The digital banking revolution is all about keeping customers happy. In order to do that, banks need to “have compelling value propositions for the customer,” according to Siam Commercial Bank’s president Arak Sutivong. In order to present value in 2019 and beyond, disruption is required.
We often think of disruption as a sudden change, predominantly because of the rise of tech startups. Uber changed the way we take cabs, Airbnb revolutionised holidays, Netflix disrupted our viewing habits. In fintech, companies like Monzo in the UK or Alibaba in China have introduced digital-first products that have made waves in the industry almost overnight.
This has laid down the gauntlet for incumbent banks, but the challenges they face are far different to startup challengers. For one, startups may look like they’re challenging big banks, but their market share is minimal in comparison. Big banks have loyal customers, a brand and a well-established reputation to think about. They can’t put out an MVP app (for instance) that doesn’t do the job.
Also, fintechs often take one small aspect of banking and approach with a digital-first mindset and improve it. Banks have a bigger job, changing multiple aspects of their business and striving for constant digital improvements to processes and customer experience.
The aim should not be sudden innovative change, but a steady disruption, constantly questioning, testing and improving all areas of the business - a methodical approach to digital improvement over many years.
Steady doesn’t necessarily mean slow, as we’ve mentioned. It simply means building internal infrastructures and changing mindsets that approach business issues in innovative ways, with a customer- and digital-first mindset. Disruption in this respect is ongoing, not overnight.
What does steady disruption look like in practice for APAC banks?
Bhavesh Shah, corporate VP and chief purchasing officer at Firmenich, said in an interview with Global Finance Magazine: “We’re accustomed to reading about the immense digital opportunities in India and China, but it was ASEAN that, in August 2018, inked an agreement on e-commerce endorsed by all 10 nations, with detailed provisions encouraging member states to promote paperless trade, cross-border data flow and electronic payments.”
According to Ernst and Young, leading APAC banks have outperformed the global banking sector in the years following the global financial crisis, and will continue to do so in the coming years.
There’s a rapid adoption of digital payments, widespread smartphone use and companies eager to find new markets. The number of non-cash transactions is “expected to grow around 29% annually in emerging Asia through 2021” according to Kanwar, and most central banks in Asia have been progressing rapidly on their digitisation agendas.
There’s a reason why China is leading global investment in the fintech sector (with Alibaba front and centre of that charge) - it’s a country with a transformative mindset. This is a mindset that is starting to be adopted steadily by more Southeast Asian countries and banks.
Digitalisation is steadily shaking up the banking landscape in Thailand, for example. The recent groundwork was laid by Siam Commercial Bank, which decided to waive all digital banking service fees back in March 2018. All the big banks soon followed suit.
In Vietnam, meanwhile, banks are starting to take full advantage of the digital era, with many banks investing significantly in the segment. Internet banking services in the country have accelerated by 6.3 times over the past three years, with experts attributing the high growth to the popularity of the internet and smartphones. In both cases, these were major changes made steadily over a number of years - not too fast, not too slow, but just right.
There are also significant steady steps being taken by both public and private institutions in Laos to digitise the economy. PHB Development has been working with the United Nations Capital Development Fund to develop a Digital Financial Services (DFS) ecosystem in what was previously a greenfield environment for digital payments.
Indonesia too has been making changes slowly, but surely, with the president of Indonesia's Bank Mandiri, Kartika Wirjoatmodjo, recently piloting a new type of banking branch that replaces tellers with machines. Mandiri has also been investing in fintech startups, setting up a venture-capital unit in 2015. Over the next ten years, meanwhile, Indonesia’s digital economy is set to expand from $1 trillion in 2017 to $2.7 trillion.
Barriers to transformation
There are certain barriers for incumbent banks in Southeast Asia that make steady disruption a must if they are going to compete. Regulations continue to be a blight on digital transformation in the region. Whilst it might be leading the way in some areas, for example, the State Bank of Vietnam (SBV) risks constraining the spread of digital transactions due to regulatory restrictions.
The bank will have to relax its stance if the take-up of digital payments is not to be disrupted by tighter rules on e-wallets. The government is still on track to meet its 2020 goal of reducing cash-based transactions to 50%, but according to FT Confidential Research, 46% of urban Vietnamese consumers still exclusively use cash compared to 20% in both Indonesia and Thailand.
While the digital revolution has inspired a greater focus on customer demands and the capacity to deliver these service innovations, it has also put extra pressure on existing technology infrastructure. An EY report that surveyed over 140 senior executives in the financial services sector across Southeast Asia revealed that legacy infrastructure appears to be the most significant hurdle for banking (34%) to tackle.
Security is also an issue and with cyber threats and attacks making daily headlines, governments and banks in Southeast Asia need to place a greater emphasis on their cyber defences as they continue to transform their economies digitally. They should take the lead set by Singapore, where financial institutions now potentially have access to a grant of over $21 million from the Monetary Authority of Singapore (MAS) to help boost their cybersecurity operations.
Then there is, of course, the challenge of the fintech competitors to consider - the hares to your tortoise. The major advantage fintech players have over their traditional competitors is specialisation and speed. Banks need to realise that they can achieve more through steady acquisition and collaboration with these players than by taking them on directly.
According to Ankur Kanwar, head of cash management products for Southeast Asia at Standard Chartered Bank, the traditional banks are not feeling daunted by a more competitive environment, but are actually being inspired by it. He explains: “Whilst contactless payments are the new norm in Europe, digital payments, in general, are expected to rise faster in the emerging Asian markets than in the rest of the world, making this region the place to be”.
Of course, overhauling legacy systems can be an expensive and time-consuming project, which is why disruption from banks takes that much more time, investment and strategy than from fintechs. This is why it’s important to replace certain systems steadily, rather than throwing all your eggs in one basket at once.
Beginning by replacing outdated debt collections programs with something streamlined and future-proof like the EXUS Financial Suite would be a perfect place to start.
Steady wins the race
Steady disruption is slowly becoming the new norm in Southeast Asian banking as banks look to subtly overhaul the way they work by taking their time and focusing on specific areas of the bank that can be improved by tech.
The reality for incumbent banks in Southeast Asia is that change needs to be more of a constant trickle than a sudden shock to the system. Fintechs disrupt markets with sudden innovation, but for existing banks, disruption happens over time and it will continue to do so as opportunities in the region continue to reveal themselves and digital becomes the new normal.
Steady disruption requires quick deployment, and the EXUS Financial Suite can be deployed very quickly indeed. Contact us today to find out more.