How are digital banks different from MFS wallets?

In an age defined by the relentless march of technological progress, financial services are no exception to the rule. As consumers increasingly embrace digital solutions, two prominent players in the fintech arena have taken centre stage: mobile wallets and digital banks.

While the underlying technology is similar, a closer look reveals distinctive features and functionalities that set them apart.

As Humaira Azam, managing director and CEO of Trust Bank, says, "Mobile wallets and digital banks serve different purposes. Mobile wallets are primarily for making payments, while digital banks encompass a broader range of financial services, including savings, investments, and loans."

Up until recently, the distinction between the two would not have mattered much for Bangladeshi consumers. But with 52 organisations already vying for digital bank licences, it is better to be armed with the knowledge of what sets the two apart, and which one can serve your needs better.

Payment powerhouses

Mobile wallets or mobile financial services (MFS), epitomised by giants like bKash, Nagad and Rocket, are synonymous with convenience. At their core, these applications are designed to streamline transactions, replacing traditional cash and cards with secure digital alternatives stored on a smartphone or other smart devices. MFS services are widely used for in-store and online purchases, peer-to-peer transfers, and even contactless payments.

One key advantage of mobile wallets lies in their interoperability with various payment methods, including credit and debit cards, prepaid cards, and bank accounts. This versatility allows users to consolidate multiple forms of payment into a single, easily accessible platform. 

Moreover, mobile wallets often provide added layers of security through biometric authentication and tokenisation, making them a preferred choice for individuals concerned about fraud and data breaches.

"In Bangladesh, mobile wallets like bKash, Rocket, and Nagad primarily focus on digital payments and money transfers, providing accessibility and convenience, especially in rural areas. They often have extensive agent networks for cash transactions but offer limited savings and investment options," Humaira Azam explained.

All-in-one financial hubs

On the other side of the digital divide, digital banks offer a comprehensive suite of financial services that go beyond simple transactions. These online-only institutions aim to replace traditional brick-and-mortar banks with their user-friendly interfaces and cost-effective structures.

Digital banks typically provide a range of services, including savings accounts, checking accounts, investment opportunities, and even loans–all digitally. Therefore it is much more time saving and cost effective 

"Digital banks often have a cost advantage due to lower overheads associated with the absence of physical branches. This can result in better interest rates and lower fees for customers," opined Selim RF Hussain, the managing director and CEO of Brac Bank. 

What sets them apart from their traditional counterparts is their ability to offer competitive interest rates, lower fees, and greater accessibility. 

They cater to the digitally native generation, providing seamless account management, budgeting tools, and insights into financial habits through their mobile apps.

Digital banks in Bangladesh are expected to offer a broader array of financial services, including savings accounts, loans, investments, and financial management tools, Azam said, adding, "Digital banks function more like traditional banks, providing a holistic banking experience with regulatory oversight, making them suitable for those seeking comprehensive financial solutions."

Different target customer

Digital banks promise to reshape the financial landscape, and at the forefront of this transformation is a generation like no other: Generation Z.

That is why digital banks are more catered for tech savvy Gen-z who are more comfortable with all out digital banking. As the Brac Bank puts it, "The target customer base [for digital banks] can be somewhat different. Digital banks may target tech-savvy customers who prefer the convenience of online banking and are comfortable with minimal in-person interactions."

Gen Z's unique characteristics and experiences set them apart from any previous generation, making them the ideal architects of Bangladesh's digital banking future.

Overlaps

While MFS services and digital banks serve different purposes, there are areas where their functionalities overlap. For instance, both mobile wallets and digital banks facilitate transactions. Mobile wallets focus on payments and transfers, while digital banks offer payment services along with a wider array of banking functions.

But while mobile wallets excel in day-to-day payment transactions, especially for those who prioritise speed and simplicity, digital banks provide a one-stop solution for all financial needs, including savings and investments.

Digital banks offer advanced budgeting and financial tracking tools, empowering users to manage their finances more comprehensively. But mobile wallets primarily concentrate on payment records.

"The choice between mobile wallets and digital banking depends on individual financial needs and preferences, with mobile wallets serving daily transactions and digital banking offering a more diverse range of financial services," according to the Trust Bank managing director.