Digital Banking: Innovator for Sustainable Financial System Growth

Since the advent of the industrial age in human society, three industrial revolutions have occurred to date. These revolutions have centered around mechanization, electrification, and informatization, respectively, and have had a revolutionary impact on the three major factors of production and their combinations. They have driven profound and comprehensive transformations and upgrades in the social industrial and economic structures, greatly enhancing total factor productivity.

Finance is also in a state of dynamic change. To this day, the financial industry has been transforming and upgrading under the impetus of the digital wave, with digital banks becoming one of the forces that cannot be ignored.

Over the past decade, the number of digital banks has increased significantly, and their share in the financial system has also grown.

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Recently, Oliver Wyman, in conjunction with WeBank, released the "Global Digital Banking Development and Innovation Trends Report" (hereinafter referred to as the report). The report, through a sample study of 235 digital banks worldwide, reveals the development experience of digital banks over the past decade and explores the future development of digital banks.

Pioneers of financial system innovation

Europe has witnessed the establishment of the earliest batch of digital banks.

Between 2010 and 2015, under the development of financial technology and regulatory promotion, Europe saw the emergence of a batch of digital banks, including Monzo, OakNorth, Starling Bank, N26, Revolut, etc., which have attracted more than hundreds of millions of customers since their establishment.

At the same time, similar newly established banks have also appeared in markets such as North America, Asia, and South America, providing financial technology enterprises with banking services. China has also seen the emergence of digital banks represented by WeBank and MyBank.

In recent years, the number of digital banks worldwide has increased significantly. According to the report, by 2023, the total number of digital banks established worldwide with banking licenses reached 235, while the number of institutions providing digital banking services has long exceeded 300. Asia has become the region with the most digital banks, with about 100 digital banks in 2023, and Europe has about 70.Digital banks can be categorized into native digital banks and derivative digital banks. Native digital banks, often newly established banks or fintech companies, focus on online services and leverage financial technology to provide online financial services to areas where traditional banking services are underdeveloped and to customers not reached by traditional banking, such as WeBank and Nubank. Derivative digital banks, on the other hand, are evolved from traditional banks.

With the continuous evolution of digital technology, traditional financial institutions are also using fintech to digitally transform their existing banking services and enhance their digital capabilities. Digital banks essentially play the role of an "industry catfish" — actively contributing to the digitalization level of the financial industry.

Banks have widely applied large models and generative artificial intelligence technologies in scenarios such as intelligent office automation, code generation, and intelligent customer service; they are actively exploring the application of metaverse and digital humans in the financial industry, promoting the integration of the digital and physical realms, and practicing ESG goals, thereby accelerating the pace of digital transformation and enhancing support for the digital economy.

It can be said that digital banks have made significant contributions to the innovative development of the financial system. Digital banks continue to promote open-source technology, jointly build de facto technical standards, and enhance the international influence of our country's technology. Taking WeBank as an example, WeBank has taken on the role of a "pioneer" in improving our country's open-source innovation ecosystem and has vigorously promoted the development of open-source technology. By the end of 2023, the bank had open-sourced 36 projects in the fields of AI, blockchain, cloud computing, and big data, receiving over 40,000 stars and over 15,000 forks. On one hand, it provides effective technical solutions for various industries, and on the other hand, it offers valuable experience for financial institutions to open-source.

Diversified Pathways to Explore Sustainable Development

Overall, digital banks have been verified and recognized in major markets across all continents. However, due to the differences in market environments, inherent attributes, and business choices, global digital banks have shown diversified development paths.

For instance, digital banks in China rely on a large population base and advanced mobile internet, leading the world in the number of customers served; some digital banks in Europe and America focus on niche markets, covering fewer customers but achieving better profitability.

The report summarizes that in recent years, global digital banks have continuously explored sustainable business models, diversified business models, deep mining of unique ecological resources, multi-market coverage, and innovation in technology and data infrastructure, which will become the key to differentiating leading global digital banks from their competitors.

Firstly, by combining market characteristics and user needs, they create sustainable business models and diversified revenue sources. The business models of digital banks can be roughly divided into two categories: one relies on markets with a large population base, with retail customers as the main source of income, using scale effects and technology to improve operational efficiency and achieve profitability after reaching a certain user scale; the other focuses on high-profit niche markets in markets with a smaller population base, concentrating on a certain type of customer business (such as SME financing) or a specific scenario business (such as automotive finance). These models help digital banks find suitable development paths in different market environments and enhance customer experience and operational efficiency through innovation and technology.

In addition, many digital banks are also exploring diversified revenue models, including providing BasS services (Banking-as-a-Service), technology capability output, and offering non-financial services to SME customers, to improve profitability and obtain higher valuations in the capital market.Secondly, by leveraging their innate endowments and tapping into unique ecological resources, digital banks can explore multi-market coverage. Digital banks can integrate with other scenarios within the ecosystem to provide seamless service experiences for customers and promote the joint development of the ecosystem. In terms of data utilization, while complying with personal information protection and data compliance, digital banks can use alternative data available within the ecosystem to achieve more accurate customer acquisition, product pricing, and risk management through big data analysis.

For digital banks with different endowments, their approaches to utilizing the ecosystem also vary. Some European digital banks use financial services as an entry point to create super apps and build ecosystems to provide one-stop solutions for customers. On the other hand, digital banks derived from traditional banks tap into the resources accumulated by the original traditional banks, strengthen collaboration with external partners, and share ecosystem resources.

Thirdly, actively participate in the construction of infrastructure for the circulation of data elements and become innovators. Digital banks not only play an important role in the circulation of data elements but can also act as "data circulation facilitators" or "data circulation promoters," promoting the sharing of data elements and building a good data ecosystem. By actively participating in the circulation and sharing of data elements, digital banks can further enhance their own development and bring more benefits to the construction of financial infrastructure and various application scenarios.

The form and model of digital banks may continue to evolve.

The report points out that leading digital banks on all continents have passed the initial startup period, and top digital banks have formed scale effects and good profitability. In the next few years, the technical standards and risk management models of leading global digital banks may be exported externally to become industry standards, promoting industry standardization and thus improving the overall development level of the digital banking industry.

At the same time, with the continuous development of technologies and applications such as AI (artificial intelligence), Web 3.0, the Internet of Things, and the metaverse, the digital banking industry will continue to see innovative applications, products, and services. The report believes that the specific form and business model of digital banks may also evolve further with the emergence of new technologies, promoting further enhancement of industry value.

With the increase in scale and diversification of business, leading digital banks have also begun to adopt some traditional banking models. For example, Japanese digital banks provide offline branch services and ATMs, while virtual banks in Hong Kong, China, such as WeLab Bank, have also begun to use relationship managers (RMs) to serve mid-to-high net worth customers. European digital banks are also actively striving to obtain business qualifications such as securities brokerage to provide customers with one-stop personal financial services. These measures show the evolution of digital banks in their business models, trying to explore online and offline integration, the combination of manual and automated services, and comprehensive financial service provision while maintaining the advantages of digital banks such as convenience and low fees.

On the other hand, after more than a decade of digital development and transformation, many leading traditional banks have also acquired strong technological and data capabilities and are continuously exploring and trying new business models. Many traditional banks in the market can now provide fully online services, including remote account opening and online loans. These innovative services not only improve customer experience but also enhance the competitiveness of traditional banks in the digital age.

For Chinese digital banks, as global digital banks accelerate their development pace, their leading advantages will gradually narrow, and challenges will gradually increase. How to deal with the challenges brought by new technologies, new standards, and new models from digital banks in other regions, and how to serve a broader market, have become the focus of the next stage of development for Chinese digital banks.