Asia In The Lead: Digital Banking's Unstoppable Growth
Digital banking is here to stay but boundaries with incumbents are blurring.
Digital banking is taking off and is an unstoppable force of nature, with Asia in the lead with the largest number of banks, most users, and the highest profitability.
I don’t think there’s any debate anymore that 100% online digital banks, whether you call them “virtual banks,” “online banks,” “neobanks,” or “challenger banks.” are an idea whose time has come.
Freed of legacy branch networks, digital banks are racking up high growth globally and improving financial inclusion.
In Asia, digital banking experienced a “perfect storm” of digital-first consumers, large unbanked populations, and prudent regulatory oversight that heightened the impact of this new technology.
It is important to understand the profound impact of digital banking on developing economies and developed economies like the US and EU, where digital-first clients rather than inclusion are primary drivers.
👉TAKEAWAYS
Key digital banking trends
🔹 Improving profitability and building a sustainable business model: As digital banking enters its second decade of development, the competition in commercialization is no longer driven by the favor of capital markets. Instead, digital banks have entered a stage where they can improve profitability by leveraging economies of scale and continuously improving their profitability per customer.
🔹 Leveraging unique ecosystem resources: To improve existing business models, digital banks increasingly focus on resources within their ecosystem. Players deeply embedded in a particular ecosystem are exploring opportunities to leverage ecosystem data further to enable precise services and enhance customer credit profiles.
🔹 Diversifying business lines: Leading digital banks are exploring diversified business lines and revenue streams beyond their existing financial services. They are actively productizing their capabilities and intangible assets, such as technological capabilities, operational expertise, customer resources, and data assets.
🔹 Exploring multi-market coverage: Multi-market coverage is also a key strategic move for leading digital banks seeking sustained growth and secure positions. Following earlier global expansion efforts by a few pioneers, leading digital banks are now focusing on becoming regional champions.
🔹 Participating in infrastructure development for seamless data element flow: Leading digital banks are also making efforts to support seamless data element flow. They are offering their capabilities in secure computing, privacy computing, and federated learning to other firms as open-source or productized solutions.
👊STRAIGHT TALK👊
While digital banking has proven its worth, the digital banking boom is over and the heady days of huge PE and VC investments in a bubbly fintech market are over.
Digital banks are now left making money in the old-fashioned way by “enhancing profitability and building a sustainable business model.”
This begs the question of how digital banks make money:
“Currently, digital banks with commercial success primarily rely on Net Interest Income (NII) as their main revenue source, mostly with either of two models. One is a retail-driven model that relies on markets with large population sizes. The other is a high-yield niche market development model that focuses on markets with smaller population sizes.”
To cut to the quick, if you’re a digital bank in populace Asia, you’re in a race to scale to large numbers of users while those in the EU must diversify business lines to attain profitability.
Traditional banks haven’t given up, and with most expanding their digital services to match or, in rare cases, better their digital competitors, the boundaries between traditional and digital banks are blurring.
This blurring will only increase as digital banks expand their services into securities brokerage, lending, and other more innovative profit centers.
Traditional banks can never match digital bank’s low cost per customer, which is why digital banks have staying power.
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