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The rise of innovative technologies in finance has naturally sparked an interest in digital banking.

It has become something of a catch-all term, however: while the competition to disrupt banking is quite intense, many traditional banking institutions are currently attaching themselves to the idea of a digital bank in order to look more modern.

New electronic money licence holders are going after potential customers who prefer the quick and convenient approach offered by digital applications, while also referring to their services as digital banks. But are they really digital banks?

Digital banking apps – can they change finance?

The term digital bank is commonly used to describe the panoply of new payment apps or banking extensions. The definition is often used very broadly to describe the technological innovations within the banking sector or any banking solution that has a digital asset such as a mobile banking app.

Andrej Zujev, the founder of banking software provider Forbis Group, claims that many of the currently available digital services should not be categorized this way.

“Digital banking is not just about modern solution implementation. The term should be ascribed to new technology built to fully digitize banking services, in other words making banking services as automated as possible. I would even say that none of the digital payment solutions that call themselves a digital bank are really digital banks.”

According to Zujev, the framework of ‘true’ digital banking needs to rely on automated systems to a large extent. “The need for human resources should be very limited,” he says. “Nearly everything can and should be done automatically.”

On the other hand, Zujev agrees that some vital functions should still be overseen by people. For example, human beings should check on all issues related to escalated legal concerns, advanced anti-money laundering or geographically specific regulatory concerns. This provides better quality assurance and security of large assets. Marketing and communications can be considered as well, but the rest should be automated.

What does a true digital bank look like?

Even modern banking solutions, while steadily becoming rivals for traditional players, should not be seen as fully digital banking companies. Big market players like Revolut or N26 employ thousands of people, raking up expenses that wouldn’t be necessary for a completely digital bank. Real digital banking should be investing more in technology rather than physical assets.

Some of these applications would not want to be regarded as digital banks in the first place. Canadian lending app Mogo Inc, is designed to help Canadians manage their money and borrow more effectively and mindfully. Its CEO, Greg Feller, sees Mogo (NASDAQ: MOGO) as more of a fintech company than a banking solution.

Mogo’s technology might be acquired by a more traditional bank in the future, but Mogo is not seeking to provide full banking services. Mogo’s success in the market should also be measured by its ability to acquire customers, especially in the highly-contested under 30s market, not something every digital bank or fintech has been able to achieve.

Modern technologies are still underused in the banking sector. Currently, the most technologically advanced frameworks are not being used to their full potential in digital banking. One of the possible reasons for this is the still-ongoing use of more common IT solutions which are less developed than disruptive technologies. Developers are using traditional algorithms instead of applying AI (Artificial Intelligence) or Big Data. These components are the future of automation and should be involved as much as possible.

Full digitalization of banking may take a while, which is why companies like Mogo represent an attractive short cut for banks. It is very difficult to predict how digital banks will look in five or 10 years from now. Although the future of this industry is ever evolving, some steps may ensure a more sustainable development course. A new structure and organisation for banking may be necessary, to fit the new realities in financial services. There are many ideas and time will show which solutions can be the most suitable for banks and their clients.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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