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Digital banks also tend to use «advanced data and technologies» to focus on markets such as SMEs which traditional institutions might consider unprofitable or risky. «For example, (China-based digital bank) WeBank’s microlending product uses emerging technologies such as big data and AI in risk analytics and modeling to broaden (SME) access to loans in China,» Barry added.

Focus On Key Offerings

Beyond the basic services and killer differentiation, digital challengers can also offer a core value proposition that resonates with millennials, said Shannon Aw, Head of Business and Innovation and Growth at Synpulse. «StashAway and Instarem are changing the way how we bank and manage our finances; the goal is not to be a one-trick pony. The port of call is to serve most consumer banking needs, but be anchored around one or two key offerings,» said Aw.

Those with assets and ecosystems, such as ifast, SingTel, and Grab – all of which have applied for Singapore's digital banking licenses – fit these criteria. «For example, SingTel can package their banking services with data,» said Aw. SingTel has recently bundled complimentary insurance with SIM card top-ups, as reported by finews.asia. 

Grab, with its near-monopoly of the ride-hailing market, has added food delivery services, hotel bookings, and a suite of micro-insurance products on its app, making it a possible winner. 

Lack of Access

Not everything will be smooth-sailing for these challenger banks or neo banks though. While they can save costs on operating physical branches, the lack of physical touchpoints could mean an inability to serve customers with complex loan structures or requirements, said Janet Young, UOB's head of group channels and digitalization in a recent interview with finews.asia.

They may also suffer from a lack of access to other services such as insurance and brokerage accounts, compared to conventional banks. «Traditional players like DBS and UOB are already very entrenched in the local market with strong and highly trusted brands, a huge customer base and strong capital,» notes Chia. Meanwhile, these banks have also started their own digital transformations.

Trust And Stickiness Factors

Digital banks also need to be build trust, said Forrester's Barry. In a recent survey by her firm, only 51 percent of respondents say they felt safe using their financial information online. Even in a mature market like Britain, digital banks have only garnered a market share of about 7 percent since 2010.

Metro Bank – a British digital bank founded in 2010 – only reported its first annual profit after seven years in business, Chia notes. «Most digital banks elsewhere are not profitable yet,» he added.