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What they all have in common, however, are the innovative ways they deliver banking services without physical branches.
According to McKinsey[1], a digital bank has the following characteristics:
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”.[2]...
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