In the year 2018, the word bank does not impress Millennials and Generation Z. Fintech is the buzzword of the modern times.
Digital Banks, often confused with fintech companies, are once again making waves in the financial sector. Digital Banks and Fintech companies have a different set of features, but their future in the financial sector is intertwined.
The last couple of decades have seen a radical shift in spending and saving preferences of individuals. The Baby boomers were “smart with money”. On the other hand, the Millennials fuelled the consumer finance sector.
The era of Cryptocurrency brought a change in the financial objectives of Millennials and Generation Z. Focus shifted from spending to investing.
The transfer of value, dubbed as the Internet of Value (IOV), on blockchain (XRP, Bitcoin, Ethereum etc.) eliminated the concept of traditional banking from the minds of Millennials and Generation Z. At the same time, the Cryptocurrency trading paved way for the progress of fintech, as investors wanted fiat/crypto conversions to invest in and cash out from the Cryptocurrency markets.
The fintech sector, which was in the nascent phase in the year 2010, has now matured to facilitate both types of users; (non-crypto) users who just want to move fiat without opening bank accounts and the (crypto) users who need fiat/crypto conversions.
Circle, Stripe, Transferwise and other such companies surfaced on the fintech landscape and are now prominent players in the money business.
Digital Banks are (most of the times) backed by established commercial and/or investment banks. The banking license gives them the right to provide traditional banking services, albeit in a completely digital (online) mode. The customers of Digital Banks do not need to visit their banks to avail the offered services.
The usual service offerings of the Digital Banks are:
- Deposit Accounts (Current and Savings), which earn interest at competitive rates along with Debit Cards. Customers can fill out the account opening form (online) and attach the required documents. The application is usually processed within a week. Once the application is approved, the new deposit account can be accessed online.
- Personal Loans. The loan installment calculator is present on the website to facilitate the customers. Customers can fill out the online loan application form and attach the required documents. Once the loan application gets approved, the applied amount will arrive in customers’ digital bank account.
In both the cases, the completed forms along with the attachments are submitted online with just “one click”.
Digital Bank or Fintech: which one is best for you?
Digital Banks provide Personal Finance products and services. Financially savvy people prefer saving and investing in profitable markets. Digital Banks serve their Personal Finance needs.
Open an account of your choice from the comfort of your home or office. Earn interest on idle funds. Obtain loans without visiting your bank. Withdraw money (at your convenience) to invest in profitable markets.
Individuals with a “live for the moment” life motto are best served by fintech companies. fintech companies focus on innovating efficient methods of “moving money”.
Some of the recognised names in the digital banking industry are: (Please note, we do not endorse the services of any of the banks listed below. Readers are advised to carry out their own due diligence)
- Finnbank (Parent: Chase, USA)
- First Direct (Parent: HSBC, UK)
- Mashreq Neo (Parent: Mashreq Bank, UAE)
- Marcus by Goldman Sachs (USA)
Reuters on 15 October 2018 reported,
“Barclays Plc (UK) is launching a retail account that will offer U.S. consumers a low-cost, digital-only bank with the backing of a major financial institution.
The move will put the London-based bank in competition with Goldman Sachs Group Inc’s new Marcus Brand in the digital banking space.”
Quoting Financial Times, Reuters reported,
“Barry Rodrigues, (Head of Cards and Payments at Barclays International) said, the bank would ‘leverage Barclays’ UK knowledge and expertise’ to create a current, or checking, account for its U.S. Online Bank, which already offers credit cards, savings and loans to 13 million customers.”
Barclays is in the testing phase of this venture and plans to launch this service in the market next year.
It is pertinent to mention here that Barclays has a $25 billion loan book in the United States, comprising $20 billion to its Co-branded card customers and $5 billion to online bank borrowers.
Who will win?
Digital Banks and fintech both serve different purposes. Fintech aims to eliminate cross-border payment barriers and provide better “merchant payment solutions” to eCommerce retailers. On the other hand, Digital Banks offer Personal Finance products and services.
Traditional banks have partnered with fintech companies to reduce their money transfer times and eliminate cross-border payment friction. However, for traditional banks, the hybrid business model (partnership with Fintech + offering traditional banking services through digital banking) will bring success.