The exponential growth of Information and Communication Technologies (ICTs) is revolutionising the world around us. This phenomenon has of course not been lost on the financial sector.

Thus, the reality described by the term newly coined by the Finance and Technology union (FinTech) is disrupting traditional banking. Within the FinTech ecosystem, we will focus on analysing what are known as Digital Banks by endeavouring to answer two questions:

1. What they are, and what the features of Digital Banks are
2. How they benefit consumers of financial products and services

1. What they are, and what the features of Digital Banks are

As discussed in the “Sorry Banks, Millennials Hate You (Scratch; Viacom Media Networks, 2014)” report, traditional banking is at its greatest level of risk of disruption. A striking example of this is the emergence of what are known as Digital Banks.

We can distinguish between three types of Digital Bank:

• Neo Banks: these are applications with no banking licence of their own, and not in the process of applying for one. This means that they are unable to receive deposits from customers. They provide a mobile-first experience with a (traditional bank) partnership acting as a depository for money, which handles Compliance and KYC (Know your Customer) controls.

The broad array of companies that provide financial services enables the setting up of a bank through aggregating the various services by using APIs (Application Programming Interfaces). These enable communication between the different applications, providing the user with transparency in the way in which they are processed or regarding the bank by which they are underwritten.

• Challenger Banks: these are banks with a banking licence, or in the process of obtaining one (Fully-licensed Banks), and which provide the customer with a new banking experience, with a Data-Driven model and with new pricing, product and service proposals, either their own or those of third parties. In other words, they are fully-fledged retail banks, with a full range of services, albeit dispensing with branch-based distribution channels, emerging as digital banks.

In order for them to operate as banks, they have to overcome the complex and costly process of obtaining a banking licence. In this sense, the financial authorities in the United Kingdom (the Financial Conduct Authority and the Prudential Regulation Authority) are leading the way by scaling back requirements in terms of capital, by extending the time limit for acquiring capital required by Basel III, and by simplifying the process of obtaining a licence, thus allowing a reduction, from two years to six months, in the time it takes to complete this formality. See the detailed UK FinTech report in this regard. On the cutting edge. An evaluation of the international FinTech sector, by Ernst & Young, February 2016.

• BaaS (Bank as a Service) or Api Bank: these were first implemented in the United States and in Asian countries. In Europe (where they now have a presence) they will benefit from new expansion opportunities with the coming into force of the new PSD2 payment services directive, designed to create a European Digital Single Market, by forcing banking institutions to open their payment services to third-party companies through APIs. These institutions provide financial platform services, an own-brand model, so that they are able to provide financial services, either with an actual BaaS (bank, electronic money institution or payment institution) licence, or one from a third party, with the support of other institutions’ technology.

2. How they benefit consumers of financial products and services

We will list just a few of the benefits of Digital Banking for consumers. See the III Ranking Anual sobre Competidores del Sector Financiero (3rd Annual Ranking of Competitors in the Financial Sector), produced by the Instituto de Estudios Bursátiles (Institute of Market Studies) Research Department (June 2016) for a more in-depth insight. Comprehensive and relevant analysis of the 15 main competitors in the global Financial Sector.

The increasing popularity of Digital Banking (with intensive use of technology and lower costs, and which the most notable part of traditional banking is joining), particularly among Millennials (15% in the United States, according to a survey by the American Bankers Association) is due to a number of reasons, including:

• Greater efficiency. Simple, a Neo Bank acquired by BBVA in 2014 (operating independently), scrapped all service fees a year later. NUMBER26 enables international transfers at very low cost. Cost reduction of capturing and cross-selling is estimated to be 10 times less than with traditional banking.

• Online-only banking. Banks such as Monzo, WB21, Atom Bank and NUMBER26 allow all transactions to be performed using the app. Bankaool, with the backing of Mastercard, provides an Uber card requiring no credit history. Ebankit enables Facebook friends to make payments to each other.

• Increased financial inclusion. Countries with limited access to banking services, such as Ecuador (40%), benefit, meanwhile, from a high degree of uptake of mobile telephony (90%). It has more than 30 million users in Africa.

• Quick login. Atom Bank uses the customer’s face to log in to online banking services without a PIN. CMB allows cash withdrawals from cash machines using facial recognition to identify the user, thus avoiding potential fraud.

• Clear and simple viewing. Standardbank manages cards and their cancellation via its app. Other institutions provide a summary of consumers’ information at a glance, without the need to log in: Icanbanken, BDO, Greatsouthernbank, Tescobank, Barclaycard.

• More convenient transfers. From the customer’s mobile phone, and entering only the recipient’s number: Swedbank, Skandia, ING España, ABN AMRO. Or using only one’s voice, which Santander UK now allows.

• Enhanced security when purchasing offline and online. Using digital Wallets, which is possible with BBVA Bancomer, BBVA España and Bankia. Or the possibility of making payments by mobile via NFC technology: BNP Paribas, Banamex, BanBajío or ING España.

• Opening an account without the need for an address. Monese makes the procedure involved in opening an account easier for migrants, international students and travellers needing to open a foreign bank account but who have no postal address.

In a world that is hurtling towards a fourth industrial revolution with an open banking ecosystem, in which there are already over 100 million users availing of mobile financial services, the banking industry has the opportunity to reinvent and revive the sector, thanks to the inclusion of technology in its business models.