Digital banking is not just a futuristic concept anymore. In fact, some banks are making great progress towards digital banking and social banking, like Citibank, as I described in my previous blog post.
But what does this mean for regulatory compliance? Should digital banks have the same regulatory compliance as traditional banks? Maybe not.
What is a digital bank?
First, we need to agree upon how we define "digital" in digital banking. In a blog post from Neal Cross, Chief Innovation Officer at DBS Bank, multiple definitions of digital banking are discussed. I agree with his definition:
Digital is all about making what can be seen unseen – making services so smooth and seamless that it becomes invisible to the customer. Despite all the automation and improvements that digital banking has the potential to achieve, customers and their needs still form the very core of the banking sector.
When considering definitions, however, we should also consider that many new players have arrived in the banking sector. Digital players like Google, Apple, Facebook and Amazon may become a new kind of bank. These new banks are different from traditional or digital banks, because they are focused on mobile wallets or integrated payment services, and not on savings. Also, with these banks, you won’t be able to take cash out of your bank account: it’s all about digital payments.
If these companies offer mobile wallets or integrated payment services, retail banks and credit unions could lose access to one of their most vital big data streams: payments insights, says Jim Marous.
What does this mean for traditional banks? Many traditional bankers or banking executives state that it is not so easy to become a bank. The younger bankers realize that with new technology and without the need for physical channels like branches, the barriers for many banking services such as payments are lower than ever.
The real threat
With new channels and new opportunities comes change, and the real threat to banks is losing the customer relationship to the new high tech players. Unless traditional financial organizations can build partnerships with providers outside the financial services industry, as Jim Marous states in the same post above, they risk losing even their most loyal customers.
With a partnership, both the companies with the customer insights and the financial institutions could benefit from shared insights. Chris Skinner also writes about these benefits in book Digital Bank, which he calls this ‘intellisense’. The bank that ties itself into the value of intellisense is the bank that will be at the heart of the next generation of retail payments.
Becoming a bank
What kind of regulations should the world apply to these new high tech players when they are starting to become banks? Or are they actually becoming a banks?
In my opinion, the new high tech players are not becoming real (digital) banks, because their focus is on mobile wallets and integrated digital payments without the part of savings accounts, loans and credit accounts. There is a big difference between offering specific financial services and being a bank, as Philippe Gelis, CEO of Kantox, stated in his LinkedIn post. Nonetheless, they are serious competition to the banking industry.
Should the high tech and other new players have the same regulations as the real banks then? I think not. Since they don’t have real money that people can take out of the bank, or interest that they can offer their customer over their money, there’s little in these companies that has to do with their customers' money.
I think people won’t store a lot of their money in these mobile wallets. Of course, companies like Apple and Amazon have a lot of customer information regarding money, creditcards and spending behavior, but this doesn’t make them a bank. I agree with Jim Marous that the biggest threat to the financial services industry is the customer insights that these companies have.
Best of both worlds
If we agree not to treat the new players as banks, the traditional banks will then have their own regulations to be compliant to, and the companies who have the customer insights should at least make sure that they have a good security system that is compliant to the privacy regulations. Let the banks – who handle the real money of the customers – do their jobs with all kinds of compliance. Regulations are surely the last thing the high tech company wants anyway. I’d say: establish partnerships between financial institutions and the new (high tech) players, to benefit from the best of both.
What do you think, should we apply the same regulations to these new players in the banking sector as to the traditional banks?
You can read more about banking and regulations the paper, Data Quality: The Achilles' Heel of Risk Management.