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Future of consumer banking in Asia-Pacific
Part 1 - the case for change

The landscape of consumer banking continues to evolve at a rapid pace. While balance sheet strength, an entrenched clientele and brand value may provide today’s incumbents an edge over newer competitors, there is little room for complacency.

Changing regulation, emerging technology and higher client expectations imply that any existing head start is being systematically eroded by the entry of digital disruptors such as FinTechs1 and bigtech platform players. The emergence of these companies presents traditional banks with an existential threat and reminds us that while banking will always be necessary, banks, as they exist today, may not be.

Incumbents thus do not have the luxury of being complacent. This first piece in this series of three articles explores why banks must reinvent themselves if they want to realize a ‘bank of the future’ vision.

中文版本

Chinese version available

The case for reinventing consumer banking

The future of the banking ecosystem will look very different from today due to evolving regulations, emerging technology, elevated client expectations and entry of disruptive competitors:

Changing regulations

While the prudential regulatory agenda is plateauing, conduct risk and better outcomes for clients are set to remain a focus area for regulators globally. Policymakers in many markets are re-engineering financial sectors to promote competition and innovation to better serve the digital economy.

One such regulatory impetus that is gaining traction in Asia-Pacific is Open Banking. This requires banks to share select customer data with third-party providers with consent, and permits third-parties to initiate payments from customers’ to merchants’ bank accounts, bypassing the traditional credit and debit rails. Open Banking gives retail and business customers greater control of the amount of personal and financial information they are willing to provide in exchange for better deals and improved financial services.

Figure 1: Open Banking around the world

EY - Future of consumer banking in APAC - the case for change

Source: EY, 2018

How can banks benefit from increasing access to their data and systems? We see the Open Banking framework nudging traditional banks to reassess their current closed environment and explore new platform models based around open architectures and ecosystems. Collaborating with a wider community of external developers not only allows them to use client information to derive deeper insights, generate new income and raise retention rates, but build out existing applications to improve their financial solutions and convenience for customers. For example, data transparency would allow account holders to view their financial information from multiple accounts across different banks without having to log into each separately.

Changing technology

Technology is evolving at an exponential pace. From big data analytics to artificial intelligence (AI) and machine learning, to potential uses for distributed ledger technology, banks are faced with the challenge of deciding where to invest limited investment dollars to most effectively drive digitalization, serve customers, deliver sustainable efficiencies and mitigate risk.

Most banks in Asia-Pacific and particularly those within the emerging markets are focusing on areas to drive digital transformation, ranging from the more conventional (e.g., omni-channel customer experiences, cloud, data analytics and mobile technology to reach a wider catching of customers and raise financial inclusion) to game-changing applications such as blockchain and smart contracts, AI, and machine learning (Figure 2).

Figure 2: Technological priorities at Asia-Pacific banks2

EY - Future of consumer banking in APAC - the case for change

Source: EY Global Banking Outlook, 2018

While digital technology will help transform the way customers are served and business processes are conducted, technology alone will not lead to digital maturity. Banks need to also address legacy concerns related to poor data, and disparate risk and control processes; develop coherent strategies; and phase in their technology investments realistically.

We believe that the rapid evolution of new technology means many banks will struggle to keep up in an innovation ‘arms race’. Further, the risk of getting big bets on new technologies wrong is high, and failure will prove costly. Hence rather than investing in every new technology individually, it is imperative that banks adopt a problem-based approach to implementing combinations of technologies. This will see various technologies applied cohesively to support strategic objectives rather than individually implemented in a disaggregated and untargeted manner.

But how do banks keep up with the relentless pace of change and ascertain the right investments? Success is higher if they shift from innovating in a silo to participating in an innovative ecosystem and collaborating with partners and peers as they seek to digitize themselves.

Changing client expectations

Eighty-two percent of consumers go online to potentially buy a new banking product or service, yet too often traditional banks relay on paper-based manual application processes. This is no longer acceptable in a world where client expectations are being elevated by leaders from other industries such as technology and retail e-commerce. In those instances, consumers are increasingly able to make purchases wherever and whenever they desire during their everyday activities with just the click of a button.

As consumers become accustomed to contextual interactions within these sectors, more expect comparable availability 24x7, real-time capabilities, greater transparency and personalization, and frictionless user experiences from their financial providers. They want banking that is ubiquitous, yet able to seamlessly provide curated financial solutions to help achieve their personal financial goals.

So how can banks deliver this elevated customer experience? They should review the markets and client segments they target. Banks must understand how to interact seamlessly with clients across channels, and efficiently configure solutions to support a range of customer journeys such as purchasing a house. This involves transitioning from pushing products to proactively suggesting tailored financial solutions based on big data analytics of customers’ financial and non-financial behaviors. And above all, the speed of execution will be of essence as they seek to differentiate themselves through customer centricity and experience.

Changing competitors

While one-third of digitally active consumers already use FinTechs for certain financial services, perhaps the greater threat to traditional banks’ market share is from established bigtechs such as e-commerce, payment or social platforms that are increasingly offering financial services. Especially within Asia-Pacific emerging nations such as China (Figure 3) where traditional banks are less entrenched and more consumers trust well-known tech firms with their money, bigtechs have gone on to established comprehensive multi-licensed integrated financial ecosystem.

Figure 3: Estimated volume lost by banks to disruptive models by 20253

 

China

Developed Asia

Emerging Asia

Payments

50%

34%

36%

Investments

50%

34%

36%

Personal lending

34%

17%

24%

Credit card lending

28%

17%

24%

Mortgage

14%

17%

12%

Source: Citi GPS: Bank of the Future: The ABCs of Digital Disruption in Finance, 2018 i

Bigtech platform players are generally asset-light, not saddled with legacy IT systems, digitally savvy and well-funded, and thus better able to quickly adopting new technologies and agile data-driven operating models. Most also already have massive captive customer bases and low online acquisition costs. Their breadth and scale across various products and services also give them more extensive customer and transaction data than traditional banks, enable deeper understanding of behavior, and equip them to deliver innovative products utilizing new service delivery models and innovative approaches to risk profiling.

Such platform players compete in sub-segments where they can deliver high-volume and low-margin products by addressing consumers’ financial needs at lower cost. They typically start with a core offering (e.g., e-commerce and payments for Ant Financial, social for Tencent’s WeChat in China and mobile payments for Paytm in India), and then leverage their platforms and dominance in these areas to channel customers into multiple other offerings to enhance stickiness. By doing so, they could capture significant market shares in consumer payments and money transfers, investments or personal wealth management, and personal lending by 2025.

While many new competitors are unlikely to expand their financial offerings into full-service banks because of costs, stringent regulatory and capital requirements for financial providers, new regulatory restrictions, or to avoid competing directly with their banking partners — they are nonetheless disrupting segments within financial services. As they do so, they squeeze incumbents’ margins and market share, and impact their brand value and visibility to customers.

How can incumbents fight this threat? They should similarly disrupt their existing business models through platform thinking, and utilize customer data from a wide array of sources to help clients access tailored products and services across a range of industries through customer-centric gateways.

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1 FinTechs: Organizations combining innovative business models and technology to enable, enhance and disrupt financial services. EY’s definition refers to an industry that includes not only early-stage start-ups and new entrants, but also scale-ups, maturing firms and even nonfinancial services firms.

2 Note: Developed APAC comprise of banks from Australia, Hong Kong, Japan and Singapore, and emerging APAC are from mainland China, India, Indonesia and Malaysia. The percentages of banking assets represented in the survey sample are 58% and 81% for developed markets and emerging markets respectively.

3 Disruptive business model include those by platform players, FinTechs, and digi-banks or challenger banks. These models vary across product – Payments: digital payment via wallets; P2P or account-to-account and digital only cross-currency exchange; Investments: low price, digital only brokerage and robo-advisor; Personal, credit card, and SME lending: digital only, P2P marketplace; Mortgages: digital-only robo-mortgage, new credit scoring.

Source:
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