cover most of the products and services provided by traditional banks, their philosophy and approach to banking comes to revolutionize the industry to its core.
How Do Digital Banks Differ From Traditional Banks?
Some of the differences between the two are obvious. Digital banks shed the need for physical branches, reduce the complexity of accessing your account, requesting a loan or seeing real time allocation of your funds. To make it simple, you’re in charge. You have an entire financial institution in the palm of your hand and it’s fully accessible through a mobile app.
Apart from these glaring differences, there’s more fundamental dissimilarities between the two forms of banking.
Digital banks are prone to opening a dialogue with their client base. They are willing to not only let customers peak at what’s happening behind closed doors, but also invite them in to join. Just have a look at the Monzo’s or Revolut’s online blogs.
Their blogs and articles let you in on the plans, products and goals of the companies going forward. As a client, you’re not treated as the recipient of services and products. You feel that you’re part of a brand that values your feedback and is willing to share its vision with you. This kind of attitude builds the groundwork for meaningful, long term relationships between bank and client.
Now compare that to what you’re used to from traditional banking institutions. Communication between them and the client is restricted to impersonal press releases, stale monthly statements of transactions and delay of payment warnings. Not exactly the relationship-building type of communication.
Interaction between digital banks and customers does not stop there. Digital banks have taken the initiative to embrace the social media era and make a conscious effort to speak the millennial language. Their mobile banking apps are designed to inform, notify and advise users about their finances at all times.
Weekly reports and segmentation of spending in categories such as groceries, entertainment, transportation etc. The ability to budget weekly or monthly and receive notifications along the way to keep you on track and achieve your goals. These features might seem “cute” to some but they are so much more than that. They are gestures that show the customer that their online banking provider understands them.
This is completely different to traditional banks. Their attempt to “digitize” their services and package their banking products in a more modern way has its shortcomings due to the difference in culture and principle. Their mobile apps still include industry vocabulary like “debit” and “credit” and transactions are displayed in a very accountant/banking style.
Digital banks are geared and designed towards offering practical and actionable advice for bettering your lifestyle. Their advanced algorithms record your spending habits and recognize trends along the way. By doing so, they’re able to make suggestions on how you can save or better allocate your funds.
Let’s see an example. If you use your credit card to buy the Economist on weekly basis, the app will be able to propose a monthly/yearly subscription to the publication that will save you both money, time and hustle.
This kind of advice does elevate your lifestyle but digital banks do not stop there. Their endeavor and pursuit to build a relationship with their customers drives them to go further and offer advice that can change lives to their core. All you have to do is read this article by Monzo. This is the kind of advice you get from your family, your best friend, not a financial services institution.
The banks of the digital age are not only banks. They have embraced the open banking system to offer customers more choice and freedom whilst obviously complying with the Financial Conduct Authority protocol. They are not just worried about cash withdrawals, savings accounts and interest rates. Their goal is to become a financial partner not just a provider and establish a relationship based on giving and receiving.
Can Traditional Banks Become Digital Banks?
Yes and no.
The point of contest is not whether traditional banks are ready to embrace the use of technology. The fundamental differences between a traditional bank and a newly formed digital bank are ideology, culture and business model.
Traditional banks view the digitisation of their services as part of building better relationships with customers. For digital banks, it’s not just a point of reference or part of a more elaborate plan. It’s their actual product.
Digital banks understand that the new generation of customers have very specific expectations from their banking provider. Speed, convenience and simplicity are essential for millennials. Traditional banks are playing a catch-up game trying to adapt. They have decades of legacy programs and processes to deal with, making it particularly difficult to adjust.
On the contrary, digital banks are incorporating these principles from the get-go. From financial budgeting to check your balance features and cryptocurrencies, the fintech sector is booming in so many verticals.
Traditional banks have introduced nicely designed websites and smart apps but that’s no longer considered a showstopper.
People expect these features, as fintech companies have raised the bar substantially. Clients are now in charge of the narrative. Their wants, needs and demands are driving the banking conversation. They will no longer accept what’s put in front of them.
Changing banking apps to look more modern and adding features like touch ID is not really attacking the problem at its core. It’s like having an old house with outdated appliances and blocked pipes, but you choose to focus on painting the porch.
Digital Banks Were Made for the Gig Economy
The gig economy is a fairly new term and it was created to reflect the working tendencies of the millennial generation. The term refers to a flexible working culture where its members choose to work as freelancers or independent contractors and have more control over their schedule and working hours.
This new workforce breed spend a lot of time on their mobile device, prefer to have multiple sources of income and have to deal with student and personal loans. This is completely different to the situation of the previous generation. The partakers of the traditional economy were used to a single finance stream and full time job.
The differences between traditional and gig economy members have a direct impact on their banking needs. Millennials need to have both control and coaching on their financials. Running to your local branch or calling your personal banker does not exactly qualify as convenient.
Members of the gig economy need digital, tools, alerts and communication channels on the go. They need their banking provider to be able to support their lifestyle and working choices. Digital banks use this knowledge upon building their software. They try to seamlessly integrate all of these components and that’s evident in the results.
Digital banks offer customers the chance for self-service, education, advice and transact through a simple app.
What Does the Future Hold for Digital Banks?
Digital banks are not only the future, but the present of banking. Now that we’ve established that, let’s try and visualize the digital bank of the future.
The client and their needs seem to be the force driving development and innovation in the sector. Banks seem to be heading towards a personalised model similar to YouTube or Google. Based on your choices and most frequent uses of the app, your digital bank will be able to recommend the appropriate tools and services that apply to your use case.
Customers will not only see an interface that’s tailored to their needs and daily use but will be recipients of specialized advice, offers and plans. Digital banks will therefore place a lot of emphasis on building the kind of infrastructure that can adapt, integrate and work both with platforms and operations.
It’s not a matter of if, it’s a matter of when. Digital banks are the unavoidable destiny of the banking industry as the power of the Internet and the new generation of customers is hard to deny or contain.
The evolution of stale industry such as the banking industry was in the making for some years now and it seems like the advancement of fintech companies has finally caught on.
Stay tuned as we will soon be back with an evaluation and an update on the progress of this subject.