Opposition Leader Cole Simons On Digital Banks

[Written by Opposition Leader Cole Simons]

Like many countries around the world, Bermudians live in a digital economy, with much of our financing, shopping and other personal services supported digitally.

The education and the international banking sectors are also advancing to meet the growing demand for online access to a plethora of new learning opportunities, as well as for the development of digital financial transactions

The One Bermuda Alliance supports this necessary evolution. It is imperative if Bermuda is to remain competitive and be at the forefront as a world class financial service authority.

While there will always be traditional banks in the banking landscape, using the analogy of how plant species evolve and adapt to their surroundings to survive, the same applies to in the banking sector. New types of banks will continue to evolve and adapt to the growing demands of the population. In 2022, they represent digital banks.

In light of the above, we believe that there is room in Bermuda for the newly licensed Jewel Bank and their digital offerings.

What are digital banks?

Simply put, a digital bank offers the same type of banking services as a traditional bank except it operates entirely online without any single physical infrastructure, such as a bank branch.

What are the differences between traditional banks and digital banks?

The difference lies in its form.

Conventional banks have a physical form with the presence of a head office and branches, while digital banks can operate with only a head office, typically not requiring the presence of a branch office.

Like traditional banks, digital banks make money through fees and commissions charged on products bought through their online platform, providing investment advice, etc. Digital banks also make money by earning interest on clients’ deposits held in the Digital Banks’ Digital Accounts.

Protecting The Public Interest:

When it comes to protecting the public interest from a conduct and prudential perspective, like traditional banks, digital banks should and will be regulated by the BMA, which is a good thing. They are also aligned with Bermuda’s Digital Asset Business Act 2019.

Digital vs Traditional Banks Which is best?

While the answer depends on the consumer, here are a few pros and cons of virtual banking to consider:

Advantages:

• 1. Lower Fees:

The cost of operating physical brick and mortar stores is far greater than the cost of running a virtual business. In many instances, account fees at online-only banks are lower than traditional banks. For example, most digital banks do not charge a monthly account maintenance fee, while some traditional banks do. I have been advised that online banks such as Ally, Axos, Discover and other online banks do not require a minimum deposit to open an account, either.

• 2. Higher Interest Savings:

As it is cheaper to run a digital bank, the savings you receive often translates into higher interest on your savings. This means that with a digital bank, your money can work harder for you.

• 3. Less Mail:

Although you can have this option with traditional banks as well, a virtual bank is set up for paperless interactions.

• 4. Fewer Fees:

Brick and mortar banks have fees for just about everything, unlike the digital options that are available.

• 5. Minimum Balance Options:

Sticking to minimum balances can be a great habit to get into for your financial security and these requirements are not exclusive to virtual banks. You will find them at most brick-and-mortar banks, as well.

• 6. Convenience:

With an account at an online-only bank, business can be transacted on any day of the week, at any time and from any place, if you have access to a computer or a digital device. There is no need to visit a bank branch.

• 7. Many standard bank services:

In addition to standard checking and savings accounts, many online-only banks offer other traditional banking services and products, such as money-market accounts, certificates of deposit [CDs], mortgages, auto loans, personal loans and investment options.

Disadvantages:

• 1. No Physical Locations:

Sometimes it is nice to have a face-to-face conversation with a human being. While nearly every banking task can be accomplished with a device in the palm of your hands, some of us may feel more secure dealing with a person. With a virtual bank, your interactions with people will only be over the phone, which is a challenge for many seniors, who may not be computer literate.

• 2. ATM Fees:

Virtual banks do not have as many of their own ATMs. Therefore, its customers will be charged additional fees to use another bank’s ATM.

• 3. Minimum Balances:

Some virtual banks require a minimum balance in your chequing account to unlock low or no-fee accounts.

• 4. Transfer Fees:

Some virtual banks charge fees for moving money around.

• 5. Risk verses reward:

The introduction of digital banks may be a catalyst for Bermuda’s existing local traditional banks to close some local branches. As mentioned earlier, while digital banks have a smaller physical footprint with no branches as their services are delivered digitally, there is a real concern that this could be an impetus for Bermuda’s current traditional banks to potentially move to more digital services and close their branches, which will result in the cannibalization of jobs for Bermuda employees.

In Conclusion:

Digital banking provides a plethora of benefits, like lower fees, higher interest rates and around-the-clock convenience, while an online-only account typically falls short of the in-person exchanges at traditional banks, like cash deposits and customer service. Thus, before leaping into digital banking, be sure to consider what is most important regarding where you place your money.

As a banker, I believe that if you are going to support digital banks, you should conduct your own proper research – be aware of what successful and well-established banks are doing. Also, look at what local banking regulators are doing and saying, as these banks must submit their filings.

You should and must evaluate the risk verses the reward of both traditional and digital banks

In addition, the scalability factors enjoyed by most digital banks should not be discounted, as this factor seems to allow them to attract thousands of international clients, which has the potential to be challenging to Bermuda’s reputation as an offshore financial center.

Therefore, as a banking professional, and the Shadow Minister of Finance , I take the view that , Bermuda must make sure that this new generation of banks have the suitable level of resources and capital to ensure that the appropriate degree of due diligence and operational standards are adhered to. These banks must also ensure that they adhere Bermuda’s Know Your Client and Anti Money Laundering laws and protocols, and that our sterling reputation as a blue chip offshore financial center is well preserved and is not compromised.

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