Klodian Tomorri
The financial system in Albania faces a situation that at first glance seems paradoxical. Per capita, Albania is one of the countries with the highest number of banks, with 1 bank for less than 200,000 inhabitants. But on the other hand, the country has a shallow financial profile and very low banking coverage, with 60 percent of the adult population not having an active bank account.
These figures are even more problematic in rural areas, where the population is almost completely excluded from banking services. According to an INSTAT survey, only 17 percent of adults in rural areas of the country have a bank account compared to 47 percent in cities. There are several reasons for this large financial gap. But on the supply side, the main reason remains affordability.
Traditional banks are unable to cover the entire population with services because this would be an operation with huge losses. Opening physical branches in areas with few inhabitants does not pay back, since the costs of offices, staff and other operating expenses would exceed the income that could be secured several times. On the other hand, the costs that physical banks impose on their services to finance operating expenses discourage a significant portion of potential customers even in urbanized areas.
But intensive developments in the technological field have opened up new opportunities and highways in the financial system as well. And the key word in these developments is, of course, digitalization.
While more than half of the Albanian population is currently outside the banking system, almost 100 percent of the population owns a phone. Digitalization makes it possible for the phone to be a bank or the bank to be on the phone.
Today, most traditional banks are offering a wide range of online services. But a few weeks ago, Albania experienced a significant development in this regard, perhaps the second most important after the country's membership in the Single European Payments Area. This was the licensing of the first fully digital bank in the country.
Jet Bank received preliminary license approval from the Bank of Albania, while with the full fulfillment of the conditions and obligations arising from the legal framework, it is expected to officially launch its activity soon. But what does this mean for the financial system and consumers?
A fully digital bank is a banking institution that offers financial services exclusively through online channels without physical branches, offering access to accounts, payments and other products through applications and the web, under the same regulatory requirements as traditional banks. This type of banking, which originated in Europe, is growing at an explosive pace worldwide, with the number of fully digital banks currently exceeding 300, while their market value is estimated at over $70 billion.
Today, the world has fully digital banks, which count 400 million users, such as China's WeBank, or Britain's Revolut, which has already exceeded 50 million customers. Many of these banks, although relatively young in age, have already managed to become profitable due to the great advantages they have in cost over traditional banking.
China's Webank currently has an operating and maintenance cost of 40 cents per account per year, while for large traditional banks this cost is at least 10 times higher.
These cost advantages and the convenience of having a bank in your home, which allows you to perform transactions 24 hours a day without having to physically appear at a branch and wait in line to be served, are two very strong points of fully digital banks, especially in the segment of new consumers, but also those who are currently underserved by traditional banking.
In general, the fully digital banking model relies on collecting small online savings and channeling them into small and online loans. This could create further space for lending to small businesses, which for one reason or another are not served by traditional banks. Meanwhile, on the consumer level, this model ensures that almost 100 percent of deposits are covered by the insurance scheme, which in any scenario, including bank bankruptcies, provides for the full return of deposits up to 2.5 million lek or 26 thousand euros.
Meanwhile, another benefit is that digital banks shift employment towards value-added profiles such as technology, cybersecurity, data analysis, and regulatory compliance, consequently offering higher salaries to employees.
However, like any major technological development, digitalization has its challenges. First, those related to cybersecurity, which remains a critical element not only for fully digital banks, but also for traditional ones. While the second challenge remains that of massification. Due to the high entry costs, which come from IT expenses, digital banks need to reach a certain customer base to become efficient entities.
However, one thing is certain. The introduction of digital banks could be good for consumers, who would benefit from more competition, and could push existing traditional banks to improve their service offerings.
Editorial
