Digital (and challenger) banks come in all shapes and sizes. Some are offshoots of big tech companies, others are fintech startups, and yet others provide banking as a service (BaaS) to non-financial institutions via APIs
What they all have in common, however, are the innovative ways they deliver banking services without physical branches.
According to McKinsey, a digital bank has the following characteristics:
- a digital front-end and operations
- a digital-native back-end core
- structure and culture like those of a technology company
The
first two points are technical and easy to verify, yet a business
culture is something intangible. However, it goes to the heart of the
issue. McKinsey offers a definition: “the characteristics of a
digital operating model include a horizontal structure, minimal
bureaucracy, a nonhierarchical environment with high levels of staff
empowerment and ownership, and a test-and-learn culture enabling
continuous development of systems, products, and channels.”
Levels of
bureaucracy vary significantly between digital and established banks.
In traditional established and well-resourced banks, the regulatory and
compliance “bureaucracy” has notably expanded over recent years to
tackle the increasing demands placed on them by regulators in various
national and supra-national jurisdictions.
While
regulators in jurisdictions such as Singapore and Malaysia have shown
some flexibility or have sought to build a parallel regulatory
environment better adapted to digital banks, the vast majority of
jurisdictions still apply existing banking laws and regulations to
digital banks. Even in the few jurisdictions that have set specific
regulatory frameworks for digital banks, the main licensing and ongoing
requirements are similar to those for traditional banks.
The
situation continues to evolve. The Financial Stability Institute (FSI)
recognised that the sector offers significant benefits compared with
traditional banking. It concluded that: “the overall challenge for
authorities is to maximize the benefits of fintech innovations while
mitigating potential risks for the financial system”.
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