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Traffic prosperity and hidden worries of profits: the development of the global digital bank industry

In the past ten years, the banking industry has continued to evolve with a new form of organization in continuous exploration and innovation. The concept of digital bank has quietly appeared with the popularity of mobile devices.

Digital bank provides customers with banking services mainly through the Internet. Customers can get all kinds of services through purely online and self-service operations. In this model, the "bank”  becomes "lighter". It integrates the convenience of fast online payment and has the safety and security of a bank. 

Development of digital banks

The first digital bank was the Security First Bank. Then with the advent of smart mobile operating systems, some digital banks appeared in Australia and the United States. By 2013, facial recognition, fingerprint and other identity verification technologies, as well as OCR were available to end users. A number of entrepreneurial digital banks emerged in Europe and the United States. From 2014, China, South Korea, India and other Asian regions closely followed. The world entered an explosive period of digital bank development.
Industry Development Tracking Canvas

Brutal market competition

The market has shifted to an intense focus on customers, and continuously upgraded user experiences and UI designs seem to have become the martial arts of Internet products. This is also the case in the digital bank industry. Many digital banks are very attentive in the design of the App UI and many innovative forms of interaction have emerged, which are eye-catching.

Many banks have also worked hard on products and services to create more innovative and “interesting” functions and services. Examples include giving personal wealth management functions a gamified experience; adding social elements to deposit products; and even issuing bank cards that are completely customized by customers.

Like many other Internet products, most digital banks choose to attract customers through a wide range of discounts and rebates such as fee-free exchange services to attract customers with overseas travel plans or wealth management products with a high interest rate. They create an atmosphere of short supply to achieve the goal of scarcity marketing. Some digital banks choose to introduce insurance services and provide small and medium-sized insurance with preferential prices for young users. They also attract loan customers through benefits such as low-interest-rate loan service.

Worries about profitability

As an emerging industry, digital banks generally have a notable status quo in the current market of having an unhealthy income structure. Most of the digital banks have not yet formed a diversified income mix yet, at the same time, they have done everything possible to reduce the deposit and loan spreads and intermediate business income to benefit customers, which has greatly reduced the bank's ability to manage risks. Except for considering users, banks also need to develop diversified income businesses and operate reasonably.

Whether it is the visuals and experience, service innovation, discount rebates, or low learning cost product design, the designs and marketing that everyone is accustomed to are all aimed at pleasing users. This is understandable in the Internet era when traffic is king, but in the face of such brutal market competition, "experience" and "privileges" alone cannot help digital banks win in the market competition. Underneath the user experience and the pleasing appearance, most digital banks have not yet found the core product to truly attract users on the asset side. The unclear profit model has caused losses to increase year after year. In today's Internet economy, there are too many "beautiful experiences" and "failed businesses", and many close after a few rounds of capital-burning.

A possible way out

The main profit model of digital banks is the deposit-loan spread. Although more than 60% of the digital banks on the market have all kinds of loan services, including personal loans and small and micro-enterprise loans, there are few digital banks that have obtained stable profits. In the past 8 years, only a handful of digital banks in mainland China and South Korea have achieved  profitability.

In a fiercely competitive market, the threshold for loans is gradually lowered, and customers' choices are increasing, but the overall demand for loans is difficult to increase at the same rate. Under such circumstances, digital banks should take advantage of  Internet channels, cooperate with related industries and seek new loan scenarios such as personal travel loans, study abroad loans and special loans for small and micro-enterprises. By creating more diversified loan scenarios and building external ecosystems, digital banks may escape the awkward status quo of no profitability.

Companies that have obtained digital bank licenses can also cooperate with the traditional financial industry to develop more personal financial services, such as insurance, funds, stocks, etc. They can make profit by charging corresponding fees.

For digital banks who already have a considerable user base, they should combine big data analysis with user operations, then draw corresponding user profiles and provide more intimate and customized financial services for different types of users to conduct more precise marketing. This can also increase efficiency and reduce operating costs.

Aside from its innovative services or precise user positioning, each digital bank needs to find its competitive advantage. In the pursuit of innovation, we cannot ignore that all business models need to be based on profit. digital banks can only be sustainable in the competitive market only if they continue to explore a stable and long-term profit model and gradually rationalize their business structure.

Digital Bank: mainly used in some European countries, Australia and Singapore.
Virtual Bank: mainly used in the Hong Kong region and some areas of Europe.
Neo-bank: also called "challenger bank", "new-style bank", mainly used in the United States.
Internet Bank: mainly used in the Taiwan region and South Korea.
Direct Bank: (Direct Bank), in a narrow sense, is consistent with the above concepts. It refers to a bank that does not set up physical service outlets and only serves customers through information technology. In a broad sense, some traditional banks in mainland China call their own digital transformation channels (such as banking apps) as direct banks. 

Disclaimer: The statements and opinions expressed in this article are those of the author(s) and do not necessarily reflect the positions of Thoughtworks.

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