Digital banks may attract customers with sleek apps and fast onboarding, but many remain financially fragile. Without stable deposits, steady lending income and the proper licences to diversify, they struggle to build sustainable models once initial capital depletes. Brian Lo, former group head of market and liquidity risk at DBS Bank, argues that long-term viability stems from how these banks manage funding, risk and product design. A bank survives or fails based on its ability to establish a disciplined financial foundation.
Lo identifies three core capabilities that digital banks must master to advance beyond start-up status. These are structuring funding and lending (asset and liability management), managing stressed cash flow (liquidity risk) and designing products that align commercial appeal with balance sheet impact. “Banks must manage the balance sheet properly,” says Lo. “That means strong liquidity management, proper product structuring and a good asset-liability committee (ALCO).” These are essential disciplines that determine whether a bank can withstand shocks, serve its customers reliably, meet regulatory obligations and generate returns.
Traditional banks win on trust and diversification
Traditional banks have long acted as financial intermediaries with trusted, diversified funding structures. “They channel funds from people who can provide them to people who need them,” explains Lo. DBS Bank exemplifies this with a broad deposit base, access to wholesale funding and capital market instruments. Customer deposits provide low-cost, predictable funding that anchors long-term balance sheet strength.
“Customer deposits are very liquidity friendly,” Lo explains, “They are sticky, and banks don’t have to reprice them constantly.” DBS adds interbank borrowing and capital instruments, such as commercial paper and subordinated debt, for managing interest rate and maturity risks. On the asset side, the bank lends across secured and unsecured products and invests in government and corporate securities, building a diversified and balanced balance sheet.
“Trust shows up in your liquidity ratios,” Lo notes. Trust leads to more stable funding, which in turn improves key regulatory metrics, such as the liquidity coverage ratio (LCR), the net stable funding ratio (NSFR), and the capital adequacy ratio (CAR). These ratios go beyond compliance. They reflect a bank’s resilience, signalling its ability to absorb stress and fund operations efficiently in times of volatility.
Capital-rich, income-poor digital models
Digital banks often launch with equity-heavy balance sheets and limited lending. Lo points to MariBank in Singapore, which had a capital adequacy ratio above 600% at the end of 2023. “These banks are asset-light when it comes to lending,” he notes. These high ratios do not necessarily indicate robust performance, often signalling underutilised capital instead.
“Once you go into lending,” says Lo, “you need to do it in a scalable and efficient way.” For many digital banks, that scalability is missing. Without stable deposits, they struggle to lend at scale, and idle capital delivers no return. Attracting attention with a single profitable month does not build a sustainable business. Without dependable liabilities to support lending, margins shrink and growth stalls.
Volatile and expensive deposits erode margins
Digital banks must pay more than incumbents to secure deposits. In Hong Kong and the Philippines, some offer rates two to three times higher. “You can attract customer deposits,” says Lo, “but it comes at a cost.” High funding costs compress net interest margins before lending begins.
“You need to look at the overall net interest margin after taking the funding cost,” Lo adds. That margin often narrows to the point of eroding returns entirely. The volatility in rate-sensitive deposits further weakens the funding base. Promotional incentives, such as supermarket vouchers or launch bonuses, attract rate-sensitive customers who quickly move their funds when better deals arise. “The deposits are not sticky but are highly price sensitive,” Lo explains. This introduces liquidity risk and forces digital banks to hold excess cash reserves, which limits capital efficiency. A bank cannot lend confidently or profitably when it must continually reprice or replace its funding. The combination of high acquisition cost and low deposit durability worsens the capital deployment challenge.
Licensing limits block access to new income streams
Digital banks face not only market-based constraints in addition to licensing restrictions that prevent them from pursuing higher-margin revenue. Lo emphasised that traditional banks generate a significant portion of income from asset management, payments and other fee-based services. In many cases, digital banks often cannot access these without additional approvals. “Would they be allowed to do asset management?” Lo asks. “That’s a licensing issue. If not, how do you increase profitability?”
Without fee-based revenue, digital banks rely on net interest income, which expensive deposits and weak lending have already eroded. Strategic diversification becomes difficult when product scope is constrained by regulation. Lo highlights secured vehicle lending in Indonesia as one viable niche where shorter loan tenors and manageable credit risks allow digital banks to deploy capital profitably under existing regulatory parameters.
Institutional governance is non-negotiable
Digital banks require robust governance to manage liquidity, capital, and regulatory complexity effectively. Lo stresses the need for institutional discipline. “There must be an ALCO chaired by the chief executive officer.” The ALCO functions as the bank’s financial control centre, aligning strategy with risk exposure and funding structure.
“This is no longer a fintech play,” Lo states. “It is a full-fledged institution.” Digital banks handling deposits and extending credit must operate with the same internal rigour as traditional financial institutions. Liquidity buffers, capital reporting and product controls require formal oversight. Without structured governance, digital banks face the risk of misalignment between fast-changing funding dynamics and long-cycle lending exposures.
Balance sheet mastery will determine which digital banks survive
Technology may attract users, but financial discipline builds institutions. Digital banks that rely on promotional rates, volatile deposits, and limited licences will face structural barriers to scaling. Lo emphasises that the balance sheet must drive growth through disciplined capital deployment, reliable funding, and regulatory compliance. Banks must treat balance sheet management as a strategic foundation, not a regulatory formality.
“Eventually, they must become proper financial institutions,” says Lo. “They need governance, funding and risk management. Otherwise, it’s not going to work.” Long-term viability will depend on how well digital banks replicate the fundamentals of regulated finance and simultaneously innovate at the margins. Those that embed financial control, capital discipline and institutional governance from the outset will shape the next chapter of digital banking in Asia.
We are pleased to announce the first Tactical Skills Workshop by the Future Banking Working Group (FBWG). This exclusive session will focus on Managing Balance Sheet Risks of a Digital Bank—a critical area as financial institutions navigate the unique challenges and opportunities of the digital era.
The balance sheet of a digital bank serves as a blueprint of its financial health, reflecting its assets, liabilities, and equity. Unlike traditional banks, digital banks often feature unique asset compositions, such as technology investments and subscription-based revenue models, alongside conventional elements like loans, deposits, and reserves.
This workshop will delve into the nuances of digital bank balance sheets, exploring how their structure impacts risk exposure, profitability, and growth potential. With insights into regulatory frameworks and case studies of business strategies, participants will gain actionable knowledge to align their institutions with industry best practices.
Key Highlights:
- How is the balance sheet of a digital bank different from a traditional bank?
- Balance sheet risks for digital banks and its impact on their profitability
- Case studies: Business models that work—and those that don’t
- Regulatory considerations for licensing digital banks
Agenda:
- 4:00 PM – 4:10 PM: Opening Remarks by Urs Bolt, Chairman, The Banking Academy
- 4:10 PM – 4:30 PM: Presentation by Brian Lo, Risk Management & Regulatory Strategy Expert
- 4:30 PM – 5:00 PM: Questions & Answers Session followed by Closing Remarks
Speaker:
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