It’s not as exciting or controversial as cryptocurrency, but it’s become much more important: digital banking is transforming the simple business of holding deposits and transferring payments. These are the most basic banking features, and we have centuries of established protocols to make them work. That’s why starting a bank is extremely easy—in theory—all of the tools necessary can be taken off the shelf and applied to a new book of customers.
But we don’t have banks popping up all over the place for one simple reason: regulation. It’s not hard to set up the software, hardware, personnel, and protocols for setting up a bank. But it is hard getting a banking license, even in countries with questionable banking restrictions. This is why the crypto craze saw a bunch of brokerages and firms offering big yields; at the time, cryptocurrency was considered an unregulated space where anyone could effectively start a bank.
The problem is, while the tools needed to make a bank work exist, they all need to be fully implemented in the appropriate way. One small error can result in big mistakes, as anyone who followed the story of FTX in 2022 knows. This is why banking is one of the most regulated industries in the world; people need to trust banks with their money, and that trust only comes when the bank has been endlessly tested by accountants, regulators, security experts, etc.
Banking moves slowly for this reason. Going from the old way of doing things to the new way of doing things is often impossible or illegal; the ACH system that manages bank transfers in America is over 50 years old, which is why it still takes more than a day to transfer funds between banks. That, however, has been changing with over-the-top transfer services from Paypal (PYPL) to Zelle, and banks have been trying to implement this layer for speedier and easier transactions for years. Why aren’t transfers instantaneous in America today? Regulation—although that is changing, with new same-day transfer protocols to be implemented in the near future at a national level.
Digital banking is the world where this is happening. It’s a corner of banking where the old world of slow moving regulatory hurdles stop innovation, and actual technological tools that are well established elsewhere—online messaging, for instance—are repurposed to inspire innovation in banking. Obviously these two forces are oppositional, resulting in a lot of tension, frustration, and difficulty as banks try to become digital banks.
Digital banking, surprisingly, is far from the boring topic you might expect, largely because of the struggles between playing by the rules and innovating that banks currently face. The bankers and consultants helping banks navigate these two opposing forces are also getting more compensation thanks to their efforts. And this is far from a field that is losing demand—if anything, the digitization of retail banking and upcoming regulatory changes in America make this back office playground one of the most exciting out there in the industry.
