As some countries begin to emerge from Covid-19-imposed lockdowns, consumers and companies are adjusting to a ‘new normal’ which includes a great deal of uncertainty. What we do know is that the crisis has accelerated the move towards digital, particularly in financial services as people have adapted to the closure of physical banking branches and the reduction of physical transactions and handling of cash.
In some ways this seems like a perfect storm for digital challenger banks, which have already been taking market share from incumbents and seeing strong growth, but even they are suffering during the present crisis because of the broader economic downturn. In this situation, one of the advantages that big banks have compared to challengers becomes apparent – the size of their balance sheets and their ability to invest. For banks that have not had digital transformation as a main priority before now, the consumer acceleration towards digital we have seen recently should be mirrored in how banks invest in their future digital offerings.
The new face of financial services in Asia
Challenger banks have undeniably changed the face of Asia’s financial services landscape, driven by changes in consumer behavior and attitudes towards digital platforms over the last decade or so. In Asia, Japan, China, South Korea and the Philippines are among countries which have handed out digital banking licenses, while Malaysia and Singapore will soon be following suit. The innovative use of new technologies by digital challengers has introduced new and more efficient ways of doing things, such as using facial recognition to streamline digital onboarding processes, allowing customers to open a new bank account in a matter of minutes, and applying AI to mine data sets for new customer insights to deliver more personalized products and services.
Using a combination of digital technology and innovation, some banks have also begun to bring financial services to Asia’s large unbanked and underbanked populations. For instance, new neobank TONIK is launching in the Philippines – a country with 70% of its population unbanked – later in 2020, making it the first licensed fully digital bank in South East Asia.
The incumbents’ challenge
So, the pressure is on for traditional financial institutions to adapt to the innovations in banking by providing the user-friendly, intuitive, omni-channel experience that customers now expect. One of the difficulties for many traditional banks in this regard is that a digitized bank is not the same as a digital bank. Simply offering a digital front-office does not necessarily improve the customer experience if back-office processes are not also organized and performed efficiently.
Banking challengers are now well-known for developing their services around the needs or requirements of users and aim to enhance the customer experience – incumbents must follow suit otherwise they risk falling behind. In order to keep up in this competitive environment, incumbents will need to prioritize enhancing the customer journey, investing in understanding customer behavior and innovating to offer personalized products and services.
Leveraging the cloud to streamline services
Digital banks use cloud technology to offer streamlined services; new fintech market entrants are mostly cloud-native, which allows them to provide much faster, agile, and scalable digital solutions.
Fortunately, incumbents are not exempt from these benefits. Historically, large banks have preferred to locate their IT infrastructure on-site primarily due to anxieties around cloud security, however as cloud has become mainstream and been proven to be secure, these concerns have been alleviated. Incumbent banks are now starting to embrace the idea of cloud and the benefits it offers, such as allowing them to access structured and unstructured data in a seamless manner. Cloud also makes data integration from different sources far easier to manage, and has the ability to scale to process large amounts of datasets, while taking advantage of machine learning and data science to identify and prevent fraudulent activities, providing a seamless entry point for tackling some of the longstanding pain points for incumbents.
The emergence of Open Banking has enabled incumbents to work with fintech firms to integrate new solutions in what is known as the ‘partnership ecosystem’. Underpinned by the cloud, this ecosystem allows banks to safely test and explore new products and services developed by third parties – and helps regulators encourage innovation whilst ensuring consumer protection.
Banks that can understand customers’ unique requirements and provide a seamless user journey will be best placed to compete with digital disruptors. Embracing cloud technology and collaboration with other financial ecosystem players will enable incumbents to innovate, create efficiencies and build a more cost-efficient business. This is especially important at a time when the pace of digitalization in financial services is increasing more than ever.