Banking is a rapidly changing industry, and to remain relevant banks must continue innovating. From high street players like Barclays to startups like Britain’s Monzo, banks are focusing on using automation and technology to deliver a more efficient and innovative banking experience that far surpasses basic online banking.
In this article, we dive into some misconceptions about digital-only banking. We collaborated with Enrique Melero, former HSBC Private Bank Finance COO and cryptofinance consultant and developer, to learn more about his thoughts on digital-only banking, blockchain banking and what lies ahead for the future of consumer banking.
Not just a British phenomenon
When it comes to digital banking, so-called challenger banks and neobanks are leading the race. Most challenger banks and neobanks are based in the UK. One reason is that the UK was an early adopter of digital banking.
However, digital-only banks are not just a British phenomenon. Digital-only banking has fast become a global movement, with challenger banks and neobanks popping up worldwide from Europe, South America, and blazing the trail to Asia.
Breaking moulds or just popular?
Digital-only banks are steadily becoming a contender for traditional financial institutions like nobody’s business. They offer better rates and lower fees to customers thanks to their branchless presence. Compared to their branch-based counterparts, digital-only banks leverage technology much quicker and more cost-effectively to offer streamlined banking services. This enables digital-only banks to typically provide services that are tailored to individual customers’ needs, such as instant credit line and affordable travel insurance over the app.
And yet, digital-only banks still face major hurdles in terms of customer acquisition as more of them flood the market. Despite their slow transition into the digital game, legacy banks still have the upper hand as most customers hesitate to leave a well-known, established bank for a startup company. Digital-only banks’ disruptive products are still too new and customers are still hesitant about the idea of letting a startup manage and secure their money.
The race towards digital banking
PwC’s Digital Banking Survey shows that when it comes to mobile banking, the greatest mobile adoption comes from consumers in the 18- to 24-year-old bracket (82%). Mobile banking penetration fades pretty steadily with each succeeding age group, with only 29% of smartphone owners in the 65+ age group reported using mobile banking.
Mobile adoption has certainly driven digital uptake in banking. Research from CBInsights shows that as of 2016, mobile interactions account for 56% of customer banking engagements in Europe. Moreover, in the last 2 years, banks across Europe have shut down approximately 1,000 branches.
Compared to traditional financial institutions, digital-only banks put emphasis on solving customers’ pain points and what customers want in the digital age. With most users of digital channels being the young and tech savvy, digital-only banks are making headlines with their tech-driven propositions that resonate with this age group as incumbents maintain a branch-centric business model.
Millennials have the edge?
An age group that is used to getting a ride and ordering food with a few taps on their smartphone does not want to go through lengthy forms or jump through hoops that do not do them any favours. This leads to banks competing to provide the most efficient and seamless banking experience through slick interfaces that speak to customers in a clear, simple, and consistent language.
While millennials are all for the digital age, older generations might not be as quick to adopt. They do, however, use smartphones - key to changing their banking behaviour. Baby boomers (those born roughly between 1946 and 1964), for all their differences, still deserve attention. Unlike Millennials, boomers save more than they borrow, buy more than they rent property, and are far more loyal banking customers. Mass affluent boomers, who make bigger financial decisions and long-term investments compared to the younger demo, represents a key demographic for banks that have rolled out apps, e-payment services, and more.
“Digital-only banks built their customer base from scratch. As a result, their products are only offered to customers that could be disrupted with mobile technology”, said Melero. Melero commented that products offered by digital-only banks, typically payment services and current accounts, apply to all ages and income levels and that digital banks only providing these products should be differentiated from institutions providing lending services.
Traditional banks operate their current account keeping and payments services at a loss, mainly due to their legacy customer base and the changes in compliance and in market conditions. Melero sees fully digital lending institutions are radically transforming the current lending businesses offered by traditional banks, and that they are targeting people of all ages. Melero used a startup in Switzerland as an example. This startup recently proposed offering loans to elderly insurance policy holders who could not afford health treatments not covered by their insurance companies. “If you are a new, digital-only bank, go beyond payments and current account keepings - and target your products to people of all ages”, said Melero.
Are banks coining it?
We have covered challenger banks and neobanks, but there is a new wave that is hitting the digital-only shores: cryptocurrencies. With stiff competition across the pond, digital-only banks are looking to expand their services to keep up with mainstream demand by integrating cryptocurrency into their services.
As a former COO of a major bank, Melero stated that “It is a matter of time before high street banks will start including cryptocurrency exchange services to customers, in the same manner, they propose buying and selling of foreign currencies today”. However, Melero mentioned that until then, there still needs to be a shift of mindset to change the current perception that cryptocurrency is a kind of security.
Once that is achieved, banks will allow buying and selling of financial assets against crypto in the same way that they accept fiat currencies today. “Banks will then provide crypto lending services, which will make the banking system safer and more transparent”, said Melero.
Despite the wild price swings and other risks surrounding digital currencies, mainstream cryptocurrency interest is set to grow. Once it does, it is inevitable that customers will seek banking solutions that will allow them to trade and store both their crypto and fiat currencies on one platform. Banks, particularly digital-only banks, will be in another race to offer the best crypto-related services to stay ahead in the game.
When asked whether crypto-first banking will revolutionise the whole banking industry, Melero said, “It goes beyond enabling clients to make crypto payments and loans. The real revolution is when banks will stop borrowing money from their clients and will just simply manage their clients’ funds. This can only be possible using blockchain-based processes”.
Melero is of the thought that once blockchain-based processes are implemented in the banking industry, there will no longer be a need for banking licenses anymore. He also stated that the deposit-taking business and the risks of successive bank bailouts will become a problem of the past.
It’s still early days for digital-only banks to fully integrate crypto trading services, but the trend is quickly becoming apparent. Banks looking into integrating crypto have a unique opportunity to provide a groundbreaking and tailored approach to banking for their new breed of customers. Not to mention that narrowing the gap between the crypto and traditional banking can allow digital-only banks to become a serious threat for bigger, more established legacy banks and further boost the global crypto economy.
Leading by example
At Bitwala, we have always believed that blockchain technology has the potential to disrupt the world economy. We want to empower people to exchange value globally, instantly and at lowest possible cost. With this vision in mind, we are hard at work with our German partner bank to bring a completely new blockchain banking experience that allows a seamless transition between crypto and fiat to the world, starting in Europe.
Want to be among the first to get access once we go live in mid-2018? Head to preregister.bitwala.com and join our growing waitlist. If you want to keep track of our progress, follow us on your favourite social platform to get the latest updates.