Digital Banking, With Millennial, Mobile – And Governmental – Tailwinds

Kill the check. Shutter the branch. Make that leather wallet a mobile one, wielded on smartphones.

The push toward digital banking seems an inexorable one, with the technology and demographics acting as tailwinds, and where governments have increasingly gotten into the act of promoting digital banks (the pure-play kind) and making forays into bits and bytes, where once paper and face-to-face transactions reigned.

As we noted in this space earlier in the summer, using apps to bank is markedly being embraced by the younger generation. As spotlighted in the Digital Banking Tracker, the global digital banking market is slated to grow by 16 percent, compounded annually. As many as 72 percent of bridge millennials say mobile apps are important for accessing bank accounts. The age of personalized service is upon us.

To be sure, there’s a road that must be traveled before getting those services in place – perhaps among the most visible signposts is the granting of a digital banking license.

The importance of procuring those licenses – to offer web-based services in a manner that dovetails with and mirrors the products and functions that might be on offer from traditional FIs – was underscored by the news that the group behind the Facebook Libra cryptocurrency has applied for a payments license in Switzerland.

The digital banking efforts are far more widespread, however, allowing non-banks and tech-savvy upstarts to compete with entrenched lenders. In Singapore late last week, the monetary authority has said it will accept applications for five new licenses through the end of the year – writ large, the authority has pointed toward a “banking liberalization journey.”

In a bit of granular detail, the authority will offer up two “full bank” licenses, which will allow non-banking companies to offer a gamut of services, including taking on deposits from retail customers. The other three licenses would allow companies to offer corporate banking services to smaller firms and to serve non-retail customers as well.

The Singapore efforts are only among the latest moves by central banks and monetary authorities to promote competition, and have been preceded by virtual banking licenses granted in Hong Kong by the monetary authority there.

To get a sense of how digital banking attracts entrants into new verticals, Grab, a ride-hailing firm that has presence in Southeast Asia and already has an electronic wallet in place, told CNBC in a written statement that “we believe digibanks will make banking and financial services accessible and more convenient to a greater number of people in Singapore. We will be keen to apply for the license once we have evaluated the framework.”

In other examples, in Hong Kong, Ping An will be launching a digital bank within the next several months. Eight licenses have been granted in Hong Kong, including Livi VB Limited, SC Digital Solutions Limited, WeLab and ZhongAn Virtual Finance Limited.

Beyond Asia

The rise of digital banks certainly has runway, where traditional banking services have yet to make marks. As reported in this space earlier this year, as much as 70 percent of the population lacks bank accounts. One of the first neobanks in the region, Nubank, traces its genesis back to 2013, having raised hundreds of millions of dollars to expand across several financing rounds. The company said in July that it is letting SMBs try its small business bank account solution for free.

In Europe, marquee names such as Monzo and Starling Bank may be among those that spring to mind when examining challenger banks – and yes, they’ve been offering services for several years. And at least some of those firms – Monzo among them – are applying for banking licenses in the United States.

A range of technological and regulatory advances have smoothed the way for digital banking in Europe. Under PSD2, banks are required to give third-party providers access to information related to (consenting) consumers’ payment accounts. In terms of technology, APIs help facilitate access to that data. In addition, passporting can help companies expand services across nations.

Last week, money transfer company B2B Pay said it plans to become a regulated financial institution and is raising money to pursue licensure. In Denmark, to offer up another example, the FinTech firm known as Nordic API Gateway, which offers the money app Spiir, said earlier this month that it received a payment initiation service provider (PSIP) license. The company had received an account information service provider license from Danish authorities in 2018.

Circling back to the U.K., the challenger space is getting a bit more crowded. Allica said it has been granted a banking license by the Prudential Regulation Authority (PRA). That license will let the challenger bank launch banking operations, regulated by both the PRA and the Financial Conduct Authority (FCA). Allica said in the announcement that it acts as a “bespoke bank for SMEs.”

The Middle East has also seen its share of digital banking traction. There, Anglo-Gulf Trade Bank was granted a digital banking license from Abu Dhabi Global Market’s Financial Services Regulatory Authority, standing as its fully licensed digital bank. Among the banking services on offer, according to a release, is the permissioned exchange of Know Your Customer (KYC) information from the authority to the bank.

And in Australia, the financial regulator earlier this week granted a new digital banking license to “online-only firm” Xinja Bank. The goal, according to Competition Policy International, is to promote competition against the largest traditional FIs in Australia, colloquially known as “the Big Four,” with Xinja allowed to lend and take deposits.