Can Digital-Only Banks Play by the Rules?
Noura Aboud
Remember the last time you had to visit a physical bank branch? For most of us, it is becoming a distant memory. Gone are the days of queuing for a teller or scheduling appointments for transactions. Digital-only banks have transformed our relationship with money, offering everything from instant international transfers to real-time spending analytics at our fingertips. Yet as these fintech innovators reshape banking, recent regulatory breaches by industry leaders Wise and Monzo raise a critical question: are digital banks built to handle the heavy regulatory responsibilities that come with safeguarding our money?
The Regulatory Framework Is Shattering
Picture building a modern skyscraper on Victorian foundations, this is precisely what digital banks are attempting with regulatory compliance. The issue stems from a fundamental mismatch between traditional banking regulations and digital operations. These regulations assume physical verification processes, face-to-face interactions, and paper trails - none of which align with digital banks' instant service model.
This misalignment became starkly evident in November 2024 when Wise failed to maintain proper address documentation for hundreds of thousands of customers. This was not a simple oversight. Rather, it revealed how digital banks' drive for rapid customer onboarding directly conflicts with EU’s anti-money laundering requirements. When regulations demand thorough customer due diligence, digital banks respond with automated verification systems that prioritise speed over scrutiny. Consequently, they expose themselves to criminal liability under anti-money laundering statutes while simultaneously creating civil liability risks through inadequate customer verification.
When Borders Become Blurred
The regulatory challenge expands when we consider how digital banks operate across national boundaries. Traditional banks built their compliance systems around clearly defined territorial jurisdictions. Digital banks, however, process millions of cross-border transactions daily, creating a regulatory nightmare. This became evident when Monzo breached multiple aspects of the UK Retail Banking Market Investigation Order in November 2024.
The introduction of the U.S. Corporate Transparency Act in January 2025 may further expose this jurisdictional weakness. The Act requires detailed beneficial ownership information - a requirement that directly conflicts with digital banks' streamlined onboarding processes. As a result, these banks face an impossible choice: maintain their rapid service model and risk regulatory breaches, or implement stricter controls that undermine their competitive advantage. This dilemma is not merely operational, it strikes at the heart of digital banking's business model.
The Customer Protection Crisis
These regulatory challenges culminate in a critical failure of customer protection. Traditional banking law established clear duties of care through centuries of precedent. Digital banks have dismantled this framework without creating adequate replacements. The UK Financial Conduct Authority's January 2025 warning about inadequate security measures highlights this growing crisis.
When disputes arise, digital banks lack the documentary evidence that traditional banks maintain through physical interactions. This creates a domino effect: without proper documentation, dispute resolution becomes problematic. Without face-to-face interactions, identifying vulnerable customers becomes nearly impossible. Without traditional fraud prevention mechanisms, customers face increased exposure to financial crime. Each of these failures stems directly from digital banks' attempt to bypass traditional banking infrastructure.
Reimagining Regulatory Compliance for the Digital Age
The regulatory challenges facing digital banks also present unprecedented opportunities for innovation. Traditional compliance frameworks, built on paper trails and physical verification, could be transformed through technological solutions. Smart contracts and blockchain technology, for instance, could automate compliance processes while maintaining security. Meanwhile, artificial intelligence could enhance fraud detection and customer due diligence, potentially exceeding the capabilities of traditional banking systems.
More significantly, the cross-border nature of digital banking could catalyse international regulatory cooperation. Rather than viewing jurisdictional complexity as a barrier, it could drive the development of standardised global banking protocols. The European Union's digital finance package already points toward this future, suggesting how regulatory frameworks could evolve to embrace digital innovation while maintaining robust protections.
The future of banking is undoubtedly digital. With thoughtful regulatory evolution and continued technological innovation, digital-only banks could not only match traditional banks' compliance standards but potentially exceed them, creating a more secure and accessible financial system for all.