Central banks issuing digital banking licenses in fear of Fintech’s rapid growth

An analysis of Asia’s current Fintech situation reveals how the leading digital banks managed to raise over $6.7 billion in capital in combined funding. As markets became more open to the lack of regulators, it was easy for neobanks and digital banks to flourish.

In the last decade there were many examples of successful neobanks such as Revolut, Starling Bank, Fidor, Monzo, Simple and Moven. But are regulators going to start changing the game to make sure traditional banks don’t suffer?

How is Neobanks different from traditional banks going digital?

Many financial regulators have shown a desire to cooperate on a global scale to standardize neobank practices worldwide. Lately, many traditional banks have been trying to catch up with the pace of innovation coming from their new competitors. How are neobanks still different from traditional banks?

According to Andrew Beatty, the head of Global Banking Solutions, the majority of successful neobanks do not rely on their own solutions, but instead look to third-party software solutions that offer everything. In return for an investment, these solutions can easily provide a ready solution with a working API, machine learning, databases and even regulations. This approach saves start-ups significant amounts in terms of costs and resources, and leaves more room for innovation.

In this way, the core technology is flexible and can overcome contingencies on a wider scale. Ironically, this age of competition also calls for more collaboration.

There are a number of key foundations such as APIs, clouds and microservices, to be developed individually. Also, some of the more advanced neobanks use blockchain levels of military grade security. Due to ever-increasing customer expectations and regulations, there is a possibility that fintech and financial institutions will become one in the future. And it can give them an unprecedented amount of control.

What are regulators doing about it?

It is becoming increasingly difficult to balance digitized and globalized banking services with financial stability. According to the chairman of the Bank for International Settlements’ Financial Stability Institute, central banks should start contributing to the work of digitizing regulatory requirements and frameworks.

On the other hand, some regions like Singapore see the capital differently. They shook up the local market by granting fintech banking licenses to offer various banking services. They can now serve small and medium-sized businesses with loans and full banking services.

Other regional regulators looking at that example started issuing licenses for more digital banking platforms and neobanks to prevent fintech from taking over the market, which is a reasonable concern.

Will the regulations tighten up for Neobanks?

From an empirical perspective, the last time financial regulators tightened their requirements after the last financial crisis was back in 2008. From this point of view, regulators can expect to bombard financial institutions with new requirements and tighten the regime again right after the next financial crisis.

On the other hand, there are fintech solutions that largely help companies stay in touch with regulatory standards in terms of anti-money laundering, risk management, compliance and cyber security.

Can Fintech Ever Replace Banks?

Even if regulators fail to stop the dominance of fintech in the neobanking world, the banks will still have the upper hand. Customers and investors will be less willing to trust their funds with start-ups and instead secure their money through banks with a proven track record and guaranteed safety.

What is the best case?

The best case scenario would involve fintech and neobanks working together to meet the operational standards for operations brought by regulatory institutions on a global scale. As previously mentioned, the majority of neobanks currently do not rely on their own architecture and instead leave several core aspects of their business to third-party solutions.

These solutions that neobanks and white label digital baking can offer include, but are not limited to:

• All in one banking as a service (BaaS) package, including licenses and regulations.

• Security oriented (military level security on blockchain.)

• Machine learning and artificial intelligence models to reduce risk and analyze key processes.

• Document Verification (KYC)

• Biometric login and authentication

• Data storage systems

• Business automation

Last word

Fintech in regions where regulatory institutions allow it looks forward to offering banking services. While consumer expectations are increasing, there will always be a demand for innovative features in banks and neo-banks. Fintech can deliver these as third-party solutions.

Regulators are coming together to draw a road map for the future decade, where fintech will be limited in terms of available offers and services to banks. But if that doesn’t happen, traditional neobanks won’t go bankrupt. Customers and investors are more willing to trust their financial institutions with proven track records and security than startups right away unless they offer something new.