Whether you call them digital banks, challenger banks or neobanks, this much is clear: The flavor of the decade in global banking is coming to Egypt in early 2024. That’s when most of us expect the first homegrown digital bank to open its (virtual) doors. Digital banks are all about digitalizing the banking experience — but they go far beyond banks simply having digital or online banking services. These institutions go hand-in-hand with themes of financial inclusion, but have vastly different roles from NBFIs.

On the second day of the Enterprise Finance Forum, we brought together leaders from the firm that’s set to launch Egypt’s first digital bank and a regional powerhouse that’s already launched a neobanking proposition in the GCC + Pakistan: Group Head of Mashreq’s retail banking Fernando Morillo, and Sherif El Behery, CEO of Misr Digital Innovation (MDI).

So… what exactly is a digital bank? Digital banks globally have lower capital requirements than conventional banks, in return for their tech-driven contribution to the national strategies of financial inclusion, said Morillo. “They are characterized by their high percentage of digital interactions and a reduced reliance on physical branches,” said Morillo.

A core characteristic is simply that digital solutions are the foundation of operations: Digital banks “involve being agile and focusing on solving problems with digital-first approaches,” Morillo said.

They’re digital, but they’re more banks than they are NBFIs: Oftentimes, digital banks have distinctive capabilities by virtue of their regulatory environment, allowing them to provide services such as taking deposits, providing loans and facilitating sizable transactions, while non-bank financial institutions (NBFIs) are not allowed to accept deposits, Morillo added. Digital banks are meant to provide a comprehensive suite of services and compete with traditional financial institutions, while fintech firms typically concentrate on specialized market niches, Morillo explained. “We’re not inventing banking products — we’re just packaging banking products and inventing a new way of delivering them,” El Behery said.

And “who” is a digital bank? Some grow out of existing banks. That’s the case with the brand MDI will launch — MDI is owned by Banque Misr, even though it is set up as a separate company. MDI was the first bank in Egypt to apply for a digital banking license. It’s also the case with Mashreq’s various Neo propositions, all of which are brands owned by Mashreq and operated under the bank’s existing licenses. Other times, they’re fintech players or NBFIs that look to bulk up their range of what they can do by starting to take deposits.

Corporate parentage makes a difference: Morillo pointed out that setting up a digital bank as a fresh entity represents a substantial financial commitment that could go up to USD 150 mn, while “established banks can make use of their existing infrastructure and accumulated expertise,” said El Behery. The approach taken by banks varies: While some favor distinct brands operating under the same corporate umbrella, others choose partnerships or establish entirely new digital bank entities. The choice depends on market conditions and specific objectives, said El Behery, noting that MDI is taking the latter strategy.

Personalization + customization are key features of digital banks: Digital banks emphasize the fulfillment of customer requirements over the promotion of particular products, looking to craft a frictionless user journey by customizing their offerings according to individual customer needs, said El Behery. “The essential products are those that address customer needs, including receiving money, making payments, and lending,” El Behery added.

And the regulatory differences between digital banks and NBFIs has a massive impact on the potential growth of each: “In reality, what you see is that digital banks are born without limits, and therefore are born within a scope where the sky’s the limit. When you set up a digital bank, you’re going for all the businesses [as clients] eventually,” Morillo said.

Quality over quantity: Digital banks don’t need to start with a large offering of products, but rather a few that are very well thought-out and seamless in terms of user interface and user experience, said Morillo.

That forward-looking view also factors into the underlying infrastructure for digital banks: Digital banks deliver personalization for users — effectively infinite “tiers” and personal offerings — using advanced technology and data-driven solutions, El Behery said. The tech stack behind MDI’s planned digital bank, for example, is a “refreshed” take on the tech stack already used for Banque Misr, El Behery said. “We redesigned the whole backend system to cater for the needs of the customers for the digital bank,” he added.

Digital banks are first a retail solution, but they can also serve the smaller end of the SME scale very nicely: Sole proprietors are a hybrid of SME and retail clients: “They behave like individuals, but they have a company of their own. Digital banking provides the solutions for this type of client,” Morillo said. These clients lack the time needed to spend a full or half business day at the bank to complete a transaction, he noted. “That’s where there’s a big network to tap into. There’s several hundreds of thousands of individuals that can be served from a digital platform.”

Corporate clients will eventually come along: When it comes to digitization, corporate clients are on their own path, especially given the complexity of their transactions, El Behery said. While they do have distinct needs, the essential shift towards digital banking primarily impacts the retail sector, he said The digitization process in corporate banking frequently revolves around enhancing procedures and managing data efficiently. Corporate banking won’t see in the near term the type of profound tech- and methodology-driven changes that we’re about to see in the retail segment, according to Morillo.

What do digital banks need to truly take off? It’s primarily about the right country, with the right mindset. “You need a country with a regulator that wants a clear and bold agenda of financial inclusion. A country with a young population that is hungry for these types of solutions. A country that is willing to embrace technology. It’s not just about being young — it’s a mindset and it’s about wanting to leapfrog, which we can see in Egypt all over the place,” Morillo said.

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