Standalone digital banks are called neo-banks. They are a part of fintech players — fintech provides financial products through electronic platforms.

Fintechs do so by three ways. First of all, they set up entities which compete with banks, e.g. digital banks. Secondly, they set up entities which collaborate with banks by providing services such as KYC checks, loan processing, loan collection, risk management and so on. Thirdly, they set up entities that eliminate financial intermediaries, e.g. peer-to-peer lending platforms.

Standalone digital banks pose the most direct threat to banks. However, these do not take the banks head on. They target high risk customers which banks tend to avoid, e.g. individuals with lower incomes or credit scores.

Digital banks cannot earn much fee income as they deal with lower income clients. Many may think that digital banks save on maintaining brick-and-mortar branches, and thus may have lower operating expenses. This is not true. They have huge marketing expenses. Many digital banks are loss making.

Banking experience suggests that branches will retain their centrality. Digital banking cannot substitute the branch, especially in customer acquisition and customer retention. Digital banking is an added service to sustain the business.