Since the 21st century, the digital economy has surged, with young users favoring digital and mobile banking. Their affinity for digital channels and demand for personalized services have reshaped financial consumer demand.

The advancement of cloud computing, mobile internet, big data, and AI has opened up new possibilities for the banking industry. The application of these technologies enables banks to offer more efficient and personalized services, as well as improved risk management capabilities.

New technologies have reduced the costs of some products and services, enabling banks to extend their reach to previously unserved segments such as SMEs and limited-income individuals, thereby broadening the customer base.

The development of the digital economy has brought new competitive landscape. Fintech companies and Internet platforms have challenged traditional banks by participating in the financial business with the advantages of technology and business models. These new entrants have met consumer demand by offering innovative digital financial products and services.

The Global Digital Banking Development and Innovation Trends Report indicates that the number of digital banks worldwide experienced growth around 2019, with customer base, asset size, and revenues all sustaining rapid growth.

Especially in Asia and South America, digital banks have experienced rapid growth due to large population bases and strong demand for financial inclusion.

Digital transformation is a major trend and an inevitable choice for industries, with digital banking being the most crucial part and the most direct business manifestation of this transformation. Digital banks, regarded as financial institutions that primarily offer banking services through the internet or other digital channels, typically do not rely on a physical branch network. Instead, they leverage technology platforms to deliver services, thereby reducing costs, enhancing efficiency, and offering a more convenient user experience.

The rise of digital banks is the result of advances in fintech and changes in consumer behavior. They are transforming the way traditional banking operates and driving innovation and change across the financial industry. The key to differentiate digital banks from the traditional is that, regardless of whether or not they set up branches, they no longer rely on physical branch outlets, but rather use digital networks as the core, utilizing cutting-edge technologies to provide online financial services. Overall services tend to be customized and interactive, and banking structures tend to be flattened.

Digital banking is characterized by intelligence and online presence, meaning that the bank’s operations and management can be automated online. Thus, digital banking is concrete, not an empty concept. It is not only the channel innovation of traditional banking business, but also the reengineering of overall banking business process, optimization of organizational structure, innovation of products and services, upgrading of technology system, and the change of end-to-end digital transformation of banks.

We can analyze the characteristics of digital banking from the following aspects:

Business entrances include self-service mobile banking (including USSD) and Super App, as well as partner platforms (including operators, travel, retail, etc.). Customers can complete banking services through mobile phones (including smartphones and feature phones).

The main products of the digital banking include mobile deposits, mobile loans, digital payments, and digital marketing, which are independently operated by commercial banks, as well as third-party products from partners (including operators, insurance companies, fund companies, etc.). They are all processed automatically by the system without manual intervention, achieving electronic, paperless, and intelligent operation.

In the past, there were a lot of offline and manual operations. But in the digital banking system, a centralized process engine is used to unify the scheduling of all tasks and process events, and automate the recording of data at each key point to ensure digitization and traceability of the operational process. Enhance work efficiency while drastically reducing the business error rate, lowering operating costs and improving the input-output ratio.

In the era of Bank 4.0, banking is all about seamless integration with daily life scenarios, making services ubiquitously accessible, yet never confined to the four walls of a bank branch. By leveraging Open APIs, the banking system not only exposes its own products and services, but also integrates third-party capabilities through external Gateways. This approach of Open Banking facilitates a two-way exchange - extending the bank’s offerings beyond its walls while also embracing external innovations - to establish a new model of open ecosystem for commercial banks.

Leveraging cloud-native technology, the digital banking operations are fully online and run 24/7. The system is designed to have unlimited scalability to accommodate the industry ecosystem. Built on a distributed and microservices architecture, the technical framework effectively addresses the high availability, high concurrency, and high scalability requirements of commercial banks’ digital finance services. The extensive use of AI technology enhances operational efficiency and strengthens customer service engagement. Furthermore, the integration of cuttingedge internet technologies ensures the security, stability, and reliability of the digital banking system.

The digital banking landscape varies significantly across regions due to cultural differences, market dynamics,consumer habits,and regulatory environments. In China, digital payments have become the most critical application area within digital banking. Banks leverage payment scenarios to build business ecosystems, thereby innovating their products and services. This strategy has led to a proliferation of payment services that are deeply integrated into daily life, making transactions convenient and efficient. In contrast, in Africa, online micro-lending is a priority for commercial banks when it comes to digital transformation. These banks focus on meeting the financing needs of the general population, particularly those who may be underserved by traditional banking systems. Digital lending platforms offer accessible and quicker solutions to individuals and small businesses. In developed countries, the focus of digital banking is often on the digitization of customer service and the enhancement of customer journeys. Banks aim to expand their reach and strengthen customer interactions by providing a seamless online experience. This approach is designed to offer customers a more personalized and user-friendly experience, with an emphasis on convenience and engagement.

Banks transitioning to digital banking services or expanding their digital offerings often encounter unforeseen risks and challenges. Many of these stem from the rapid evolution of technology, regulatory environments, and customer expectations.
Here are some of the key risks and challenges:

Digital banking players are not only commercial banks; fintech companies, Internet companies, and telecom carriers and other such non-financial companies have joined the digital banking field, either by holding some of the banking licenses directly, or by cooperating with the banking business.

We observe that the operating entities of digital banking probably take some of the following forms:

Digital banking services are quite different from traditional bank services in terms of customers, products, services, operations, and risks. For example, they have different compliance requirements (like Know Your Customer or KYC), cater to different customer groups (wallets can be opened for non-bank customers), and operate relatively independently from the traditional banking system, allowing them to run on their own. Banks operate digital banking services as separate business units and product lines, which facilitates innovation and allows for appropriate risk isolation. Some financial groups even run their digital banking services as independent legal entities, exploring more flexible innovation models.

Eco-friendly enterprises refer to companies such as internet firms, e-commerce platforms, and telecommunications operators. Leveraging their vast customer base, these companies build rich ecosystems and integrate financial services into their existing business models. Due to the synergistic effects of financial services, digital banking has become one of the most important components of their business ecosystems. By offering digital banking services like payment transactions and consumer loans, these enterprises further enhance the value and advantages of their ecosystems.

Open collaboration is a characteristic of the digital economy. In the field of digital banking, licensed financial institutions like banks partner with ecosystemoriented companies that have customers and channels. These companies bring in traffic, customers, and scenarios, while banks provide them with banking products, professional services, and related financial resources. By combining their respective strengths, they offer innovative digital banking products and services to customers.

Banks need to explore digital banking services based on their own circumstances, focusing on specific business scenarios for digitization to control risks and scope. Since this is related to existing resources and closely tied to current customers, businesses, and systems, it is generally not operated as an independent legal entity.

Technology is the main driver of digital banking, so technological advances and innovations are often decisive for digital banking when financial institutions are conducting digital banking, and banks need to review the use of technology in light of their own resources and business characteristics, and it is critical to choose the right technology implementation strategy when conducting digital banking strategic planning.

As we said earlier, the players in digital banking are not only commercial banks, but also telecom operators, ecommerce companies, Internet enterprises and fintech companies, etc., and their paths of technological realization and evolutionary strategies will be different when they carry out digital banking.

In the process of digitization, the system deployment mode of the core business system of digital banks is an issue that every digital bank cannot avoid, which is related to the independence of business, data, and customer groups, and also needs to consider the regulatory requirements, organizational structure, business development strategy, and capital investment.