Revolut, Fidor, Simple, N26, and Monzo are just some of the well-known digital banks that allow customers to open an account on their phone in minutes, whenever and wherever they want. But digital banking is not limited only to online banks. Over the past decade, banks that have created internal digital bank spin-offs optimized revenues and reduced operating costs by up to 70%.
But before we go any further, let us clarify the basics.
In layman's terms, a digital bank is a bank that operates online and provides its customers the services that were previously available only at a bank branch.
Ok then, what is meant by online banking?
Online banking involves the digitization of all traditional banking products, processes, and activities to serve customers through online channels.
Most frequently, they include all the traditional banking services that are available 24/7 on mobile phones, computers, and compatible smart devices, without the need for a customer’s presence in the bank branch:
Obviously, digital banking software makes all traditional services easier to access, understand and manage.
This approach allows us to test digital banking risk concepts before moving parts of the old legacy business to the new system. Notable examples include Goldman Sachs’ Marcus, RBS’ Bó, and State Bank of India’s YONO, which gained more than 26 million customers and reached profitability within 18 months.
According to Statista, the digital banking sector will grow continuously over the next five years. This trend reflects the ongoing development and expansion of digital banking services in the foreseeable future.
Source: Statista
The growth of digital banking is primarily driven by the increasing adoption of digital technologies and changing customer preferences, who are increasingly inclined to use digital channels for their financial transactions. Modern digital banks are capitalizing on this trend, offering fast convenient mobile and online banking services according to consumers needs.
Although the two terms may seem interchangeable, there are actually fundamental differences between digital and online banking.
Online banking includes only some transactional functions of the underlying core banking system. Online banking is typically accessed via the Internet and provides basic banking functions such as account management and statement access. The capabilities of an online banking system are limited and cannot be quickly expanded to provide additional banking services to consumers.
Digital banking systems are much more flexible and allow banks to add and expand features much faster than traditional systems. Digital banking relies on high-level process automation, web-based services and APIs to provide banks and their customers with high levels of cost efficiency, security and flexibility. Modern banking solutions enable a fully digital customer journey, generating real-time data streams and accelerating key analytics.
There’s one more term frequently confused with online and digital banking – mobile banking. It can be defined as a service provided by an existing bank to its customers enabling them to perform transactions via their mobile devices, without the need to visit a bank branch.
So, out of the three notions, digital banking is a much broader one. It is safe to say that it is made up of a combination of online and mobile banking.
As more and more digital banks enter the market, it is important to understand how modern digital banking solutions enable them to offer better and cheaper services than traditional competitors. Here we highlight the most essential advantages of digital banking:
Traditional banks invest a lot of time and resources in checking and accounting. By eliminating redundant back-office processes, digital banking software significantly reduces operating costs. Digital banking systems remove a lot of work from banks by automating the processes associated with daily financial transactions. Digitization reduces the number of steps and people involved in transactions, reducing the risk of costly financial errors.
Integrated KYC and AML protocols enable digital banks and customers to open accounts within minutes from any internet-enabled device. ID Verification systems and risk assessments enable banks to serve customers quickly and easily, allowing people who are not bank customers to access financial services. A major advantage of personal banking is that it is available 24/7. This means that customers can carry out any transaction from anywhere and access a wide range of services.
Digital banking software enables sophisticated personalization strategies powered by artificial intelligence (AI) and machine learning (ML). Banks can offer customers relevant financial options, interactive tools, and educational resources at the right time. Automated budgeting, spending analytics, savings reminders, and many other tools help inform and engage customers.
Digital banks already have many features that established banks simply cannot offer, such as buying cryptocurrencies and gold or investing in stock markets directly in the banking app. Mobile and online banking customers can instantly change their security settings, and transaction limits, and even specify whether or not they want to enable NFC or magnetic stripe payments.
Check this article to get more information about the advantages of digital banking.
While the terms “neobank” and “challenger bank” are familiar to nearly anyone today, telling one from the other may be difficult, so let’s dot all the i’s and explore the main types of digital banks.
Neobank is a digital bank operating online, without any physical presence, which provides its customers remote access to its services via a mobile app. Many neobanks don’t hold a bank license and partner with an existing bank for bank-licensed operations (which means, their customers need to create an account at the partner bank). Often, the range of services offered by a neobank is narrower compared to the licensed banks.
This term originated in the UK and refers to a recently launched bank that “challenges” traditional banking institutions. Being more user-friendly and cost-effective for an end-user, challenger banks focus on the audience segments that are underserved by the big financial institutions.
To get more info about building a digital bank read this article.
These are fully licensed neobanks that provide a full range of banking services and their only difference from the brick-and-mortar banks is the mode of operation – which is completely online. Examples of the new banks are Revolut, Monzo, N26, and Starling Bank.
Exactly as the name implies, these are non-banking institutions that provide financial services – for example, streamlined loans or mortgages, but they don’t simultaneously accept deposits or offer checking and savings accounts. Some of the nonbanks like Monese operate on EMI licenses.
According to McKinsey, more than 65% of banks surveyed are exploring the potential of next-generation core banking platforms. The digital banking experiences offered by challengers are forcing incumbent banks to re-examine legacy technology in their core business.
Source: Capgemini and Efma
This shift has led to a significant increase in mobile banking app development efforts across the industry. Financial institutions are recognizing that a robust, user-friendly mobile app is no longer just a nice-to-have feature, but a critical component of their digital strategy. By investing in mobile banking app development, banks can provide their customers with seamless, on-the-go access to a wide range of financial services, enhancing user experience and strengthening customer loyalty.
White-label software for digital banking helps banks modernize and benefit from lower costs, faster time to market, rapid scaling, and personalized offerings for consumers. Companies looking to launch a digital bank can get to market in a fraction of the time by partnering with SDK.finance, a white-label FinTech solution provider that helps businesses launch financial and payment products.
The Platform is designed to support a broad array of financial services, such as digital wallets, money transfer, card issuing, payment acceptance, and robust KYC and AML compliance features. This enables clients to seamlessly integrate and tailor functionalities to their specific requirements while upholding stringent security standards.
Our solution includes pre-built integrations with trusted partners and comprehensive back-office tools, which boost operational efficiency. These features simplify the management of clients, transactions, and finances, streamlining business operations.
View the demo video of the SDK.finance Platform to see how you can streamline transaction management and guarantee financial compliance using our robust FinTech Platform:
Through its white-label core Platform and an expert team with 10+ years of FinTech experience, SDK.finance quickly and reliably transforms customers’ product visions into live masterpieces. Whether you’re envisioning the creation of a digital wallet, neobank, payment processing system, payment acceptance solution, money remittance platform, or a currency/crypto exchange, our white-label solutions empower you to bring your ideas to market much faster than traditional from-scratch development.
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