Digital banks were born during one of the last worldwide crises. The recession of 2008 saw some of the world’s first digital banks emerge, standing apart from the traditional institutions that were losing the trust of millions.
But now, as the COVID-19 pandemic continues to play out, there is a question as to whether neobanking will boom or bust across the world. There are a few elements at play here that could push these new banks in either direction.
Cash is contagious
One effect of the coronavirus that is being seen worldwide is the shunning of cash. With fears that handling cash could lead to the spread of germs, many countries have recorded an uptick in contactless payments. Some countries, such as Ireland, have also increased their contactless payment limit (from €30 to €50) to help consumers and businesses during the crisis.
The embrace of contactless payments will be a boon for digital banks. All cards from these banks are contactless-enabled and mobile payment wallets such as Apple Pay and Google Pay come standard. Plus, digital banks do not charge fees for contactless payments, which will be a huge sticking point in markets where these fees are standard, such as Ireland.
Research from global financial comparison site Finder shows that 22% of Irish adults are expected to have a digital bank account by 2025. However, with the coronavirus pandemic and the impact of new regulations, this could happen sooner.
Security plus safety
The pandemic has thrown the world into chaos. Jobs that were considered secure have been lost and businesses that were considered stable are now looking into administration and redundancies. During these times, it’s possible that people would lean more towards stable institutions such as large banks rather than new, digital-only banks.
However, licensing regimes can do a lot to instil trust. Finder research shows that an estimated 980,000 Singaporeans (approximately 20% of the adult population) currently have a digital bank account. About 10% more are planning to open one in the next five years.
The Monetary Authority of Singapore (MAS) established a solid licensing regime and opened up the banking industry to tech players looking to build a bank. It received 21 applications for 5 digital banking licences, with the successful applicants likely to start operating by mid-2021. The support by the regulator helps to build trust in digital banking and may lead to growth in the market in Singapore.
It’s a similar story in Hong Kong. The Hong Kong Monetary Authority (HKMA) granted licences for virtual banks to operate, saying it believes it would “promote fintech and innovation in Hong Kong and offer a new kind of customer experience”.
Finder research shows 16% of Hong Kong adults currently have a virtual bank account while a further 12% plan on opening one in the next 5 years. According to the HKMA, the virtual banks are subject to the same set of supervisory requirements applicable to conventional banks. Also, large tech companies such as Ant Financial have been granted a licence to operate a virtual bank in Hong Kong. These two factors will be hugely influential in the uptake of digital banking, especially in the uncertainty of the ongoing COVID-19 crisis.
Features from your phone
Lockdown orders have been in place for most countries throughout April and will be continuing for some countries into May. The branchless world of digital banks was almost designed for this. The longer lockdowns continue, the more people we’re likely to see opening a digital bank account.
Digital bank accounts are designed to be accessed from your smartphone and can be signed up for and managed without stepping foot outside of your home. They also offer a number of features that might be useful to people during the crisis.
For example, most digital banks offer some sort of international payments feature. While you won’t be travelling anytime soon, you still may need to send money abroad, receive payments for work or hold multiple currencies in the one account. You can do all this with a digital bank account. Plus, there’s usually no or low foreign currency fees.
Other features that might be useful include spending controls and budgeting features. Times are tight, and it’s never a better time to be in control of your spending and your money. These accounts are low-cost as well. You can opt for a no-fee account for the basic features or pay a monthly fee for more premium features.
Will it be bang or bust for digital banks?
These are trying times, and it will be a test for digital banks. The timing is difficult in markets such as Hong Kong and Singapore where digital banks have only just started offering their services this year. But even for more established markets such as Ireland, which have had digital banks since 2015, it’s difficult to measure the effect that COVID-19 will have on the trust of new players in banking.
Only time will tell if consumers continue to be willing to try out new accounts, especially with licensing regimes now properly established, or prefer to put their trust in traditional banking.