We take a look into digital banks - the different types, what they can offer to consumers, the advantages they bring and their overall safety
Patrick Johnson, November 27th, 2020
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A Digital Bank is an organisation that can offer banking activities online that were historically only available at a bank branch.
According to the FFIEC (Federal Financial Institutions Examination Council), e-banking is the “automated delivery of new and traditional banking products and services directly to customers through electronic, interactive communication channels.”
The ‘banking products and services’ that this relates to are:
In essence, a digital bank should be able to provide all the banking functions that have traditionally been carried out at bank head offices, branch offices and via bank cards at ATM machines.
The earliest forms of digital banking can be traced back to the introduction of ATM machines and cards which were launched in the 1960s. When the internet and digital networks became widely available in the 1990s, online banking suddenly emerged as a viable option, with what we know as modern digital banking starting to appear.
The advancement of smartphones in the millennium then opened the door for even more advanced transactions. These days it is thought that 76 percent of individuals use online banking regularly as of 2020.
The digital banking industry has become so advanced these days that there are now several different types of digital banks and many companies operating within the sector, such as Revolut, Monzo, Monese, and N26.
There are many different types of digital banks such as ‘Challenger Banks’, ‘Neobanks’, ‘Beta Banks’ and ‘Non-banks’. For the purpose of this blog, we're going to focus on the two biggest categories – ‘Challenger Banks’ and ‘Neobanks’.
Impressively, on a global scale, neo- and challenger banks have been growing at a Compound Annual Growth Rate (CAGR) of approximately 46% and are expected to reach US$356 Million by 2025.
Essentially, challenger banks are Fintechs that have their own banking licenses which means that they can offer the traditional banking services in a flexible way. Revolut, Monzo, Monese and N26 can all be categorised as challenger banks and are direct competitors of traditional banks across the world.
Another stand-out feature of challenger banks is that they tend to streamline the retail banking process by leveraging new and innovative technology. In addition to this, challenger banks do have a physical presence, although this is usually quite small.
It is estimated that there are 100 challenger banks in operation globally today.
The main difference between challenger banks and neobanks is that neobanks do not hold a banking license but instead rely on a partner bank. This means that they're unable to offer some banking services.
Neobanks are completely digital banks that have no physical presence. They reach out to customers via mobile apps and web platforms and often offer more user-friendly interfaces and fee-free services. Neobanks also tend to focus on a specific customer area such as SMEs.
A global report on neobanks from Business Insider Intelligence estimates that there were 39 million neobank users as of the end of 2019.
There are many advantages of digital banking with neo- and challenger banks alike. The online banking industry is so diverse and fluid that new benefits and services seem to be emerging all the time.
There are some people out there who are still suspicious of the safety of digital banking, lamenting the loss of physical bank branches and questioning the digitization of such important financial services.
However, the reality could not be more different. Digital banks have always made security one of their main priorities and as such, have adopted much more innovative and technologically secure protocols than many traditional banks.
The most high tech methods of in-app and payment authentication are often sought after by digital banks and they provide them to customers via partners such as Veriff. This includes practices such as:
When it comes to regulatory banking bodies, most digital banks are usually covered by the Financial Conduct Authority (FCA) and/or the Financial Services Compensation Scheme (FSCS), which adds another level of security, bringing added peace of mind to already happy customers.