Digital banking, digitisation, and digitalisation
The term digital banking means many things to many people. Consider the difference between the terms digitisation and digitalisation. Digitisation suggests turning existing non-digital channels into digital channels, while digitalisation involves a wholesale change of philosophy from being a vertical manufacturer and distributor of products to taking part in a broad new digital ecosystem.
Several factors combined to ignite the race to provide digital-first or mobile-first banking services, including the global financial crisis, the arrival of the smartphone, and the rise of big tech players in the aftermath of the financial crisis.
The fintech world
Some companies – such as Western Union – claim to be fintech or financial technology companies since the 1860s when the first transatlantic cable was laid. However, the term came into common use around 2014, and refers to the use of technologies and particularly software in the delivery of financial services.
Clayton Christensen popularised the idea of disruptive innovation, as opposed to continuous innovation, and proposed that companies disrupt themselves before competitors arrive to disrupt them. As traditional banks had grown into one-stop shops providing a vast array of financial services, entrepreneurs began to see ways to focus on one area of banking, and disrupt that service with technology and software. By unbundling the services offered by banks, these fintech entrepreneurs could focus on one service such as payments, lending or remittances, and offer a digital service native to the internet.
Notably, disruptive innovation tends to come from startups and entrepreneurs rather than from established businesses. Early fintech businesses such as Transferwise and Lending Club focused on disrupting the payments and lending industries.
Definitions of digital banks
When the first fintechs emerged in the last decade, they named themselves in a variety of ways, some as fintechs, and others are digital banks, neobanks, or challenger banks. Since that time, fintechs that distinguished themselves as non-banks – such as Transferwise (rebranded in 2021 to Wise) or Lending Club – have acquired banking licences and moved from offering one service to offering a full suite of retail banking services.
New digital banks are sometimes referred to as neobanks, generally meaning new and digital only banks. Neobanks can operate with their own banking licences or under licence from another bank. For instance, Envel considers itself a fintech while offering retail banking services, but it keeps its deposits with Kansas National Bank.
The term challenger bank is more commonly used in the UK, where it is understood to mean a bank operating on its own banking licence. It may or may not have branches. Starling Bank and Metro Bank are both considered challenger banks, but only Metro Bank has branches. Below we look at three fintechs that have become or are in process of becoming licenced banks.