Aubrey Hansen

Fell down the rabbit hole two years ago. Time to write about it.

Is the New Wave of Digital Banking Putting Pressure on Traditional Institutions?

Over the past few years, the online digital banking industry has exploded, growing from a budding community into a force with which to be reckoned. What was once a collection of small tech startups desperate for investors is now a billion-dollar industry that challenges traditional financial institutions.
Way back in 2014, Jamie Dimon, CEO of America's largest bank JPMorgan Chase, predicted the emergence of the modern fintech banking industry. In an annual letter to shareholders, he warned investors about the threat of Silicon Valley fintech startups, saying that:
"they all want to eat our lunch, every single one of them is going to try and a lot of them will succeed."
New advancements in financial technology mean these digital banking startups can now offer better products, faster, and at cheaper rates due to low overheads, automated systems, minimal staff, and no physical branches.
Traditional banks that are reluctant to utilize automation technologies that would result in staff redundancies are unable to match the attractive rates and low costs of digital banks. However, while a new school of young professionals may be ready to embrace these technologies, can they offer the same level of service to corporate clients? 

Digital banks that are leading the charge

Millennials and mobile phones have been noted as the main contributing factors in the rise of digital banking. Reports indicate that as many as 60% of Millennials are not satisfied with existing banking infrastructure and in low-income countries, over 2 billion citizens remain unbanked due to lack of access to services. Now, for the first time, the digital banking industry presents an opportunity to solve these issues.
Individual users with only basic banking requirements have been drawn to small startups like Simple Bank, which offers powerful budgeting tools and no-fee structure. The only fees customers incur is when using their debit cards outside of the US, and VISA charges this fee, not Simple. The company is similar to Monzo, a UK-based mobile-only banking solution aimed at offering low-fee banking to frequent travellers.
Offshore digital bank EQIBank, based in Dominica, was founded in 2016 and is comprised of former employees from HSBC, Credit Suisse, Bank of New York and UBS. The tech startup is the world's first licensed and regulated offshore bank, boasting 240 years of combined experience from its founders and directors. 
Speaking of the current shift in the banking sector, EQIBank CEO Jason Blick feels "banking is broken" and that the traditional industry has not evolved to support new emerging asset classes.
"The process is too complex, too expensive and too insecure. We launched EQIBank to solve these problems, redefining the boundaries of banking," commented Blick. 
Across the pond, London-based Starling Bank was founded in 2014 by Anne Boden, once Vice President of UBS and former COO of Allied Irish Banks. The mobile-only digital bank has raised over $300 million in funding since its inception and is licensed and regulated by the Prudential Regulation Authority and the Financial Conduct Authority. The bank has, in the past, been associated with the hugely successful online money transfer company TransferWise, another challenger to the traditional banking sector.

Looking ahead

Since Dimon's ominous prediction, several high-level employees from the traditional banking sector have made the move into the fintech industry, bringing an added level of professionalism to the industry. Now, many digital banking customers have access to an extensive range of financial services including trading, custody, lending, clearing, and settlements. While the majority of large organizations currently maintain their existing banking relationships, going forward, it would appear the traditional banking sector may need to revolutionize or risk getting left behind.
Soon, teenagers who opened their first-ever bank account online will not understand the concept of visiting a physical branch or meeting a bank manager in person. Many of these teens will grow into positions of power, starting businesses of their own while maintaining a relationship with their choice of online digital bank. As these startups foresee the need for comprehensive services that meet the needs of corporate clients, several traditional banks are already stepping up to meet the challenge. 
Barclays, Citigroup, and Charles Schwab are just some of the traditional banks that have begun investigating fintech solutions to compete with the onslaught of tech startups. As the second decade of the 21st century draws to a close, it will be interesting to see how the banking industry develops in the next ten years. Disruptive technologies like blockchain and AI are likely to shake-up the financial world in a way never before seen, changing the face of banking forever.

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