Digital Banks vs Traditional Banks: How Banking is Changing

Table of Contents

As digital banks become more popular, we discuss the reasons for their growth, and whether they pose a risk to traditional institutions.
As digital banks become more popular, we discuss the reasons for their growth, and whether they pose a risk to traditional institutions.

Banking has evolved dramatically over the past few decades. Traditional banks, once the mainstays of the financial world, are now navigating a landscape increasingly dominated by their digital counterparts. These online-only banks bring a fresh approach, eliminating the need for physical branches while promising efficiency and convenience.

In this analysis, we’ll delve into the contrasts between traditional and digital banking, highlighting user experiences, growth patterns, and the innovations that set digital banks apart. Additionally, we’ll explore whether the rise of digital banks truly poses a significant threat to the longevity of traditional banking institutions.

What is digital banking?

In the vast financial sector, digital banking has become a modern solution to break through the limitations of traditional banking. These banks operate only online or through mobile apps and lack the physical branches that many people are used to. Instead, they are harnessing the power of technology to offer a range of financial services, from standard checking accounts to complex financial instruments, all at your fingertips.

Notable pure-play digital banks in the Philippines include CIMB Bank Philippines, UnionBank, DiskarTech (RCBC), and Komo (EastWest Bank). These banks have quickly gained popularity, providing a competitive alternative to traditional banks. The key difference between digital and traditional banks is not just their physical presence (or lack thereof), but also how they operate:

  • Cost efficiency:
    Without the overhead of maintaining physical branches and large staffs, digital banks typically pass on the cost savings to customers through lower fees and better interest rates.

  • Speed ​​and accessibility:
    The online nature of digital banking allows for 24/7 access, instant updates, and faster transaction processes.

  • Innovative features:
    Many digital banks are leading the way in innovation, offering budgeting, savings, and even investing tools, often integrated directly into their platforms.

  • Supervision framework:
    Both digital and traditional banks are subject to financial regulation, but digital banks face unique challenges. For example, the Financial Conduct Authority (SEC) of the Philippines has developed specific regulations for digital banks, focusing on aspects such as cybersecurity, data protection, and online transaction processing. These regulations are often more stringent or different in nature than those for traditional banks, reflecting the unique risks and operating models of digital banks.

However, it is important to note that the core of banking – safekeeping of funds, facilitating transactions and providing financial services – remains consistent across digital and traditional platforms.

Popularity & Growth of Digital Banks

In December 2023, ADVANCE.AI released the “Philippine Fintech Report 2023” (hereinafter referred to as the “Report”), which will lead readers to fully understand the development background of the Philippine Fintech industry, systematically analyze the current status of Philippine Fintech supervision, and clarify the role of the Philippine authorities in the financial The focus of future development in the field of science and technology and the outlook for future trends are aimed at helping pioneers in the Philippine fintech market to avoid potential business risks, find business entry points and advantages, and successfully open up the situation.

Thanks to its relaxed foreign exchange system and capital access policies, the Philippines has gradually become a national market with great appeal for foreign investment in the Asia-Pacific region. In the process of responding to the COVID-19 pandemic, the Philippine fintech industry has developed rapidly due to the increased demand for “face-to-face” services in various industries. From 2020 to 2023, the number of users of digital financial services in the Philippines has increased exponentially. Under the active guidance of regulatory authorities, the Philippines has also become an emerging market for blockchain technology, digital asset service providers and digital asset holders. The Philippine capital Manila has also been praised as “one of the most fintech-friendly cities in the world.”

How do digital bank and traditional bank revenues compare?

Comparison of digital and traditional bank revenues provides valuable insights into the current banking landscape. Traditional banks such as HSBC have maintained their lead in terms of revenue generation, with HSBC reporting revenues of £43.5 billion in 2023.

Although digital banks’ user base is growing rapidly, their revenues are still small in comparison. The most profitable digital bank, Wise, reported revenues of £850m, showing that digital banks are steadily gaining market share.

The growth trajectory of digital banks focuses on user-friendly platforms and innovative services, which lays a good foundation for their future growth. Their lower operating costs and technological advancements are the key drivers of this growth trajectory.

In response to the rise of digital banking, traditional banks are evolving to expand their digital offerings. A notable example is JPMorgan Chase’s launch of Chase Digital Bank in the Philippines in 2021, which aims to capture the growing market for digital-first banking solutions. The move demonstrates how traditional banks are adapting to the digital age to remain competitive and meet changing consumer preferences.

Overall, while traditional banks currently lead the pack in terms of revenue, the growing presence and influence of digital banks in the market is driving change across the industry. The future banking landscape is likely to narrow income gaps as digital banks continue to expand and traditional banks adapt.

User satisfaction: digital banks vs traditional banks

In the competitive landscape of the banking industry, customer satisfaction is a key differentiator. Recent trends and data reveal interesting insights into how digital and traditional banks are performing in this regard. Digital banks have consistently achieved high customer satisfaction. Starling Bank leads the pack with an impressive 90% satisfaction rating, followed closely by Monzo Bank (87%) and Chase (85%). These high scores reflect their focus on user experience, innovative features like instant deal notifications, and personalized budgeting tools that resonate well with their customer base.

In contrast, traditional banks face challenges in keeping up with these satisfaction levels. For example, HSBC and Barclays had satisfaction ratings of 71% and 70% respectively. While they have a strong customer base, issues such as long customer service wait times and a lack of responsiveness to technological advances have been a point of contention for some customers.

The adoption of digital banking shows clear trends across age groups. Younger generations have embraced digital banking – 31% of Gen Z and Millennials already have a digital bank account, reflecting their preference for technology-driven banking solutions. This is in stark contrast to older generations, who have significantly lower adoption rates—just 24% for Generation X, 16% for Baby Boomers, and 13% for the Silent Generation [8]. These data clearly show that younger users prefer digital banks, while the older generation still prefers traditional banks.

However, traditional banks are not standing still in this situation. Many companies are investing heavily in digital transformation to enhance the online banking experience, aiming to close the satisfaction gap.
Trust and security remain vital in the banking industry. Digital banks must continually prove their reliability and security, while traditional banks need to innovate without compromising the trust they have built over decades.

Overall, while digital banks currently lead in customer satisfaction, the evolving efforts of traditional banks suggest that the competitive landscape is focused on improving the customer experience across the board.

Possible explanation for higher satisfaction

The higher customer satisfaction achieved by digital banks compared to traditional banks can be attributed to several factors. Digital banks place great emphasis on customer experience. Their platforms are often driven by innovative technology and designed to be user-friendly and intuitive. This focus on the customer journey translates into higher satisfaction.

Digital banks are often more agile and quicker to adopt new technologies. Features like instant notifications, budgeting tools, and easy account management directly on the mobile app cater to a digitally savvy customer base.

Personalization is another strength of digital banks. They use data analytics to understand customer needs and preferences, allowing them to customize services more effectively. Being digital-first, these banks can quickly iterate and improve their services based on customer feedback. This responsiveness ensures they continue to evolve to meet changing customer expectations.

The convenience of managing your finances anytime, anywhere is a major attraction. Digital banking eliminates the need to visit physical branches and fits the lifestyle of modern consumers who prefer online transactions.

These factors together contribute to higher satisfaction among digital bank customers. As digital banks continue to innovate and customize their services, they are likely to maintain or even increase their satisfaction advantage over traditional banks.

What qualities of digital banks attract users?

The growing popularity of digital banks is largely due to their unique features, which are well suited to the needs and preferences of modern consumers. The user-friendly interface and seamless banking experience offered by digital banks, often through mobile apps, has significant appeal, especially to the tech-savvy generation that values ​​transaction efficiency and simplicity.

Built-in budgeting tools in platforms such as Monzo and Starling Bank allow users to track spending, set financial goals and manage finances more effectively. This particularly resonates with younger users who are keen to use technology to increase financial knowledge and control.

The easy registration process is another highlight of the digital bank. Users can open an account in minutes without having to visit a branch, in stark contrast to the often lengthy process at traditional banks.

Digital banks have also filled the gap left by traditional bank branch closures. They provide basic banking services, ensuring that people in these areas do not become financially underserved.

Banks like Starling make international payments and currency conversions easy, and often have lower fees than traditional banks. This is especially beneficial for people who travel frequently or engage in international transactions.

Innovative features such as blocking gambling transactions, creating virtual cards, and providing instant notification of transactions offer a level of control and customization that is often lacking with traditional banks.

Together, these features make digital banking extremely attractive, especially for those seeking a banking experience that is consistent with the digital age. Therefore, digital banking is not only an option but also a preference for an increasing number of consumers.

in conclusion

The banking industry is undergoing a critical transformation with the emergence of digital banks, posing challenges to traditional banking institutions. This evolution is driven by changing consumer preferences, technological advancements and innovative approaches by digital banks.

While traditional banks continue to lead in terms of revenue and customer base, digital banks are rapidly gaining popularity, especially among younger generations who prefer ease of use, innovation, and digital integration in the banking experience.

The future of banking appears to be a fusion of two worlds. Traditional banks are increasingly adopting digital strategies to remain competitive, while digital banks are striving to expand services and customer trust. This balance shows a more customer-centric banking environment where choice and convenience are paramount.

Both types of banks will need to continually adapt to consumer demands and technology trends. For traditional banks, this may mean further digital transformation. For digital banks, the focus is likely to be on expanding services and enhancing security and trustworthiness.

As competition increases, it is likely to spur further innovation and improvement across the industry, resulting in better services, more choices and a better banking experience for consumers.

In short, the banking landscape is undergoing a major transformation. The rise of digital banks marks a new era in finance that promises to reshape the delivery of banking services and the customer experience.

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