digital bank

Fintech, Techfin and different drivers for Digital Banking

An FortNynja webinar comprising BPC, WeWork Labs, GHL and OneConnect Financial Technology, kicked off with a question to try pin down the definition of digital banks.

The moderator, Paul Ark from WeWork Labs framed it this way, “There is a lot of vocabulary getting thrown about, there is ‘neo banks’, ‘virtual banks’, ‘challenger banks’, ‘online banks’ ‘ digital banks’, there are a lot of different terms..

“For many people who aren’t deep into fintech, the terminology can get quite confusing.”

So between all these terms, what’s the difference if there is any?

BPC’s Peter Theunis broke it down quite simply to whether the startup players; or fintech players; have banking license, and whether they have the support of a large financial institution in the background.

Yao Jing from OneConnect agreed with Peter, observing at the same time that there is a new definition every half a year. He also wanted to emphasise there is definitely a fundamental difference between a real bank with a license, and a fintech without a license.

“When you talk about licenses, it could be a full bank license, a wholesale bank license, or just a lending license, and even a wallet license.

“In some countries, if you just do SME financing using your own money, you don’t even need a license,” he said adding that it’s also a good thing to look at the origin of companies that want to offer banking services.

Fintechs, techfins

The general phrase that the industry has for companies like these are ‘fintechs’ when in actual fact they are more like ‘techfins’ on account of having a strong tech background.

He opined that ‘techfins’ is a better word to describe them, and also to be able to distinguish from actual banks that want to become more digital by offering services via digital technologies.

“Some of (banks) even spin off companies to do digital. My company spun out of PingAn Group, (which has) an insurance company and is also one of the biggest banks in China. So, a company like ours has more financial services (FS) in our DNA. So fintech is a better word to describe us.”

Big technology firms like Alibaba, Facebook, Amazon, Google and so on, are examples of techfins, or rather Big Tech companies that have started to offer financial services as well, including payments, money management, insurance and lending.

However, the webinar stayed focused on discussing the traditional view of digital banks – a tech startup that is offering banking services, and that may or may not have a license.

What are the ideal target markets for banks like this?

Asia and Europe – different drivers

GHL’s Danny Leong pointed out that these banks have come about because there are segments that are unserved, or underserved.

“A big portion (of market) is underserved meaning it is served some of the services, but not everything.”

And different countries would have different demographics that fall into the unserved or underserved segments.

From an Asian perspective, Danny called out businesses the and rural population.

Traditionally a lot of banking services are geared towards large merchants, “The sole proprietors, the micro SMEs with service-based offerings like mechanics, yoga instructors, mom and pop stalls, and the rural areas.

“In ASEAN, it is very apparent that they are definitely underserved. So you need a different form of banking systems to reach them,” Danny said.

Peter offered a contrasting observation for drivers of in Europe, pointing out that a majority of the population in that region, do have bank accounts and/or a relationship with a traditional bank. Instead, PSD2 regulations, and an open banking culture, have driven startups to offer banking services with specific target markets in mind.

“Most of them have a clear positioning, or they want to be the second bank, or the third bank, or they want to target millenials, or they want to do all those things.”

He observed that in most other regions like Asia, Latin America and Africa, a lot of digital banks’ plans have to do with financial inclusion.

There is a lot of interest to provide basic banking services at an affordable cost. “We see the incumbent bank in say Asia Pacific, have trouble delivering this. So there is a big opportunity for the newcomers, if they can find an affordable way to do that,” Peter said.

Critical technologies

Onboarding is an important activity for these new digital banks, and Yao Jing had later pointed out e-KYC as being one of two critical technologies for digital banks at this point in time.

Yao Jing opined, “eKYC is part technology and part regulation. If you do not have this eKYC regulation framework, you can’t open an account without face-to-face with banking staff.”

This would be a huge hurdle for digital banks that are new as they need to ramp up customer acquisition and establish a strong footprint across a country. On the bright side, he noted that many SEA countries are rolling out digital bank regulation and/or eKYC regulation.

The second critical tech for digital banks is anti-fraud technology.

The digital bank operator faces a new type of challenge – frauds from the virtual world which does not have geographical borders. “You have to deal with all these cyberfrauds very carefully,” Yao Jing said.

The hour-long webinar tapped into the collective wisdom of three professionals whose work have a wide geographic coverage. Other questions asked and answered during the session, had to do with relevancy of blockchain technologies for digital banks, and the nature of relationship between digital banks and traditional incumbent banks.