Achieving profitability: Insider insights from successful digital-only banks

Asking the experts at Money 20/20

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Malcolm Macnaughtan, Head of Financial Services, APAC

29 May 2024

Achieving profitability: Insider insights from successful digital-only banks

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Finding the right path for sustainable revenues

Why do some digital-only banks thrive and others struggle to gain traction? This question is as relevant today as it was when the first digital bank launched. Digital-only banks present a tremendous opportunity to include more people in the banking system, especially in underbanked markets. However, as digital-only banks expand and launch in new markets, they need to achieve viability as businesses and gain trust from prospective customers.

At Money 20/20 Asia 2024, I moderated the panel “Evaluating Profitable Business Models for Digital-Only Banks and Enhanced Financial Access.” Money 20/20 Asia provided a perfect venue for this topic. While profitable digital-only banks are rare, Asia-Pacific seems to host more than its fair share.

The lively panel discussion featured leaders from three successful digital-only banks. The panelists included Jessica Lam, WeLab's group chief strategy officer; Simon Beitz, founder and CEO of Alex Bank, an Australian digital-only bank; and Nick Woodruff, chief of staff at Singapore’s Trust Bank. They shared their first-hand perspectives on the actions digital-only banks can take to build sustainable businesses.

Solving the profitability puzzle

If we look back a few years, there was widespread excitement around digital-only banks. Many thought they were poised to push traditional banks aside thanks to their low fees, high interest on deposits, and modern user interfaces. Profitability was expected to come fast thanks to their leaner digital-first operations. Fast forward to today, and some of the shine has faded, especially in certain regions. For example, Europe is home to several high-profile digital banks struggling to achieve profitability.

What went wrong? High customer-acquisition costs and lack of focus on traditional banking principles likely played roles. In the scramble for customers, many banks emphasized deposits and payments. That’s a poor recipe for profitability, especially in markets where regulators have low caps on interchange rates. Some have responded by exploring new revenue streams, such as subscriptions. While those digital-only banks are exploring interesting avenues to profitability, the panelists come from banks that found ways to move faster in that direction.

Three key takeaways from the panel

Our panel members came from three digital-only banks that share an enviable trait: All are either profitable or on track for this year. Our panelists shared their perspectives on how their banks avoided common pitfalls on their paths to profitability.

Start lending early: Modern banking is complex, but that doesn’t mean you should stray from the basics. Collect deposits and lend at a higher rate. The panelists agreed that digital-only banks should start prioritizing lending at the outset. Just as digital-only banks compete to win account holders, they must originate loans. Take Australia-based Alex Bank as an example who launched with two deposit products and two lending products.

Choose the right ecosystem partner: The right partner helps you stand out in the market and access a large customer base from the beginning. This partner can introduce your proposition to its customers, lowering acquisition costs and accelerating growth. The key is to partner with a giant, such as a telco, in the ecosystem in which you want to thrive.

When Hong Kong-based WeLab moved into the Indonesian market, it partnered with the Indonesian conglomerate Astra to launch its Bank Saqu brand. The bank attracted 500,000 customers in just three months. Trust Bank offers another interesting example. It partnered with a leading grocery brand at its launch. Trust also illustrates a related point that choosing a partner whose own proposition enjoys strong affinity with your target customers really helps drive engagement with the banking proposition. Strong tie-in promotions helped the bank attract 100,000 customers in less than two weeks. That’s especially impressive when you consider that, prior to Trust’s launch, many considered the Singapore market already saturated with traditional and digital banking offerings.

Use agility to seize new opportunities: When we think of digital-only banks, we tend to view them as targeting a younger and underbanked audience. Digital-only banks launch with campaigns, products, and interfaces intended to appeal to this audience. However, it’s critical to never stop questioning assumptions in order to spot new opportunities. Compared to incumbent banks, digital-only players usually aren’t constrained by inflexible legacy cores. It’s critical to look for opportunities to use the agility that comes with a modern approach – and to adapt the business to win those opportunities.

After launch, Trust Bank examined its customer base and found that about 30% of its account holders were older than 55. The bank adapted its products and promotion strategy to include more offers aimed at this audience. It even made changes to the design of its app to improve ease of use to appeal to these more mature customers. A modern cloud-based infrastructure helped the bank respond to this unexpected opportunity quickly.

Let’s reinvent banking

As the panelists showed, the future looks bright for digital-only banks, even in markets that appear saturated. Success calls for speed and innovation, which is true for both incumbents and digital-only challenger banks. To advance, you need the right approach to technology – whether you rely on legacy systems or cloud infrastructure. At Amdocs, we’re helping banks modernize from the core to the customer. Talk to us about how we can help you make the move to no-code banking. 



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