1. Overview, evaluation and analysis of the digital banking market in the world.

1.1 General overview of the digital banking market in the world

1.1.1 What is Digital Banking?
Digital banking is a form of providing banking services based on the
application of digital technology, and giving customers the convenience of trading,
not limited by space or time. Digital banking has a fully functional type of a bank,
from its organizational structure to its workflows, products and services, documents
and methods of dealing with customers. Digital banking works through digital
platforms, digitizing data, eliminating complex transactions. The bank's services are
performed entirely on the online platform.

1.1.2 Overview of the digital banking market in the world

Nowadays, users using digital banks have entered the global acceleration phase. Most
customers are motivated by innovations in Fintech and growth in digital use.
According to a McKinsey report on digital banking in 2021, nearly nine out of ten
users across emerging and developed markets are actively using digital banking and
most of them are willing to pay for banking services through digital channels. The
outbreak of the COVID-19 pandemic has led to an increase in online banking
practices, forcing both individual and business customers who had previously opposed
digital banking to turn to digital banking as their new standard.
Figure 1: Market size, segments, payment services, regions of the world banking
market

Source: Digital Banking Market Report 2021

According to 2021 digital banking statistics, the global digital banking market is
valued at $803.8 billion in 2019 and is expected to reach $1610 billion by 2027. The
market size grew at a CAGR (compound annual growth rate) of 8.9% during the
forecast period. The rapidly growing digital transformation in the banking industry, as
well as consumer demand for smart phone and digital banking services, is one of the
key drivers of market growth.
● The retail banking segment accounts for the largest share of the digital banking
market with a market size of $574.4 billion in 2019 and is expected to reach
$1320 billion by 2027. The significant growth in the consumer banking
segment was primarily due to increased top-line revenue, cost reduction and
risk control. Meanwhile, Credit unions were valued at $73.8 billion in 2019 and
are expected to reach $146.1 billion by 2027.
● The digital payments segment is the largest service segment in the digital
banking market, valued at $194.5 billion in 2019 and expected to reach $402.5
billion by 2027. The increased sales of banking products and services through
online platforms is driving the global sales of banks' digital goods.
● Among the world's regions, as of 2019, North America has the largest digital
banking market value, at $376.2 billion in 2019 and is expected to reach $721.3
billion by 2027. Lifelong customer retention is one of the key objectives of
most financial institutions in this region. The digital bank in the Asia-Pacific
region is rated as a promising market thanks to the increasing use of
smartphones and initiatives such as customer education programs, media
promotion for digital banks. The Asia-Pacific market was valued at $69.9
billion in 2019 and is expected to reach $153.0 billion by 2027.
Users around the world are also adopting a number of digital banking channels. By
2021, approximately 2 billion users globally were actively using digital banking. It is
forecasted that by 2024, this number could reach 2.5 billion people.
Figure 2: Percentage of users of digital channels by region

Source: Statista 2021

According to Statista 2021 statistics, China already has more than 800 million digital
bank users, which is about 41% of the global market and this number is expected to
reach nearly 1 billion by 2024. Following that, Europe , North America, Oceania and
Central Asia, Middle East and North Africa, Latin America and Sub-Saharan Africa
with 19%, 12%, 11%, 7% and 3%,respectively.

According to McKinsey's research, digital regulators around the world now have two
popular digital banking licensing models, namely digital banking and traditional
banking licensing.
● Regulators in China, Malaysia, the Philippines, Saudi Arabia, Singapore, South
Korea, and the UAE have created their own digital banking licenses, which
often include provisions specifying which products are allowed to do business,
which segments of digital banking, and which physical services are allowed to
be deployed. And each country has its own specific regulations.
● The US and some countries in Europe - require digital banks to have a
standard banking license. In these cases, digital banks often start with an
alternative license, such as an electronic payment license or e-wallet, then
search for licenses for new services.

Figure 3: Types of digital banks

Source: BCG x Expand FinTech Control Tower

From the above licensing models, digital banking can be divided into two main
categories - those with and those without a full banking license. Organizations that do
not have adequate banking licenses and statutes are classified as Neobanks. On the
other hand, those with full banking licenses and statutes are identified as Challenger
banks. According to statistics as of November 2022, the world now has 285
Neobanks.

Figure 4: Number of Neobanks by region in 2021

 Source: neobanks.app
It can be seen from the chart that the Eurozone currently has the largest number of
neobanks in the world with 91 banks. The region is considered to be a pioneer in
fintech, including the UK, Germany, France and Finland. The leader in the number of
neobanks on the European continent is the United Kingdom. Thanks to low taxes,
developed infrastructure and government support, Neobanks have been changing the
future of the banking system in this country. As of 2021, there are 21 new banks in the
UK, accounting for one-third of all European digital banking. Following that, the
North American market dominated by the United States, which has large neobanks in
terms of both size and quantity. US-based neobanks currently occupy 8 of the top 20
neobank rankings globally, reflecting growing consumer acceptance in the country.
According to research from Finbold, Neobanks in Asia-Pacific countries had a surge
in new customers in the first 6 months of 2021.As of June 2021, there were a total of
437.2 million neobank customers in APAC compared to 302.4 million in 2020.

1.2 Evaluation of the digital banking market in the world

North America and Asia-Pacific expected to hold the majority share in regions
Figure 5: Growth rate of the digital banking market by region (2020-2025)
 Source: Modor Intelligence
+ According to the report on the banking market 2020-2025, the development
rate by region is assessed as uneven among regions. North America had the
strongest growth rate, followed by Asia and Western Europe. North America
dominates the digital banking market due to the high adoption of development
strategies such as product launches to maintain customers and the use of
customer data to improve their sales in the region. Asia-Pacific is expected to
see strong growth in the forecast period from 2021 to 2028 due to high
economic growth in the region.
+ North America is one of the leading regions in innovation in cloud computing.
The region already has a strong foothold of cloud infrastructure providers,
which further contributes to the development of the market. The increasing
adoption of blockchain technology is helping to enhance security, especially in
the Business Social Compliance Initiative sector as many organizations are
adopting digital banking platforms. This factor has been driving the growth of
the market in the region.
+ The use of digital banking platforms has seen steady growth. When users have
begun to rely more on their phones when they are stuck at home due to the
global COVID-19 pandemic, it has led to an increase in digital banking across
the region. According to McKinsey's 2021 Personal Finance Survey, the
percentage of Asian users actively using digital banking increased to 88%,
compared to 65% four years ago. More than 60% of Asian consumers are
willing to switch to “direct” banking, according to McKinsey's report.
According to the Fair Isaac Corporation's survey in 2020, 77% of Vietnamese
are open to the idea of testing fintech and new financial services to replace
traditional banking services.
Governments in these countries are increasingly interested in developing and
managing digital banking as well as implementing strategies tailored to national
contexts.
In the management and development of digital banking, policymakers act as a
guide to the system of credit institutions. Each country studies and implements the
most optimal policies in accordance with the economic and social conditions of the
country. Australia, Singapore, China, Indonesia, South Korea, Malaysia and Thailand
tend to establish flexible policies, create a friendly environment for developing
Fintech services, technology innovation based on the view that technology innovation
is the main driver of increasing the efficiency of the financial system and benefiting
consumers.
+ South Korea: The South Korean government takes a two-stage approach in the
digital banking transition. In stage 1, they piloted two digital banks, K Bank
and Kakao Bank; then they licensed different types of digital banks after
amending the Bank Act. The general policy system for managing digital
banking transformation in Korea is divided into four groups including
management model shifting, direct financial transactions, technology finance
support and customer protection financial security.
+ China: The Chinese government has had many policies to facilitate the
transparent development of digital banks; promote digital transactions through
policies to encourage consumer finance and so on.On the principle that
financial service providers must participate in fair competition and comply with
legal requirements, the Chinese Government has imposed sanctions on Fintech
companies. In terms of the legal framework, China forms the digital financial
regulatory framework with emphasis on the risk management and security of
the electronic banking business based on Basel principles.
+ India: In order to create an enabling environment for banking digitization, the
Government of India has established the National Payment Corporation, which
provides citizen identification numbers, developed electronic wallets based on
the UPI consolidated payment gateway. In addition, the Government of India
has launched the BHIM Aadhaar platform - a payment system based on
biometric technology, which allows users to transfer money via fingerprint
scanning and implement the digitalization project of CTS (Cheque Truncation
System).

There is fierce market share competition among digital banks but almost
unprofitable
Figure 6: Top 10 largest banks by valuation, total amount raised and number of
customers
 Source: Topmobilebanks

The list is based on the valuation, the total amount raised and the number of customers
that these digital banks have. Research data is sourced from public sources such as
financial institutions, official government agencies, press releases, fintech websites,
and reputable journals. Accordingly, the Ant Group (Alipay) from China is rated as
the World's Leading Digital Bank with 1.3 billion users. It is a fintech group from
China and an affiliate of Alibaba Group. Although it has experienced a few difficult
years and valuation has fallen by more than 50%, it is by far the world's largest digital
bank by number of customers and by valuation. In the second place is Revolut Digital
Bank, a representative from England. Since its humble beginnings as an app and a
prepaid card, Revolut has become a familiar name for allowing people to spend
abroad without paying high foreign currency conversion fees. Revolut currently has
over 20 million global users and is valued at $33 billion. In the third place is the
digital bank Chime, the US fintech startup. Chime has gone a long way towards
becoming a challenger bank with the largest number of users in the U.S. market, with
more than 14 million customers and 50% growth during the pandemic. Among the top
10 digital banks that are valued and have the highest number of users, the US
contributes 4 representatives, China and the United Kingdom have 2 representatives,
the rest are Brazil and Japan.

Figure 7: Digital banks are making a profit

 Source: BCG x Expand FinTech Control Tower
BCG Fintech Control Tower's analysis shows that 13 of the 249 digital banks
worldwide (by 2021), only about 5% of the total are profitable. In particular, there are
up to 10 countries in the APAC. These digital bankers are mainly located in China and
Japan. However, none of the leading companies among these banks accounts for more
than 2% market share of the total value of deposits and loans in their target segment
(typically retail and small business customers).

Analysis:
● Digital banking Trends in the near future
The future of digital banking is not only about investing in new technologies, but also
about evolving banking operations, business models and business cultures to create a
more customer-focused experience. They need to adopt the best practices of the
challenger banks and fintechs to create digital-first experiences that are embedded in
the daily lives of their customers. And they must act now, until it is too late.

- Banking-as-a-Service (BaaS) and Embedded Finance will be everywhere.

Embedded Finance and Banking as a Service (BaAS) will grow stronger
 Source: Trends Vietnam
Figure x: describes how it works when a bank acts as a BaaS provider to the
community.

Source: Trends Vietnam

Figure x: The convenience of financial embedded in every aspect of life.
Consumers are becoming more receptive to the idea of using non-bank companies and
social apps for banking-as-a-service (BaaS) and embedded finance, such as making
payments, sending money to friends, or managing money. Banking-as-a-service
(BaaS) is an opportunity for banks to partner with non-financial companies to provide
a suite of capabilities as a service, whether it's processing payments or providing
credit. Embedded finance allows banks to embed products directly into other non-
financial platforms to promote and provide their digital services such as P2P Payment,
Buy Now Pay Later, Digital Lending, or Financial management. Potential partnerships
for embedded finance could be the e-commerce sites, ride-hailing apps, streaming
services, or e-wallets that modern consumers cannot live without. Companies that
apply embedded finance have the advantage of distributing financial services because
they already have distribution channels, data, and resources. This can be seen in many
different areas, from search engines (Google with GooglePay), to ride-hailing apps
(Grab with GrabPay), to e-markets (Amazon Pay). Thanks to embedded finance,
banks can now promote their products on these popular platforms and explore new
revenue streams at a meager cost.

The boundaries between banks and non-banks will continue to blur. Banks should use
embedded finance as an opportunity to stay involved in their customers’ financial
lives, no matter where and how those customers access banking services.
.

- Continued Expansion of Open Banking and Open Finance. Continued

expansion of open banking and open finance
Open banking and open finance are at the center of the biggest shifts in financial
services today. More and more banks are opening their data, allowing third-party
companies to access customers’ transactions and financial data – with customers’
permission. According to Forrester, the enterprise predicts that next year will witness
more banks taking an open, collaborative approach to their platforms. By integrating
data from third-party partners, open banking helps banks deliver more value to their
customers while achieving a holistic view of customers’ finances.
- Taking Financial Wellness into digital products
Financial wellnesss and financial education go beyond the client experience. It is an
essential part of the whole economy and society. Finnish researchers have discovered
that financial health is one of the reasons for their health. Therefore, banks should be
responsible for providing financial wellness support to customers. Checking financial
wellness regularly will help customers detect many potential issues. At that time,
customers will promptly monitor and adjust to financial stability. In some countries,
banks are using digital tools focused on financial wellness to add value to their
customers and establish a reputation for Corporate Social Responsibility (CSR).
 ● Challenges
At present, digital transformation has always been seen as a complex issue, conducted
in a framework that includes: value creation, structural change, use of technology, and
financial aspects. Because of that rapid and continuous development trend, the world
also faces with difficulties and challenges.
(i) Requires investment and deployment resources

- The source of funds to invest in research and development of AI is high, especially

for small-scale banks. Therefore, the research and application of AI is only
implemented in large banks and financial institutions in the world.

- Core banking conversion is costly and low capital recovery. For instance, CBA Bank
of Australia estimated the cost of replacing the core IT system at USD 450 million
over 4 years, before having doubled to USD 1 billion over 5 years. NAB Bank of
Australia to replace the core system must be up to 15 years old and cost many times
compare to the initial estimate.

- For digital assets technology, it takes a lot of time to build a blockchain network that
includes banks large enough to compete with existing networks (such as SWIFT) as
well as remove intermediaries in interbank and international payments.

(ii) Challenges with risk management

The International Financial Organization (MasterCard Foundation and IFC, 2018)

indicates the main types of risks when implementing digital financial/banking services
as follows: (1) strategic risk, (2) legal risk, (3) operational risk including technology
risk and fraud risk, (4) financial risk. Particularly,

- Strategic risk is the first type of risk for the development of digital banking. This
comes from choosing the wrong strategy, building plans, measures, products that are
not in line with the capacity, market trends, leading to lack of efficiency, causing
damage to the bank.

- Legal risks: Legal regulations and regulation of many regulatory agencies do not
catch up with new technologies, thus limiting and slowing down the development of
high technology applications and Digital Banking. From there, it can lead to legal
risks for Banks/Big tech/Fintech when implementing high-tech applications. The
regulations on management of account transaction information, legal regulations on
taxation, money laundering prevention, customer information security regulations, etc.
need to be supplemented/modified in accordance with the new technology.
- Technological risk is the most mentioned risk when applying digital banking because
the more modern technology, the more difficult it is to master people, leading to risks
and losses. Assuming that a situation that leads to technological disruption (failure,
technological failure or cyber-attack), the inability to conduct transactions can be
damaged by both customers and banks, leading to risks such as loss of trust, financial
losses. Any incident in the chain of operations or a technological vulnerability also
leads to opportunities for fraudsters to take advantage of unauthorized transactions,
theft of money.

Risk of fraud: Fraud is a great concern when using digital banks. Most of them come
from reasons such as unsafe security, leading to leaked customer and bank
information.

- Financial risks: similar to traditional banks, digital banks still face risks related to
banking activities and lead to financial losses. These risks may come from liquidity,
operational, credit risks.