Starting from a report, dismantling 3 digital banking cases

From WeBank’s technological innovation to NuBank’s market expansion, and then to KakaoBank’s ecological resource integration, this article will deeply analyze these successful cases and explore how digital banks can lead innovation in the financial field and promote industry development.

Let’s first talk about three new consensuses in the financial circle:

1. Finance serves the real economy and is an important engine for economic development;
2. Banks are an important part of finance, with large size, wide scope, and deep tentacles, affecting both arteries and capillaries;
3. The future of banking is digital and its importance is growing rapidly.

The day before yesterday, a "Global Digital Banking Development and Innovation Trends Report" spread quickly in the banking circle, triggering some discussions within the circle.

This report deeply analyzes the development and practices of the world's leading digital banks, and makes judgments on the future development path of digital banks and the global competitive landscape. It is indeed very informative.

Let's make a deep-dive study note.

01 Overview of the Global Digital Banking Ecosystem

There are 235 licensed digital banks.

In 1694, the world's first joint-stock bank, the Bank of England, was established, marking the beginning of the modern banking system. It was not until the end of the 19th century that China's first national capital bank, the Commercial Bank of China, was established. With the development of the credit economy, banking business gradually expanded to deposits, loans, foreign exchange, savings, etc., and the modern banking system gradually took shape and is still in use today.

In the past decade, with the rapid development of information technology and the rise of the digital revolution, the traditional banking industry has faced many challenges. Complicated processes, long waiting times, traditional products and services can no longer meet the diverse needs of customers.

Therefore, a group of emerging financial institutions that have developed based on financial technology and online services have begun to emerge in various places. They rely on financial technology to form solutions and mainly provide core banking services such as deposits, loans, and remittances online, which is a supplement and expansion of the existing financial system. These institutions have different names. In some places, they are called "virtual banks", in other places they are called "Internet banks" or "challenger banks".

Between 2009 and 2014, digital banks began to emerge in major regions around the world.

Europe was the first to witness the establishment of digital banks. Driven by the development of financial technology and regulation, a number of digital banks emerged in Europe from 2010 to 2015, including Monzo, OakNorth, Starling Bank, N26, Revolut, etc., which have attracted more than hundreds of millions of customers since their establishment.

Subsequently, North America seized the development momentum and caught up, developing rapidly and in various forms, especially in the United States. Except for a small number of licensed banks that have obtained banking licenses, most are still fintech companies that cooperate with traditional banks to provide banking services.

Thanks to the large population base, the development of mobile Internet and the strong demand for inclusive finance, digital banks in various regions of Asia began to flourish in the second half of the 2010s. Countries including South Korea, Singapore and Hong Kong, China, issued licenses for digital banks and provided them with incentive policies such as relaxing shareholder shareholding ratios, forming a group of digital banks of scale.

As of 2023, the total number of digital banks with banking licenses established worldwide has reached 235, and the number of institutions providing a wider range of digital banking services has already exceeded 300, and their share in the overall banking industry is also increasing.

02 Five key questions that the world's leading digital banks are thinking about

After more than a decade of development, digital banks in various countries and regions have gotten on the right track and achieved certain results in terms of customer numbers and business scale. The leading digital banks have achieved profitability and distanced themselves from other followers. Long-term strategic choices and current business breakthroughs have become their current focus.

The top digital banks are most concerned about five issues, including:

1. Sustainable business model

The digital banking industry has now gone through its start-up phase in many markets.

Currently, digital banks that are more successful in business still use interest rate spread income as their main source of income. Common business models can be roughly divided into two categories: one is to rely on markets with a large population base, with retail customers as the main source of income. After reaching a certain user scale, they use economies of scale and technology to improve operational efficiency and achieve profitability; the other is to focus on high-yield market segments in markets with a smaller population base, focusing on a certain type of customer business (such as small and medium enterprise financing) or a specific scenario business (such as auto finance).

Overall, as a financial institution itself, long-term operating capabilities and sustainable business models are the key to its survival and development.

2. Unique ecological resources

Digital banks have been more or less embedded in one or more ecosystems, whether it is determined by the shareholder background or formed naturally in the process of development in line with customer needs. However, whether to fully utilize the scenarios, data, and partners of the ecosystem is a question worth discussing.

Regardless of the ecosystem, it provides rich data resources and cooperation scenarios for the development of digital banks. Fully tapping into this wealth of data will not only increase user retention in the ecosystem, but also enable more accurate customer acquisition, product pricing and risk management.

3. Diversified business models

In addition to existing revenue models, many leading digital banks are exploring diversified businesses and revenue growth. These efforts include: providing banking as a service (BasS), exporting technological capabilities, and providing non-financial services to small and medium-sized enterprise customers.

4. Multi-market coverage

Some leading digital banks have expanded their businesses beyond their home countries to cover multiple markets, while others have even attempted to expand their businesses across continents.

Due to the EU's "single license mechanism" (Licensing and passporting), digital banks in the EU are particularly active in this regard; many European digital banks, including Revolut and N26, have expanded to multiple markets, and Revolut covers more than 30 markets. Digital banks with multi-market coverage have also emerged in the Americas, Africa and other regions, such as Nubank.

Due to the need to prioritize meeting the huge financial needs of the domestic market and the late start of digital banking in some countries and regions in Asia, there are relatively few practices of digital banking in the region in terms of multi-market development. However, there have been some attempts, such as Singapore's digital bank GXS Bank cooperating with local companies in Malaysia to establish a digital bank GX Bank.

Of course, in the process of covering multiple markets, there are inevitably some localization transformation challenges, such as how to meet the differentiated regulatory mechanisms of various regions, how to coordinate efficient and low-cost operating models in the development of multiple markets, and whether there is an "optimal window period" for entering new markets.

5. Construction of infrastructure such as data element circulation

For digital banks, data is the core asset, and the circulation and application of data and related technical capabilities are one of the core capabilities of digital banks.

Therefore, digital banks not only play an important role in the circulation of data elements, but can also act as "data circulation assistants" or "data circulation promoters" to promote the circulation and sharing of data elements and build a good data ecology. By actively participating in the circulation and sharing of data elements, digital banks can further enhance their own development and bring more benefits to financial infrastructure construction and various application scenarios.

03 Case Analysis 1: WeBank: Financial Technology Infrastructure is Mature

As the first digital native bank in China, WeBank has always built its corporate moat around new production factors such as cutting-edge technologies and data elements, and achieved goals such as low cost, large scale and high availability through independent innovation.

As of the end of 2023, it has served nearly 400 million individual customers and more than 4.5 million small and medium-sized enterprise customers have applied for loans. The average IT operation and maintenance cost per household is about 2 yuan, less than 1/10 of that of its peers.

The achievement of these results is inseparable from the support of its financial technology.

1. Openhive technology base

WeBank adopts a distributed architecture (Openhive) as its technical foundation and establishes a multi-center architecture in the same city. Customers are distributed in different clusters, and multiple versions and 100+ core business systems can be deployed simultaneously in different clusters.

2. Dual platforms for technical data

We independently develop middleware components in multiple fields such as privacy computing, federated learning, AI, blockchain, etc., to ensure large-scale, high-availability, and low-cost operations at the technical and data levels.

3. Application system

Integrate the advantages of digitalization into the processes of customer acquisition, product operation, and risk management, and reduce customer acquisition, service, and risk costs through multiple application systems such as digital marketing, digital risk control, and digital operations.

In terms of infrastructure construction for the circulation of data elements, WeBank, based on its self-developed FISCO BCOS open source blockchain underlying platform, has worked with multiple government departments and institutions to build a cross-border data verification platform to promote safe and convenient cross-border verification and circulation of data, and provide reliable data verification services for residents, enterprises and institutions, thereby supporting the smooth and convenient development of cross-border work, life and business activities. This solution is based on the right to portability of personal data, allowing users to become key participants. Users actively initiate the transmission of personal information data and upload it by themselves, and realize data trustworthiness and verification based on blockchain, with separation of transmission and verification.

At present, the construction and use of the Guangdong-Macao cross-border data verification platform and the Shenzhen-Hong Kong cross-border data verification platform have been realized. Among them, this technical solution has been applied to the Shenzhen-Hong Kong cross-border data verification platform that was put into trial operation in Shenzhen and Hong Kong in May this year, providing convenient conditions for residents of Shenzhen and Hong Kong to work and live across borders and for enterprises to expand their businesses.

04 Case Analysis 2: NuBank: Winning the South American Market with Credit Card Business

NuBank is a local digital bank in Brazil. Since its opening in 2013, it has entered the credit card business, targeting low-income people, and has gained popularity in the Brazilian market with its free annual fee and convenient digital operations. Subsequently, it entered emerging markets with highly similar characteristics to Brazil with its most proficient credit card business, and achieved success in multiple markets in South America.

As of now, NuBank has achieved market coverage in Brazil, Mexico, and Colombia, covering more than 100 million users. It is the first digital bank outside of Asia to have more than 100 million users. It will achieve a net profit of US$1 billion in 2023 and an annual return on equity of 26%.

The success of NuBank's multi-market coverage strategy can be summarized as follows:

1. Focus on developing the Brazilian market

Based on the Brazilian market, NuBank gave priority to markets with high similarity to existing markets when selecting markets to expand. On the one hand, there is similarity in consumer demand, and on the other hand, there is high similarity in regulatory requirements, which facilitates the reuse of successful experience in the Brazilian market to reduce costs and increase business success rate. Therefore, NuBank chose Mexico and Colombia, and has no intention of expanding to the United States, Canada and other markets.

2. Using the free annual fee credit card business as a starting point

When expanding into new markets, NuBank uses its most proficient annual fee-free credit card business as its market entry product. On the one hand, it can make full use of existing resources and capabilities, and on the other hand, it is highly consistent with consumer demand in the Mexican and Colombian markets.

3. Customized market products

After obtaining a banking license in Mexico, NuBank partnered with local fintech companies to launch international remittance services, allowing remittances to be accepted through WhatsApp, and attracting customers by launching customized products and services tailored to local market characteristics, considering that Mexico is the world's second largest recipient of overseas remittances.

NuBank’s success is inseparable from subtle geographical factors, and even more so from its expansion strategy that is more effective.

05 Case Analysis 3: KakaoBanK: Serving over 43% of South Korea’s population

KakaoBank is from South Korea and was founded by Kakao Corp., a well-known Korean instant messaging software company. It is connected, linked and shared with the ecosystem companies of the Kakao Group to comprehensively optimize customer acquisition and customer experience, and is a model of deep tapping of ecological resources.

With the help of ecological resources, KakaoBank has achieved coverage of 22 million individual users, accounting for 43% of the total population of South Korea, with a net profit of US$268 million and a return on equity of 5.98% in 2023.

As a digital bank, KakaoBank is able to cover 43% of the country's population. What did it do right?

1. Connect and collaborate with ecosystem companies

By sharing the address book with Kakao Talk, the largest instant messaging app in South Korea, users can directly select friends on Kakao Talk in the APP to complete the transfer.

In addition, the two companies jointly launched the "Party Passbook" product, which allows Kakao Talk group owners to use the party passbook to collect membership fees from group members, confirm membership fee payment status, and urge them to pay membership fees. Members can also confirm membership fee income, expenditure, balance and other information in real time.

The product has been widely recognized by Korean consumers, with at least 1 in 6 Korean adults using it by the end of 2021. The product has brought a large number of new users and deposits to Kakao Bank.

2. Leverage ecosystem IP resources to acquire customers in batches

KakaoBank used the Kakao Friends cartoon IP to launch a campaign that gave away emojis when opening a bank account, ushering in the era of "beauty" debit cards in Korea. With this product, KakaoBank set a record of 1.51 million account openings and 1.03 million debit card applications in the first week of its opening.

3. Optimize the binding process and experience with ecosystem companies

Cooperate with Kakao Pay, the leading third-party payment platform in South Korea, to simplify the account binding process with Kakao Pay, create a smooth and seamless customer experience, and expand the target customer base. Kakao users can use the deposit balance of the bound KakaoBank account to make purchases and enjoy comprehensive income and expenditure analysis services.

KakaoBank is not only a beneficiary of unique ecological resources, but also sets an example for other similar digital banks in the industry.

06 Not a disruptor, but an innovation promoter

After more than ten years of verification and development, digital banking, as a beneficial supplement and expansion of traditional banking, is still playing the role of an innovator in the banking industry. The importance of digital banking to the global banking industry has become an industry consensus, and it is an indispensable "catfish" in the banking industry.

As for digital banks themselves, we see that there are not only leaders that set the trend and are open and compatible, but also followers that catch up and continue to innovate. Looking around the world, digital banks are booming.

In the foreseeable future, the continuous development of emerging technologies and applications such as AI, Web3.0, Internet of Things, and Metaverse will continue to promote the further evolution of digital banking forms and models. The digital banking industry will continue to launch new applications, products and services to further drive the industry forward; the boundaries between traditional banks and digital banks will become increasingly blurred; new digital banking industry standards will be established; and more digital banks will enter the market.

Looking back at China, under compliance supervision, the digital banking industry will also enter a new stage of development. The continuous influx of new players, the continuous stimulation of new technologies, the continuous upgrading of new models, the continuous establishment of new standards, and the continuous expansion of new markets will test the comprehensive capabilities of every player.

The best way to predict the future is to create it.

Chief Writer/ Jia Jia Article Architect/ Cunkouyouniu Producer/ Giant Finance