Why digital banks might already be obsolete

FROM financial incumbents to tech platform consortiums, companies are throwing their hats into the ring for Singapore's highly sought-after digital banking licences. Across Asia, countries such as South Korea are a step ahead, with Kakao Bank being one of the first digital-only banks in the region.

Hong Kong, the city-state's perennial competitor, has also unveiled a new generation of licensed digital banks in 2019. In the unflagging tug-of-war between and within nations, digital banks are seemingly shaping up to be the next battleground for financial domination.

And yet, disruption no longer occurs in a vacuum. Today, almost every major country is working towards issuing a central bank digital currency, with Switzerland's e-krona being the latest materialisation. Blockchain-powered infrastructure will have a profound impact on legacy financial systems - any digital bank player should not underestimate the transformative potential of blockchain technology.

The banking industry, well known as one of the least disrupted and most regulated fields, already has an established set of complexities to navigate. A quick scan of recent years' fintech trends reveals the breadth of strategies different players have since embraced to remain adaptive.

Digital-first companies such as N26 or Revolut set out to recreate the retail customer's experience from a blank sheet, hosting services on vendor solutions rather than relying on legacy systems. Tech titans such as Alibaba and Tencent unsurprisingly look to leverage their vast customer base and database by venturing into the banking space, which has resulted in Yu'e Bao under Alibaba becoming the world's largest money market fund.

It is clear that digital banks that look only to deploy existing technologies and strategies might soon become obsolete. Blockchain, emerging as the technological foundation of a new digital frontier, is giving rise to a new breed of companies far more innovative, synergistic and efficient.

Unbeknownst to the public eye, a functioning Open Finance ecosystem built on blockchain has been quietly flourishing in what is known as Web 3.0. In January this year, the volume of assets circulating in the Ethereum ecosystem managed to pass the not inconsiderable milestone of US$1 billion, doubling the record just a year ago.

Lending, trading, synthetic assets as well as decentralised insurance are live, working products that have demonstrated strong growth traction. Buoying this optimism is the recognition of Web 3.0 Open Finance as both an ideological and financial evolution.

ADVANTAGES

Users have full control of their assets, hence eliminating custody risk. Transactions are transparent and immutable, hence doing away with central platform risks and lowering cost of trust. Products are interoperable by design, and developers can build product combinations or derivatives seamlessly integrating with each other, therefore accelerating the pace of innovation. These core tenets are fast becoming the hallmarks of a new financial movement, a refreshed departure from the digital bank agenda.

Blockchain technology is also starting to impact inter-bank infrastructure. IDC, for instance, predicted the migration of up to 40 per cent of China's financial institutions to blockchain-powered architecture for cross-border payments by 2023, bypassing central bank infrastructure and SWIFT. Blockchain native payment protocols such as Ripple have also attracted bank clientele such as Standard Chartered, Akbank, and Santander Bank.

Even with the encouraging progress, it is worth noting that the premise of an Open Finance ecosystem is not without its own unique set of challenges. This can point to the lack of a standard decentralised identity, overcollateralisation due to low capital utilisation rate, or security vulnerabilities due to lax smart contract standards. Much like any nascent technology, these teething problems reflect the healthy growth of the industry as it develops.

For the future winners of Singapore's digital banking licences, the exploration and utilisation of blockchain technology should be a natural decision to undertake. Blockchain-powered banking infrastructure exists in perfect compatibility with the psyche of the digital citizen, restoring greater agency and autonomy to the user.

With blockchain, Web 3.0 has begun to rewrite the true meaning of financial empowerment, a narrative that once more exists beyond the buzzwords of convenience and ease.