How banks can embrace challenges and challengers despite disruption

How banks can embrace challenges and challengers despite disruption

Portrait of Nam Soon Liew
Nam Soon Liew

EY Asean Regional Managing Partner; EY Singapore and Brunei Managing Partner

5 minute read 19 Oct 2020
Related topics
Banking and capital markets
Digital

As customers evolve, incumbent banks cannot afford to stand still, much less so with accelerated disruption brought about by COVID-19.

In brief

  • The COVID-19 pandemic further underscores the vast potential for digital banking in Southeast Asia.
  • Incumbent banks’ continued success will depend on how fast they evolve before non-traditional competitors independently gain a foothold in the market.
  • Incumbent banks must recognize the importance of strategically building a better ecosystem to enjoy a sustained advantage beyond the current crisis.

Southeast Asia has seen accelerated growth of the internet economy, supported by the region’s strong economic fundamentals, digitally savvy population and rising middle class. The gross merchandise value of the region’s internet economy more than tripled between 2015 and 2019, with a compound annual growth rate of 33%, and is expected to leap from US$100b in 2019 to US$300b in 2025.1 

The COVID-19 pandemic has further underscored the internet economy’s potential, as seen in the pickup in sectors such as e-commerce, over-the-top media services and consumer tech. COVID-19 has also been the unexpected catalyst for digitalization across many other sectors, as well as shifts in digital behaviors. According to a survey by personal finance website SingSaver in June, people in Singapore increasingly turned to online digital banking during the pandemic and are expected to continue doing so after.

The potential for digital banking in Southeast Asia has always existed. There are vast opportunities for digital banking and lending, e-commerce and payments in Indonesia, given its low bank account ownership and common informal borrowing. In Vietnam, the high proportion of the unbanked presents an exciting opportunity, although there is an urgent need to develop financial infrastructure. While Singapore is a mature market, opportunities to focus on the needs of high net worth individuals and underserved small and medium enterprises remain.

Banks have to address the pain points of the underbanked and unbanked in the region’s developing markets, as well as consider the demand for better user experiences against requests for lower fees and higher returns within the banked segment.

How EY can Help

Embracing digital transformation and rising challengers

To achieve the above, accelerating digital adoption and transformation must be a priority for banks. And incumbent banks have to recognize the challenges and challengers.
 

FinTech firms and digital banks, without the burden of legacy infrastructure and restrictions, are often more agile. With the industry progressing so quickly, some FinTech firms are starting to mature and look like incumbents as they scale up and expand, even applying for full banking licenses.
 

While FinTech firms and digital banks may have their share of criticisms, they challenge incumbents by entering the market with products that differentiate and meet changing customer demand at speed, potentially eroding customer loyalty to existing banks. Such products are likely to be tailored to offer one or more of four value propositions: speed and price, mobile-first experience, value added, and ability to solve pain points. As the industry develops, digital banks will likely venture further into larger value pools, such as insurance and advisory services, and become more credible as competitors.
 

Importantly, time is of the essence. The continued success of incumbent banks will depend on how fast they evolve before these competitors gain a foothold in the market without their participation. Incumbent banks are well aware of such sophisticated and well-capitalized competitors and are bracing for them. In response, many are establishing digital strategies that involve partnering, investing in and acquiring FinTech firms as well as big tech and other enterprises with access to customers and technology, such as telco service providers and online shopping platforms, with the aims of driving efficiencies, offering new products and augmenting the customer experience.
 

In other words, incumbents recognize the importance of strategically building a better ecosystem — not a bigger bank.

Banks that offer comprehensive, yet tailored, services with compelling customer
propositions and involve key stakeholders in developing their digital strategy and
ecosystem will enjoy a sustainedadvantage beyond the current crisis.

However, it may not be easy to create the right platform that can support the ecosystem in delivering exceptional customer experiences and creating “stickiness” with the market. The biggest issue for most incumbents is the existence of legacy systems, and the need to re-architect their platforms to be agile and scalable to power their digital ecosystems. This requires a clear strategy and road map in the design phases, and the resources required to build the appropriate customer experience and service-enabling layers using microservices, APIs, cloud, artificial intelligence, and data architecture and governance.

The upside is regulations are evolving to enable banks to partner one another and create new ecosystems with other businesses. In Indonesia for example, four state-owned banks are partnering the country’s biggest telco provider to face off against the dominant players in the country’s digital payments market.

Clearly, continued innovation and transformation will be critical for future growth, even as the risk and regulatory protection agenda remains a major focus for all banks. Banks that offer comprehensive, yet tailored, services with compelling customer propositions, and closely involve key stakeholders — regulators, customers, investors, alliances and partners — in the development and orchestration of their digital strategy and ecosystem will be the ones that enjoy a sustained advantage well beyond the current crisis.


Summary

The COVID-19 pandemic further underscores the vast potential for digital banking in Southeast Asia. However, the continued success of incumbent banks will depend on how fast they evolve before non-traditional competitors gain a foothold in the market without their participation.

Incumbent banks must recognize the importance of strategically building a better ecosystem to enjoy a sustained advantage beyond the current crisis. They also need to re-architect their platforms to power their digital ecosystems, and have clear strategies and road maps, as well as resources to build the appropriate customer experience.

About this article

Portrait of Nam Soon Liew
Nam Soon Liew
EY Asean Regional Managing Partner; EY Singapore and Brunei Managing Partner
Passionate about driving economic opportunity, diversity and inclusion. Advocates digital technology transformation for value creation.
Related topics
Banking and capital markets
Digital

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