Is building a Digital Bank worth it in 2022?




Digital banks exploded onto the banking scene years back, vying for a share of the market once dominated by traditional banks. Over the years, a number of neobanks and challenger banks have cemented their place in the marketplace and every year, new digital banks spring into existence.

Aside from these, traditional banks are countering the competition with digital banking apps and platforms of their own. It isn’t surprising to see digital banking apps launched by big banks coming to par with the platforms of established challenger banks. Where legacy banks can’t compete, they leverage banking-as-a-service, boosting the development of even more digital banks.

With top contenders tightening their grip on the market and hundreds of startups flowing in and out of the pipeline, the question of market saturation is starting to show face. 

Do we have more online banks than the market needs? Are banks creating unnecessary niche products or services in a bid to stay competitive? What is the reward or motivation for entrepreneurs looking to launch new digital banks into today’s tight-fisted markets?

 

Why digital banking in the first place?

 

There is no denying that digital financial products have liberated the banking public from the monolithic processes of the old banking system. The convenience and speed of service combined with innovative services that didn’t exist 2 decades ago are generally making life easier. 

Digital banking extends banking services to remote areas, granting more access to financial services and enhancing commerce. Commerce might not have been globalized without the reliable, worldwide payment system made possible by fintech and powered by digital banks.

10 years ago, news of a new banking disruptor coming into the market usually created excitement for both investors and consumers. The big picture was clear for all to see; “take down the traditional banking system.” Today, however, while a new digital bank pumps some interest, it has to offer something unique, revolutionary or crucial to a particular niche or region to attract the attention of investors and consumers. 

From euphoria to a stalemate, all of a sudden, the relevance of a new digital bank in today’s market is up on the grill. To measure such relevance, we must look at what problems new digital banks can still solve today or the open angles that can grant them entrance into a highly competitive market.

 

How relevant are new digital banks to today’s market?

 

The truth is, as much as digital banking has eliminated many of the banking challenges plaguing the old system, we are still far from actualizing the completely digitized and seamless financial system envisioned.

There is a lot of work left on deck to achieve that dream banking system and sadly, existing digital banks and fintechs cannot do it all alone or fast enough. There is a need for new digital banks with market-fit solutions or unique entry positions to come in and fill the vacuum.

 

Payments and cross-border banking

 

For one, payments still need to be more seamless compared to what we have today. While instant bank transfers across borders are a thing today, accounts reconciliations, physical cash movements and many more banking activities happening behind the scenes are still slow. 

Country-specific regulations remain standing in the way of making complete borderless banking a reality. Central Banks Digital Currencies (CBDCs) promise to lower regulatory barriers to aid faster cross-border payments, but that may take a lot of time. 

New digital banks are uniquely positioned to tackle this problem using smart technology and strategic partnerships.

 

Local Market penetrations

 

Statistically, only a fraction of the world population uses any form of bank account (physical or digital) and digital banks have proven to be the most effective way to reach remote and unbanked people. 

It’s difficult for many established neobanks to expand locally, leaving that void to be filled by fresh, new digital banks that understand their local market and are nimble enough to penetrate. 

A good example of this is how mobile banking companies in Africa are providing access to banking services to locals better than established local traditional banks or even giant neobanks with a presence in Africa.

 

Exploring emerging markets opportunities

 

Existing digital banks are often too focused on product or revenue objectives that they miss out on exploring hidden market opportunities or creating products to meet emerging market needs. 

Since the entrepreneurs that potentially build new digital banks usually operate outside an existing market, they are able to spot and scope up new market opportunities faster with banking solutions, than established banks. 

They do this by wrapping their services around a niche exclusive to them and away from the competition. Most times, their niche-based services are so good that they make a name for themselves before new or existing banks can offer any valid competition.

 

Technological ingenuity

 

When it comes to financial technological heights, there are no caps at the moment. New digital banks are incentivized to go all out and invent whole new financial services using new technologies that might become industry game-changers. 

An example is the banking transition from USSD code payments (which was revolutionary at its time) to seamless QR code payments through smart devices. Today, fintechs are working to make payments possible through any human and non-human elements using the Internet of Things (IoT).

Years back, banking data security relied on hard records and computer systems. It then moved on to cloud computing and now transitioning to AI and blockchain technologies. Behind many of the upcoming technologies will be young digital banks backing fintechs with next-generation processes.

While digital banks often start off with a niche-based entry strategy, it gives them a foothold into a highly competitive market, from where they can gather experience, expand service offerings and even compete directly with market leaders.

 

So, do we need new digital banks?

 

The short answer is a resounding, “Yes”.

The long answer is that as long as consumer banking needs keep changing, new digital banks might be needed to satisfy them. As long as banking market opportunities keep popping up in terms of new technology, new processes, and new product or service package to replace existing ones or to create niches, we will need fresh digital banks.

There’s a limit to how many markets a single digital bank can serve, and that itself provides opportunities for new digital banks to spring up. 

With the advancement of open banking and open ecosystems, rather than present a direct competition, many digital banks might collaborate in the future towards building an interconnected banking ecosystem that benefits both banks and consumers.

 

Take the next step!

 

So, we’ve seen the inevitable market opportunities, and now is the time to take them. If you’re looking to build or scale a digital bank within weeks and at the most efficient cost, SpotBanc is the right call. 

We provide you access to technological stacks for building banking products and access to leverage banking licences of our partners, so you can launch your bank within weeks, not years. Let’s talk about building your bank, here.

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