What Are The Regulatory Challenges For Digital-Only Banks?

Digital-Only Banks are financial platforms that offer the entire service model through online methods, unlike traditional banking institutions. Thanks to its advanced technological infrastructure, it is one of the most common banking models today.

It provides a faster and safer banking process by eliminating many problems caused by traditional banking. However, it also brings with it some regulatory challenges.

Digital-Only Banks have to take more precautions than traditional banking to verify customers’ identities. Like biometric verification methods, the customer must log into his bank account using his unique physical characteristics.

Because in traditional banking, customers often had to be physically present at the branches of the banks with documents such as ID during the account opening process. However, this is not possible for digital only banks and the entire verification process takes place digitally.

 The service model of digital only banks is still not valid for many states. This emerges as the most important regulatory challenge. Legal banking regulations of countries do not define the dynamics of digital only banks, and this causes customers to have security concerns.

What Regulatory Frameworks Govern Digital-Only Banks In Different Regions?

Since there are different banking regulations in different countries, the problems faced by digital only banks platforms also vary. Although the regulators that frame the operation of financial institutions that provide completely digital services, such as digital only banks, are not yet developed enough, they have many functions.

 As the regulatory framework, we can first remember the legal regulations of the traditional banking ecosystem. Today, although many states do not offer customized regulations for digital only banks, they expect compliance with the legal regulations and limitations they recommend for traditional banking.

 Different regions have different bodies that monitor digital only banks platforms. These institutions propose many regulatory frameworks, from taxation to auditing of digital only banks platforms.

How Do Compliance Requirements Impact The Operations Of Digital-Only Banks?

In addition to supervisory bodies, many states expect some compliance requirements from digital only banks. Digital only banks must comply with specific laws and regulations regarding the local banking ecosystem.

 However, digital only banks that want to deliver their services more flexibly and freely can generally avoid these compliance requirements in developed countries after obtaining the necessary permission and official recognition. Efforts to meet compliance requirements can be both more costly and tiring for both platforms and customers.

 Today, when digitalization is making revolutionary changes in every sector, undoubtedly financial ecosystems are also in the process of transitioning to digitalization. As with every transition, innovative and user-focused financial services such as digital only banks have to deal with some regulatory challenges.

I predict that digital only banks platforms will become more widespread in the near future and they will be more flexible in complying with relevant legal regulations.

Are Digital-Only Banks Subject To The Same Regulations As Traditional Banks?

 Digital only banks are responsible for roughly complying with traditional banking regulations and meeting legal obligations and compliance requirements. However, they are going through a different process from traditional banks in many respects.

 While there is a valid legal regulation defined for digital only banks in a developed country, unfortunately, many countries that do not have sufficient infrastructure and vision for financially innovative changes are likely to have problems in managing their operations and services.

 However, since this new banking model is maintained entirely digitally, it is possible to avoid local regulations and local compliance requirements. If I need to express it more clearly, I would like to explain it with an example.

 Let’s say you are a citizen of a state that does not recognize digital banking solutions such as digital only banks. If you are looking for advantageous tax rates, low transaction fees and flexibility in investment projects, you can get rid of your local conditions full of limitations by opening a remote and online account through a reputable and secure digital only bank platform of your choice.

What Are The Challenges Of Obtaining Banking Licenses For Digital-Only Institutions?

 A digital banking platform without a banking license poses security threats to both customers and the market. Financial institutions such as digital only banks, which deliver their financial products and services completely online and manage all their operations digitally, have now become an important market that is accepted, of which governments are aware, and where significant amounts of assets are managed.

However, this flexibility provided by being digital does not save you from local conditions and legal regulations. Supervisory and administrative units in the field of finance expect certain compliance requirements from digital only banks in order to issue a banking license. These digital banking platforms must meet the requirements and deliver the requested documents completely and accurately.

 One of the most common cyber security threats today is platforms that sell financial products and services without obtaining banking licenses. Therefore, before opening an account through the digital only bank platform, you should research this platform in detail. You must ensure that this platform has a banking license and complies with international legal banking standards.

How Can Regulatory Clarity Benefit The Growth Of Digital-Only Banks?

 Developed countries propose clear legal frameworks for platforms that offer online banking solutions such as digital only banks. However, unfortunately, although digitalization is such a widespread and powerful dynamic, there are regulatory uncertainties for many countries for digital banking.

 Citizens of states that do not allocate extra time and resources to provide a legal framework in this field also experience concerns about the security and survival of their investment projects when they try to meet their financial needs through digital only banks platforms. This greatly reduces flexibility on both the bank and the customer side.

As interest in digital banking increases, I can foresee that the regulations and legal framework will become clearer in the near future. Therefore, those who complete the adaptation of this innovative banking model today will be one step ahead in the competitive and technology-filled finance world of the future.

See you in the next post,

Anil UZUN