Did Digital Banks Fail To Disrupt

Most became niche players, yet served their regulatory purpose, said McKinsey & Company Associate Partner Hernán Gerson.

ASIA PACIFIC

They were touted as game changers, expected to revolutionise the banking industry and cause major headaches to the "old" incumbents. Yet, in the decade since the massive boom in digital-only banks-also known as virtual banks, neo banks, and challenger banks, amongst a plethora of other titles-only a select few have managed to reach profitability in Asia.

"There was a lot of hype, and some of the hype may be due to companies themselves trying to get a better valuation, Michael Makdad, senior equity analyst for Morningstar. "A lot of it was media-driven [too] because to the media it was something new. So they're like, 'Oh, wow, disruption. Now that banks have not lived up to the media's expectations, they see it as a disaster, Makdad noted.

This should not be the case, Makdad, along with other industry experts told Asian Banking & Finance. "The expectation for digital banks depends on your point of view. Consumers, regulators, and investors have very different expectations," said Hernán Gerson, associate partner, McKinsey & Company. "[One] of the reasons why [regulators] allowed digital banks to enter the market is for consumers and customers in general. The digital banks were able to deliver a customer-centric proposition with end-to-end digital choice, and in many cases, with much lower fees, and much lower pricing than incumbents."

This, Gerson said, pushed incumbents to ramp up their digitisation drives, even before the pandemic struck.

"Since digital banks have raised the bar for customer experience, incumbents reacted. You can see how many of these incumbents are now investing heavily in technology, have digital in their core, and are improving their offerings," Gerson added, noting that this was exactly what regulators wanted: innovation.

Looking back