In the last decade, we have seen the migration of an increasing number of businesses onto digital platforms, as traditional industries are being disrupted. Amongst the latest to be gripped in the throes of a digital disruption is the banking industry. The latest Fintech developments and startups are determined to haul the musty, antiquated business out from behind the image of stuffy suits and even stuffier structures of marble clad capitalism and propel it into the future.
Ever keen to embrace innovation the Singapore Monetary Authority recently made an official announcement to open the banking sector to digital players.
In the announcement, it stated the intention to grant licenses to two digital full banks (DFB) and three digital wholesale banks (DWB), with the former serving retail customers and the latter catering to SMEs and non-retail clients. With even more options to choose from, customers are certainly spoilt for choice but deciding which is better depends on a myriad of personal factors.
Digital Bank Boom
The digital revolution really took off with the advent of the smartphone, with its ability to connect with individuals at all times, in a personal capacity, amid relative security. This, in turn, led to changing consumer habits and demands. Waiting days for a bank transfer, which was accepted before, is now intolerable. Opening an account is too slow if not processed within minutes and too troublesome if it has to be done in person. Catering to a world accepting nothing less than the highest level of convenience and value, with the lowest amount of commitment, digital banks rose to serve those needs. While leveraging on technology, Fintech was born into this brave new reality. Operating primarily online, with little to no physical presence, digital banks, also known as neo banks or challenger banks is the next big Fintech trend -only establishing itself within the last five years in the UK, then catching on in the rest of Europe. Digital banks like N26 from Germany, Revolut and Monzo both from the UK are the major players at this time and have quickly attracted the attention of clients and investors alike.
Headquartered in Berlin, N26 serves a client base of 3.5 million as at June 2019 and having been valued at US$2.6 billion, it is a unicorn more than twice over. Its expansion plans into the US has been underway since July 2019 and it has ambitions to grow its client base by 43% by 2020.
As of June 2019, Monzo is hot on the heels of rival N26. Also eyeing the North American market, it has entered multiple rounds of fundraising on a valuation of US$2 billion, earned from its respectable client base of 2 million subscribers.
The London based Revolut boasts 8 million customers and grew from a valuation of US$1.7 billion to US$10 billion in the space of 2019 which isn’t even over yet. It’s focus is on Asian markets and it is preparing for a Singapore launch in 2020.
Client Centric Focus
There is no doubt that this new breed of banks is exactly what people have been dreaming of for a long time. All of them have adopted popular policies and given up many traditional service revenue streams in a bid to appeal to customers. A majority have done away with the numerous service fees that accompanies many traditional bank’s functions to win over clients.
To travellers, Monzo’s zero fee structure for spending overseas, zero foreign exchange rate markup and no fees for overseas cash withdrawals up to £200 within a 30-day period is an attractive proposition.
N26 is geared towards freelancers and the self-employed. A current account charges no maintenance fees and does not stipulate a minimum balance. There are no charges on overseas spending and for transfers in the same currency as the account.
If holding and dealing with multiple currencies is something that you encounter often, then an account with Revolut makes the most sense for you. Opening and maintaining an account is free and the account can hold multiple currencies. Additionally, SWIFT transfers to overseas accounts is free and foreign currency exchange rates do not have a spread or any additional charges.
There really is no best digital bank account, as each serves a specific need or customer niche. As such, it would be wise to scrutinise the terms and offerings of several digital banks before picking one or more to sign up with.
SME Working Capital Loans And SME Fixed Assets Loans Made Easier
Another niche segment that digital banks are aiming for is the underserved SME market, especially as many of them seek SME working capital loans or SME fixed assets loans to keep skin in the business or prepare to expand operations.
As a Fintech company, these banks are willing to utilise non-traditional methods and algorithms to assess credit worthiness.
Compared to traditional banks, the turnaround time is much faster than the average thirty days for regular banks. Loan offer quotes are also provided instantly with a few swipes on the smartphone and there is often no paperwork required. Revolut also has a similar offering and like N26’s business loan, the maximum amount is capped at roughly US$30k to US$50k.The upside is that although the interest rate offer can vary, it is comparable with what normal banks charge.
Ironing Out The Kinks
Whether you are an individual or a business owner, the new face of banking is one that will appeal to you with its many flavours. However, it does come with some downsides. The cost savings that customers enjoy ultimately comes out from cost efficiencies and savings that digital banks eke out relentlessly. Staff shortage is one area that can become an issue as it did with N26 in Germany recently, resulting in a customer complaint about an €80k fraudulent transfer being addressed only after several days.
An irony is that, on the whole, digital banks offer a lot of flexibility, but within itself, it has limited features when compared to full traditional service banks. If you choose the wrong digital bank, you may find yourself actually paying more in fees. For example, different digital banks have a different limit on daily cash withdrawals, after which a transaction fee applies. This could range from free withdrawals up to US$200 daily at one digital bank to US$800 at another.
As positive as the future looks for digital banking, the industry is still rapidly evolving. Bank regulators are calibrating to adapt to the new entrants and any regulatory gaps that exist between them and traditional banks will eventually narrow, possibly increasing compliance costs. There is also a chance of additional regulatory requirements to combat the increased risks that digital banks face with their business model which makes it easier for criminals to conduct activities like money laundering.
Most of all, though, is the uncertainty of digital banks as a going concern. As yet, none, not even the largest ones like Revolut and N26 have turned a profit in almost four years of operations. This has not gone unnoticed by the public, which is used to wildly popular and ‘successful’ start-ups with plenty of followers and funding money but no profit or even suffering staggering amounts of losses. Consequently full converts to digital banks only make up about 10% in even the most mature market, the UK.
Further reports cite that most people view digital banks only as avenues for short-term spending, and would not deposit more than SG$20k in digital banks.
All in all, it is an exciting time in the industry and it is a welcome change to see banks actively and genuinely thinking out of the box. Though the changes are promising it remains to be seen if it is sustainable. For the time being, just hop onboard and ride the gravy train.