PHILIPSBURG — The banking industry is in the middle of a digital revolution that will affect banking in never before seen ways. Policy Officer Farah de Haas and Information Risk Officer Marc Kross examined the banking landscape in a blog published by the Central Bank of Curacao and St. Maarten. They describe the rise, the risks and the requirements of digital banking.
What stands out in this blog is that its foremost focus is on technological aspects, while it completely ignores the human factor. How important that factor is may appear from the following examples. A client of a German digital bank required a new bankcard. Within five days, a courier knocked on his door in Thailand to deliver the card. The customer did not pay a penny for this service. Another client of a bank in St. Maarten also needed a new bankcard. Being off island, he engaged in email correspondence with the bank that lasted more than two months. In the end, he just gave up and closed his account.
That digital banking is the future is beyond discussion. In a way, we are already there. The WeBank was established in China in 2014; it has now more than 270 million users. Chime is the largest digital bank in the United States with 13.1 million users. In the United Kingdom, Revolut leads the dance with 19.1 million customers and the Berlin-based N26 virtual bank has 7 million users.
The market entry of digital banks in Curacao and St. Maarten is in its early stages, the Central Bank-blog states, adding: “But the digital transformation trend will continue.”
Digital banking requires a lot of technology, according to the blog. It mentions big data, artificial intelligence, cloud computing, robotic process automation, chatbots, an Application Programming Interface and biometric identification.
The global digital banking market size was $803.8 billion in 2019 and it is projected to grow to $1,610 billion only a few years from now, in 2027. The number of people using digital banking will reach 2.5 billion in 2024.
These trends indicate that the traditional banks as we have known them for decades, are on the way out. They will become obsolete because digital banks will beat them on every aspect: they do not need buildings, they need less personnel and they are able to keep the cost of doing business at unprecedented low levels.
Henry Ma, the CEO of WeBank told thefinancialbrand.com that the his back office (technological) cost is less than $0.40 per account per year. Here is another cost saving strategy: WeBank grants loans through face recognition technology and big data credit ratings.
Digitalization of banking services is not without risk, but the bloggers point their fingers in this respect exclusively to clients: “Cyber attacks are becoming more common and more sophisticated. Customers are naive and ignorant about existing dangers in the digital space and they are disclosing crucial banking information.”
The Central Bank bloggers mention three challenges: finding a balance between financial innovation and maintaining safety and soundness of the financial system; ensuring a robust regulatory and supervisory framework to address risks specific to digital banks, and in particular relevant for Curacao and St. Maarten; and guarantee access to non-digital banking services to avoid vulnerable people from becoming unbanked.
“Banks can no longer take a defensive approach against digital transformation,” the bloggers write. “Since the pandemic, the CBCS has been frequently asked about the establishment of digital banks.”
How will the digital banking revolution affect St. Maarten? There is obviously no comparison to WeBank in China which has access to more than one billion active users of WeChat, the social network of its financial backer Tencent. WeBank is highly reliable: its service availability is 99.999 percent. At the end of 2021 the bank had $64.9 billion in assets.
Because of the scale, St. Maarten banks will not be able to match WeBank’s technology investments. That is a fight no local bank is going to win and in that sense digital transformation is going to leave a lot of traditional banks out in the cold. If these services are not offered locally, clients will look elsewhere for digital services.
The Central Bank welcomes the digital transformation and it is reviewing its strategic research agenda about legal, practical and regulatory aspects.
For the time being, traditional banks have only one weapon against this digital shockwave: outstanding customer service – and that is at times hard to come by.
Continue reading: The future of banking