EXUS Collections & Recovery Blog

Digital transformation in Southeast Asian banks: Mover or follower?

Posted by Nikos Lambrou on Thu, Jul 18, 2019 @ 03:07 PM


The world of Southeast Asian banking is a digital arms race. This revolution is being driven by a bold fintech startup scene, ever-pervasive e-commerce platforms and the ease of digitalisation facilitated by cloud computing. 

With transformational developments perpetually being driven by young and hungry fintech banks and an audience that is becoming increasingly mobile (90% of the region’s internet users are also smartphone users), banks need to start seriously considering their digital transformation strategies if they wish to remain relevant.

The general consensus is that digital transformation needs to be pitched perfectly in order to succeed. Move too fast and too soon and you risk alienating customers. Move too late and too slow and you’ll be left behind. That’s why it pays to be either a first mover or a fast follower.

The concept of fast followers and first movers isn’t a new one in business, of course, but it’s one that is ideally suited to Southeast Asian banking. Essentially, a first mover is a business that is concerned with being amongst the first to innovate and lead the way, whilst fast followers are more content to let others do the leading - perfecting their offerings behind the scenes and waiting for the right moment to strike.

There is, of course, circumstantial evidence that supports both schools of thought. So, for any banks on the fence about how they should be approaching their digital transformation strategy, we’ll be examining both below. Does the early bird really catch the worm? Or are the pioneers always the ones with the arrows in their backs?

First movers in retail banking

The business that introduces a product or service to the market will always have an innate advantage, as they are offering something that nobody else in the sector is. This gives them an opportunity to use their innovation to establish their brand, engendering loyalty amongst early adopters.

A first mover has the potential to not only establish their product as the industry standard but also to gain the high ground early and potentially control resources when the rest of the industry finally catches up. For banks that wish to be first movers, this means they need to be seizing the opportunities offered by digital transformation before their peers. Of course, they could never hope to beat the fintech startups to the punch when it comes to genuinely innovative, customer-first initiatives. But being the first traditional banks in the ring to adopt these practices is a good alternative.

There are also, of course, notable disadvantages to the first mover mindset. They will need to invest heavily in persuading consumers that “this is the future,” whilst followers would not need to spend as much on this kind of ‘education’. First movers are also often the ones that make the initial mistakes that followers learn from. Yahoo, for example, is a perfect example of a first mover that was usurped by a fast follower (Google) which was able to identify areas of improvement and offer a more efficient service.

Still, first mover banks have a clear advantage when it comes to embracing digital transformation - this is not something that happens overnight. Indeed, stringent requirements, legacy systems and complex structures mean that the process of digitisation is rarely straightforward. In this regard, it’s the fintechs that hold all of the best cards, as they are young and nimble enough to adapt and shift their entire business models on a dime.

However, retail banks that move first and move fast also have a distinct advantage over their potential fintech rivals - established market access, an established brand and customer confidence. This is particularly important in Southeast Asia where, while there might be more digitally engaged consumers than ever before, there are still challenges to be faced. Indeed, the adoption of mobile payments in many of the region’s countries is incredibly low, with only about 10% of the Indonesian population even having shopped online.

Only about 10% of the Indonesian population has ever shopped online

One first mover bank that regional counterparts can learn a great deal from is Singapore’s United Overseas Bank (UOB), which launched the first mobile-only bank in the country that specifically targets Millennials. The UOB’s TMRW digital bank (which also rolled out in Thailand earlier this year) aims to build a customer base of three to five million in the next five years across Southeast Asia. Malaysia’s CIMB Bank, meanwhile, launched an all-digital mobile-first bank in the Philippines back in January, which allows customers to open a bank account in just 10 minutes. This sets a definitive precedent for other regional banks to follow, and a powerful one at that.

Of course, in a region where only 27% of the population have a bank account (the World Bank estimates that around 80% of people in Indonesia, the Philippines, and Vietnam are unbanked) but there is a connectivity rate of 133%, this ease is bound to prove a gigantic benefit. It also wouldn’t have been as obvious a benefit if they would have waited for someone else to do it first.

Fast followers in retail banking

There are plenty of examples of fast followers sweeping up the market after the first movers have done all the hard work. Indeed, according to The Economist, innovators capture only 7% of the market for their product over time on average, letting those that follow in their wake claim the straggling customers when they are ready. Apple, for example, was far from the first to move into the smartphone or digital music space, but when it did make its move, it was ready to do it right.

Arguably, however, the fast follower mindset is one that doesn’t hold as much sway in 2019 as it might have done a decade ago. Technology moves faster now, particularly in developing countries, with smartphone use doubling between 2011 and 2014 in Southeast Asia and Indonesia and Vietnam revealing sevenfold growth. Whereas years ago, the fast follower mentality was that the risk of failure was greater than the risk of missing out, that’s no longer the case. Banks need to adapt or die.

It wasn’t always this way, of course. Indeed, in a Forbes from 2014, Ava Seave found that “First movers had a 47% failure rate and companies that took control of a product’s market share after the first movers pioneered them had only an 8% failure rate.” However, not only was that 5 years ago now (which might as well be a decade given the speed with which we’re currently progressing technologically) but this so-called “rate of failure” is actually rather misleading.

A false premise is often promoted which posits that fast followers are making deliberate choices and calculated risks to not launch a technology out of strategy, when it might actually be because their own tech is simply not ready yet. This is most likely the case for many Southeast Asian banks that lack the resources and the infrastructure of their European and American counterparts.

Indeed, as Cofounder of FinTech Forge and trusted fintech advisor JP Nicols said of the approach: “Banking leaders will describe their approach to innovation as being a ‘fast follower’, and my typical retort is that they are half-right. Most of them are definitely followers, but there usually isn’t anything fast about their approach.”

He might have a point, as it’s difficult to find a single bank in the region that has successfully executed a fast-follower strategy when it comes to digital transformation. There are, however, companies in the region that want to help banks to follow the fintech leaders. Brankas, for example, is an Indonesia-based platform that gives banks and financial companies the tech to roll out digital products and embrace online services whilst retaining their own identity and years of experience and existing customer relationships.

It also can’t be denied that there are definite advantages to the fast follower approach, as long as you’re willing to work incredibly fast and make sure you’re in second or third place, as opposed to tenth. 

Nicols adds that the danger is in waiting too long so that a once groundbreaking idea is now the standard. He explains: “The longer you wait, the wider the customer experience gap becomes; the gap between what your customers have come to expect as a minimum and what you actually provide them.”

A third way

Whilst there are distinct advantages and disadvantages associated with both first mover and fast follower approaches, it’s obvious that, in the current Southeast Asian climate, the fast movers are going to be the ones making the real gains. However, there is a third way that we have yet to consider - not necessarily first and not necessarily fast, there’s always the option of steady disruption.

This is a route that understands innovation will always be an ongoing concern and that digital transformation should not be a siloed investment, but the first stage of a genuine evolution. Of course, the insurgence of digital banking in Southeast Asia has always been more of a revolution than an evolution, but now that the first fires have been lit, it might be wise for banks to realise that disruption doesn’t always need to be a sudden change. 

Indeed, even the biggest names in digital tech (including Netflix and Amazon) have taken a splintered approach - working their way in slowly through stable, steady innovation and steady disruption. It’s a drip feed of innovation that leads to increased engagement, trust and, eventually, results.

Ultimately, there is still a long way to go before digital integration in Southeast Asia reaches the saturation level of Europe and the US, and banks in the region should be taking the initiative here and making sure they are amongst the first to lay the foundations. There is a definite call for an improved digital payments ecosystem in the region following the recent boom in China, but it’s up to the banks themselves to heed that call.

So, whether you decide to move first or follow close behind the leader, as long as you understand that digital transformation has the greatest impact when it’s given the time and space to infiltrate at a steady pace, then you should soon start reaping the benefits.

Debt Collections Software

Nikos Lambrou

Written by Nikos Lambrou