Digital banks have been emerging in major regions around the world, presenting a diversified development path as "catfish" entering the financial market. Have they all found sustainable business models? Besides standing on their home market, have they expanded to other markets? What kind of development reference can they provide for "latecomers" who want to enter the digital banking field? Under the global digital tide, the above questions have become the industry's concern. Through the "Global Digital Bank Development and Innovation Trend Report" (hereinafter referred to as the "Report") jointly released by WeBank and Oliver Wyman, we may see the answer. According to the "Report", driven by technological development and the demand for inclusive finance, digital banks have rapidly risen globally in the past decade. As of 2023, the total number of digital banks with banking licenses established worldwide has reached 235. At the same time, global digital banks continue to explore in the direction of sustainable business models, diversified business models, deep mining of unique ecological resources, multi-market coverage, and innovation in technology and data infrastructure, which will also become the key to the gap between leading global digital banks and their competitors.
The rise of digital banks, increasing to 235 in ten years
Digital banks, also known as virtual banks or internet banks, are a new type of financial institution that has emerged in the past decade to cope with the business limitations of traditional banks. These institutions mainly rely on financial technology to provide core banking services such as deposits, loans, and remittances through online channels. According to the "Report", major regions around the world began to see the emergence of digital banks between 2009 and 2014, with Europe witnessing the establishment of the earliest batch of digital banks. Between 2010 and 2015, a number of digital banks emerged in Europe, 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 new banks have also emerged in North America, Asia, South America, and other markets to provide financial technology enterprises with banking services. Since then, the number of global digital banks has increased significantly. In 2023, the total number of digital banks with banking licenses established worldwide reached 235, nearly four times the 48 in 2014. According to the "Report", the number of institutions providing a broader range of digital banking services has long exceeded 300. The "Report" points out that these digital banks have diverse origins, including those developed from financial technology enterprises, traditional financial institutions setting up digital business subsidiaries, or newly established banks, etc. Due to the different starting points of their business, they can be roughly divided into native digital banks and derived digital banks. Among them, native digital banks are usually newly established banks or financial technology enterprises, with online services as the core, using financial technology to provide online financial services for customers in areas where traditional bank business is underdeveloped and where traditional bank business cannot cover, such as WeBank, Nubank. Derived digital banks are derived from traditional banks, using financial technology to digitally transform existing bank business, achieving product service innovation, customer experience optimization, and operational cost reduction, such as BBVA, ING. It is worth noting that the development of digital banks is not only reflected in the number, but also the proportion they occupy in the overall banking industry is also increasing. From the perspective of net interest income, the growth rate of net interest income of digital banks is significantly faster than that of traditional banks. Similar situations also exist in the overall income and asset scale of digital banks.
Leaders achieve profitability, with net interest income as the main source
Digital banks have emerged in major regions around the world, presenting a diversified development path due to the differences in market environment, self-endowment, and business choices. Specifically, many leading digital banks in each continent have passed the initial stage and have achieved good results in customer numbers and business scale. From the perspective of profitability, a considerable proportion of leading digital banks have achieved profitability, which also indicates that digital banks as commercial organizations are constantly proving their commercial value and long-term operation ability. In fact, the business volume and customer scale of leading digital banks are highly related to the market environment they are in. For example, digital banks in China rely on a large population base and a developed mobile internet to lead 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. After research, the "Report" points out that in recent years, global digital banks have continuously explored in the direction of sustainable business models, diversified business models, deep mining of unique ecological resources, multi-market coverage, and innovation in technology and data infrastructure, which will also become the key to the gap between leading global digital banks and their competitors. In terms of building a sustainable business model, many leading digital banks have achieved profitability, and some banks have maintained a high level of profitability for several years. Although each digital bank has a different development path, the "Report" believes that some similar experiences can be observed, such as digital banks focusing on retail that need to reach a certain user scale to achieve profitability. Overall, the more successful digital banks in business still use net interest income as the main source of income. The business model can be roughly divided into two categories: one is to rely on a large population base market, with retail customers as the main source of income, and after reaching a certain user scale, use the scale effect and technology to improve operational efficiency to achieve profitability; the other is to focus on high-profit niche markets in markets with a smaller population base, focusing on a certain type of customer business (such as SME financing) or a certain specific scene business (such as auto finance). In addition, many digital banks are also exploring diversified revenue models, including providing BasS services (Banking-as-a-Service), technology capability output, and providing non-financial services for SME customers, to improve profitability and obtain a higher valuation in the capital market.
Covering multiple markets, is there a "window of opportunity"?
In exploring multi-market coverage, the "Report" shows that some leading digital banks have expanded their business to markets outside their home country, covering multiple markets, and some have even tried cross-continental business expansion. Due to the "single license mechanism" of the EU, digital banks in this regard are particularly active; many European digital banks, including Revolut, N26, etc., have expanded to multiple markets. Digital banks covering multiple markets have also appeared in regions such as the Americas and Africa. Due to the need to prioritize the huge financial demands of the domestic market, some countries and regions in the Asian region have started relatively late, resulting in relatively fewer practices in multi-market development within the region, but there have been some attempts, such as the Singaporean digital bank GXS Bank setting up a digital bank in Malaysia in cooperation with local enterprises. It is worth noting that on June 21, WeBank was approved by the regulatory authorities to set up WeBank Technology Co., Ltd. in Hong Kong, China. The person in charge of WeBank told "Finance and Economics" that the technology subsidiary will serve as the overseas business management platform for WeBank, participate in the high-level competition of the international market with independent and controllable technology, and provide technology services for countries participating in the "Belt and Road" construction. Some industry insiders believe that this is an important step for Chinese digital banks to explore multi-market coverage. However, on the other hand, multi-market coverage also has potential challenges. According to the "Report", for digital banks covering multiple markets, the more important challenge is how to maintain an efficient and low-cost operation model in the case of multi-market operations, rather than how to enter a new market. The "Report" further points out that in some leading digital banks that have been practicing, it is not difficult to observe that successful cases of multi-market coverage in markets with high homogeneity are more common, and this homogeneity is reflected in the economic structure of the market and the needs of financial consumers; or it is reflected in the similarity or mutual recognition of the regulatory system. For example, N26 has been successful in the European market, but it has withdrawn from the US and Brazilian markets after a brief attempt, shifting its strategic focus back to strengthening its business on the European continent. In this regard, when exploring multi-market coverage, should digital banks choose to enter markets with high homogeneity with their own country first, and are there still opportunities in heterogeneous markets? In addition, is there a best "window of opportunity" to enter other markets? "For relatively heterogeneous markets, the main choice is a diversified exploration path. A way that is now more widely recognized is to first empower some local financial institutions to carry out local financial business in the form of technology output, and then go out after laying a good foundation. Of course, this presents different challenges for different digital banks, and there are not many digital native banks that can do this." Shi Shi, a vice president and partner of Oliver Wyman, told "Finance and Economics" that after previous research, although there are now more than 200 digital banks globally, there are not many that can build their entire technical base from scratch and develop their own digital native banking systems. Regarding the "window of opportunity" issue, Shi Shi further pointed out that there is "heaven, earth, and people" in this, and many digital banks consider the degree of core system reuse when they enter a new market, whether there is sufficient infrastructure construction and talent supply in the new market; and how long it takes to achieve a break-even or better scale effect. "This 'window of opportunity' does not mean that global digital banks are the same, but more that each digital bank chooses according to its own actual situation and development stage." Shi Shi said. Industry insiders generally believe that digital banks will play an important role in the global banking industry, but it is difficult to become a "game changer" that fundamentally changes the existing banking industry pattern, but will continue to maintain the "catfish" posture of the banking industry, playing the role of "innovation promoter" in the overall financial system with its financial technology and innovation capabilities, promoting the entire banking industry to maintain innovation and vitality. In terms of the development of digital banks themselves, leading digital banks have formed a scale effect and good profitability, and in the next few years, leading digital banks will further widen the gap with other followers in terms of profitability, market coverage, and leading industry standards. The "Report" stated that 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 of new technologies, new standards, and new models brought by 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. Secondly, emerging technologies will continue to promote the further evolution of digital bank forms and models. With the continuous development of technologies and applications such as AI (artificial intelligence), Web3.0, the Internet of Things, and the metaverse, the digital banking industry will continue to see innovative applications, products, and services. The specific form and business model of digital banks may also evolve further with the advent of new technologies, promoting the further enhancement of industry value. Thirdly, the boundary between traditional banks and digital banks will gradually blur. 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, and virtual banks in Hong Kong, China, such as WeLab Bank, have also begun to use relationship managers (RM) to serve high-end net worth customers, and European digital banks are also actively striving for securities brokerage and other business qualifications to provide customers with one-stop personal financial services. The "Report" believes that these measures show the evolution of digital banks in business models, trying to explore online and offline combination, manual service and automated service combination, comprehensive financial service provision, and other models on the basis of maintaining the convenience and low cost of digital banks. At the same time, after more than a decade of digital development and transformation, many leading traditional banks have also had strong technology and data capabilities, and continue to explore and try new business models. Many traditional banks in the market can now provide fully online services. Many innovative services not only improve the customer experience but also enhance the competitiveness of traditional banks in the digital age, making the service model of traditional banks more similar to digital banks.
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