Digital bank’s wish to be a real boy

If you were to mention the word “digital bank” a few years back during the pandemic, you would have seen your friend’s eye glow and widen at this novel concept. So when Trust Bank and GXS first made their debut back in 2022, it created quite a commotion among Singaporeans when it was dishing out attractive incentives left, right and centre.

You would expect that this marketing strategy would be perfect for luring local Singaporeans would you? But you are wrong. When this digital banks got their reports cards in 2023, it wasn’t pretty. So why isn’t such an attracting business model catching on with fellow citizens, and can digital banks really compete on the same calibre with traditional banks?

The rise of the digital bank during the pandemic

Remember during the lockdown and everyone was cooped at home, that was the time when digital banks really managed to flex its muscles. Unlike traditional banks that have physical branches and ATMs, digital banks are banks that operate wholly online. The online presence of digital banks also allow users to manage their finances entirely from their smartphones and computers, which really came in handy during the pandemic when people couldn’t go out of their homes to the nearest banks and had to manage their banks remotely.

Higher interest rates and other incentives

For a starter, digital banks waves off the need for account and card fees, and faster transactions with everything done online. But probably the cherry on top of the cake would be the the high interest rates that digital banks offer to their customers, which has made so many people flock to their camps.

But these digital banks are offering more than just higher interest rates. They are also ramping up offerings and services to help clients offset higher inflations. Trust Bank, for example, offers customers a rebate rate of more than 20% on grocery shopping, while GXS has started to offer personal loans to its customers.

Digital banks missing high expectations

So it was a shocker when Singapore’s digital banks missed their profitability mark when they got their 2023 report card. While the number of users of these digital banks has increased, it still dwarfed in comparison with that of the trio of local banks.

Digital banks in for the long haul?

Proponents of digital banks have argued that this result from 2023 is something expected, and that digital banks are in for the long haul. They argue that, because digital banks just set their roots in the market, they would need time for them to make enough money to offset the cost of the high interest rates they are offering.

They also argue that digital banks would also need time to secure bigger investors and funds for their project before they could see breakeven, and this process would take 5 or even 10 years.

Lack of trust in digital banks

But opponents of digital banks are arguing that this report card is a glimpse of the demise of digital banks, as the initial novelty of it is starting to wane. A research study from NUS has shown that novelty and incentives still aren't enough to jump ship.

It turns out that customers are still more inclined towards the wide variety of financial products that are available at traditional banks. In comparison, digital products offer much simpler core products like Savings Accounts, Credit Cards, and Insurance, which does not fully cater to the needs of the general audience.

But probably the biggest hurdle is the lack of trust. Experts have pointed out that the majority of people are still uncomfortable changing to something that they are less familiar and comfortable with, especially when it comes to something as important as finance. Furthermore, the lack of human to human interaction also proves to be too big of an obstacle for digital banks. At the end of the day, customers still prefer face to face interaction, which gives customers a greater sense of security.

Would digital banks even survive for long?

So is this the end of digital bank? Yes i think so. For digital to really achieve the same success as traditional banks, it would require a giant shift in mindset before they could fully penetrate the banking market. It also seems that they would also need to innovate creative ideas that can draw in and retain their long term relationship, which is lacking in their strategy right now. This then would be the determining factor in establishing digital banks as the dominant force in banking.