Squeezing into a saturated market: Are digital banks here to stay or are they just a fad?

With no brick-and-mortar branches, automated teller machines (ATMs), or cash deposit machines, I struggled to explain to my elderly grandparents the concept of a digital bank. 

However, it is clear seniors are not the targeted clientele of digital banks. In the words of Charles Wong, CEO of GXS, “We are a bank born by digital natives for digital natives”.

So far, Singaporeans are showing extraordinary receptiveness to digital banks. Perhaps driven by the novelty factor and sign-up promotions, Trust Bank has reportedly hit 650,000 users within a month of its launch. 

But will this momentum be sustainable in the long run, or are digital banks another passing fad busking in a short-lived spotlight?

Do we really need more banks?

At first glance, the idea of digital banks makes more sense for countries where having a physical bank branch in every town is a practical impossibility. The wonders of technology also meant banking services could now be extended to residents in rural communities and developing economies.  

Therefore, for a small and highly developed country such as Singapore, the role of digital banks and the purported value they bring can be hard to understand. 

According to the World Bank, 98 per cent of Singapore’s population already has a bank account. Therefore, do we really need more banks to spread out our money? What can digital banks provide that traditional banks cannot? 

There is always the economic argument. While we do not necessarily need more banks, the increased competition will be beneficial since it gives us more choices. It will also spur the incumbents to up their game with better customer service and product innovation.

Already, we are seeing the positive effects. As a response to the higher interest rates offered by digital banks, the ‘Big 3’ – namely DBS, UOB, and OCBC – have increased the interest rates of their savings accounts to maintain competitiveness.

Another reason for welcoming digital banks is their power to transform our long-held image of banks. For decades, big banks have struggled to shed their image as cold, impersonal, and monolithic institutions guarding the interest of the rich and powerful. 

To the average users who are not high net worth individuals, dealing with banks can easily descend into a frustrating labyrinth of bureaucratic paperwork and nightmares.

As traditional banks continue to grapple with customer empathy and personalising their banking experience, this will be an area where digital banks can shine and fill the service gap. 

Besides offering a better customer experience than traditional banks, digital banks can also leverage their existing ecosystem of big data and analytics to develop targeted products and services specific to their customer base.

For every one of us who has wasted our life queuing at a bank, digital banks will be a welcome change from the poor customer experience synonymous with banks.

Will digital banks thrive in Singapore?

Old habits die hard. Therefore, consumers are unlikely to turn their backs on traditional banks in droves unless a catastrophic breach of trust happens to cause them to lose faith. 

Moreover, traditional banks are not the ones to rest on their laurels. Energised by the rise of digital adoption over the pandemic, most are rapidly accelerating their range of digital services to cater to different markets. DBS, for example, has started offering cryptocurrency trading services to keep up with the times. 

These developments can make it hard for digital banks to differentiate themselves from traditional players once the initial fanfare dies down. As new kids on the block in a saturated market, the ability of digital banks to create a niche for themselves will determine their success. 

So far, the newly minted digital banks are doing just that. While Ant Group’s ANEXT focuses on the needs of SMEs doing business with China, GXS Bank plans to target their savings account for underserved individuals and gig economy workers.

The outlook for digital banks

The market may be crowded, but digital banks can still thrive and gain a loyal following by offering personalised products and targeting markets that are overlooked by the incumbents. 

Aside from that, the financial inclusivity offered by digital banks also plays a part in its allure and longevity. Grab, one-half of the joint venture behind GXS Bank, has already been making it easier for micro-businesses to get a loan with various credit options. 

It is still too early to tell what kind of impact digital banks will have on us. But judging by the digital banking revolution worldwide, it is a fair assertion that digital banks are here to stay as part of our growing fintech infrastructure.

Featured Image Credit: Tsubasa Suruga via Nikkei Asia