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The rise of digital banks

Date

09/09/2021

Written by

Airnow

It’s safe to say that the banking industry has been irreversibly turned on its head over the past few years. 100% digital banking options have increased exponentially, and customers across the globe are continuing to be converted to this new way of managing their money.

There has been a surge of activity in the digital banking and fintech world across Europe in particular, with new neo banks and challenger banks emerging, existing ones expanding, and customers flocking to their doors.

As these players allow people to take control of their finances and make better decisions, they are using cashless payments, blockchain technology, artificial intelligence and customer preferences for mobile banking to increase penetration within and outside the UK market. This is catalysing the banking sector, and has resulted in a huge market share growth in just a few years.

For example, London-based Revolut grew its customer base from 1.5 million to 10 million in just two years (February 2018 - February 2020), taking them sky high above the competition in terms of DAU. Berlin-headquartered N26 also saw its customer base double to more than 5 million between June 2018 and February 2020.

How did we get here?

New regulatory freedoms

“Digital banking” emerged on the UK market first for a number of reasons, the main one being the somewhat antiquated nature of the banking system itself in Britain, which has been almost entirely unchanged for a number of years. Banks had very much been entrenched in the British institution since the 1960s. However, this relatively stable period for banks came with its drawbacks. The lack of competition led to much of the technology being incredibly outdated, and consequently new services and reforms to the current banking system to improve user-experience were difficult to implement. Frankly, with little pressure to change, modernisation was never made necessary.

But this all changed with the 2008 global financial crisis. Causing significant changes in the regulatory landscape, such as the 2012 Financial Services Act, the banking industry was forced to become more accessible than it had been for the last 100 years, virtually overnight. This has allowed for new players to stand a realistic chance of successfully entering into the market.

Technological advancements

In addition to these revolutionary regulatory changes, the industry has also been inundated with an avalanche of new technologies such as AI, the Cloud and Blockchain. For their own reasons, each technology has completely changed the landscape in terms of operational processes and what banks can offer to their customers. Such technological advancements have been seized upon by new fintechs, while comparatively archaic traditional banks, unaccustomed to change, have stumbled towards innovation, giving birth to a new era in banking: the digital age.

The digital age of banks

Digital banks have been built with the user experience at front of mind, leaving traditional banks, who have fumbled for many years with various iterations of online banking, in the dust. Feeding the ever-growing consumer demand for more efficient ways to access banking records and complete financial transactions - all through your mobile - digital banking walks hand in hand with mobile banking, the preferred platform for the masses.

While mobile banking is offered by traditional banks, users of digital banks, which are developed entirely electronically, are blown away by the silky smooth UX that allows them to send and receive money in a matter of seconds. Digital-only banks don’t lean on the financial and customer support from an established physical location - instead they’re powered via digital platforms that appeal to the millennial and Gen Z populations.

What's next?

It’s not stopping at the standard services; digital banks are branching out with a variety of different offerings. The market leader is adding currency exchange, cryptocurrency exchange and peer-to-peer payments to their banking services. Supporting spending and ATM withdrawals in 120 currencies and sending in 29 currencies directly from the app. It also provides customers access to cryptocurrencies such as Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), Bitcoin Cash (BCH) and XRP by exchanging to or from 25 fiat currencies.

Revolut currently charges no fees for the majority of its services (but for capped usage) and uses interbank exchange rates for its currency exchange on weekdays, charging a markup from 0.5% to 1.5% on weekends.

Revolut is currently leading the race. But, unlike the banking system of old, the digital banking age is defined by competition, and competition is the mother of innovation. So we can expect plenty more innovative features to be added to digital banks in the near future, a characteristic that will surely engender more growth and success in the industry. Although traditional banks still share a majority stake in the market, they may be looking more often, and more nervously, over their shoulder at the rise of Revolut and others.