Industrial boundaries, which were once clearly demarcated between telcos, banks, and technology providers, are ossifying. In the face of disruption, are commercial banks in Asia Pacific digitally ready and what could be the implications of these technological developments to the retail financial services industry?
Good afternoon and welcome to another round of TAB Radio Finance session, the online broadcasting platform at The Asian Banker. In this session, we will be sharing some updates on the trends and developments in digital banking.
These findings are based on our recently concluded Excellence in International Retail Financial Services Programme, a benchmarking exercise that identifies not only the best player in retail banking but also to identify key developments and issues each of the markets under coverage are facing.
As you may be aware the coverage of the Excellence programme spans across Asia Pacific, Middle East and Africa and evaluates more than 150 players in retail banking.
We will first start to present the overall key developments in digital banking, followed by tracking the rise of digital banks in the Asia Pacific, Middle East and Africa.
Third, we will put some spotlights on two major regions, India and China and how they fare in digital adoption
Last, we will end with some insights into the state of digital selling among commercial banks.
Executives in retail financial services are reeling under the forces of disruption. They often have to prove to their board and shareholders that they are ahead of the curve, ahead of the client and ahead of financial technology (fintech). These demands are accentuated across an ever wider interconnected circle of businesses ranging from wealth management to payments and collaborative partnerships among regulators, fintech and banks. Industrial boundaries once clearly demarcated between telcos, banks, technology providers are ossifying. In their effort to change, banks put a lot of gunpowder into digital transformation. By aiming to bridge the gap between their services and their customers’ digital footprint large banks in Asia and the Middle East continue to invest between 50-90% of their retail IT budget on digital technologies. But to move large financial institutions, executives have to pull the levers incredibly hard.
In some markets such as China, Korea and Vietnam, banks are trailing technology companies which are digitally disrupting the payments and credit industry at a scale not seen in the past.
CreditEase in China, which has become the world’s largest peer-to-peer lender with $6 billion business on its portfolio, demonstrated to incumbent banks that there are new markets with huge revenue and fee income to tap into without the need of banks as intermediaries.
Banks in the region aim for greater personalisation of customer experience by better understanding their situation and what they are trying to achieve. A more timely understanding of customer interactions with the bank, however, requires collecting and interpreting a variety of data types in real-time and at scale, a trend which is unfolding. Leading banks have completed their investment into multi node and multi core big data and computing platforms in combination with more traditional data mining and business intelligence infrastructure, which enables them not only to migrate high-cost enterprise data warehouse activities to lower cost platforms, but also to stream large scale unstructured data such as voice, click stream data, picture/social media and increase adoption of location based offers (LBO) in particular in the credit card business and real time trigger (e.g. credit cards). A growing number of banks are already trying to combine five to 15 sources of data in their quest to create more relevant needs based offers to their clients.
The key challenge is that while banks have deep information on customers who have strong relationships, there are details dropping off for customers with lighter relationships. The goal is to identify key changes in customers’ circumstances such as the birth of a child, household formation/dissolution or changing jobs, in a timely way so that banks can pro-act to assist the customer. Transactional data tells the banks about these events only after the event
Progress in natural language processing and AI will make financial services increasingly voice and touch assisted. We believe the Alexa’s and Siri’s of the industry will be the future in banking even though this is a nascent technology with plenty of limitations. We have seen banks such as USAA in the US and OCBC in Asia experimenting with this technologies successfully.
Digital only or pure internet players have emerged in the last two years. Banks which are constraint by their own legacy systems for local or regional expansion opt to spin off their digital only platforms altogether, at times in conjunction with a different core banking system and management team. Compared to Europe and the US, Asia has seen very little pure non-bank mobile/internet only players being launched in the last 2 years. More than 80% of these digital only neophyte banks are owned and run by commercial banks.
In mobile payments, banks are pursuing a mix of own closed loop proprietary and third party platforms - Mobile wallet adoption is not yet on a scale that is material at best a fraction of digital base and, based on the Excellence findings, banks’ own wallets often lose out against cards in wallet for Apple Pay, Android and Samsung Pay. While banks often lose out against larger technology players in mobile payments, recent data from Kenya is indicating that a unified bank wide payments system that enables small-value transfers between institutions (small $ interoperability scheme) has proven successful in competing with large technology firms in micro payments. Many people are aware that within a couple years of M-PESA’s launch, the total number of mobile money accounts in Kenya eclipsed the total number of bank accounts. Yet, since 2015 bank accounts once again outnumbered mobile money accounts — by over 30% driven by PesaLink, a real-time payments system rolled out by banks.
One key emerging focus banks have begun discussing with us in excellence is creating “ecosystems” which they hope are much harder to replicate. This implies not only creating lifestyle ecosystems for customers that go beyond mere product selling but also to play, compete and cooperate within a wider network of fintechs, regulators, e-commerce platforms and nonbank financial institutions. The rise of cross-sector digital partnerships will not only be opening new revenue sources, but also harness big data to reconstruct more accurate customer identities for authentication, know your customer (KYC) and credit scoring.
To create those ecosystems, banks need to better harness network effects to allow customers to easier access a broader range of products and services outside the banks’ traditional digital channels, and to collaborate with third parties to develop and market an increasing number of product variants through open application program interface (APIs). It also means to transform the value price relationship, much like what Amazon Web has done by shifting pricing, from fixed upfront pricing to performance- and usage-based pricing and unbundle product and services to tailor-fit it for clients or client segments’ specific needs. The Asian Banker Research has seen first steps in these directions among the leading banks in Asia, Africa and the Middle East, but the vast majority has yet to take on this future.
Digital only or pure internet players have emerged early in Asia too and they continue to operate successfully such as U Bank by NAB (National Australia Bank) and ING Direct in Australia or some of the early internet only banks of the like of Sony Bank, Netbank which were often part of larger bank conglomerations. There has been a second wave of neophyte digital only FIs in Asia in the last two years as the map illustrates. Outside Japan, they have emerged from nowhere in a relatively short period of time. Most are two years old - or younger or about to come in the market such as the pure digital bank of CIMB Malaysia which will launch its digital only bank in Vietnam by end of 2017.
Digital only players come in different forms and combinations. Many lean towards payments as a key business propositions. Others are mobile/internet players with a limited branch network. Some have traditional parent banks behind such as TIMO in Vietnam which is powered by the back office of Vietnam Prosperity Bank, Jibun Bank in Japan which is a joint venture between Bank of Tokyo-Mitsubishi UFJ (BTMU) and the mobile network operator, KDDI or digibank in India and Indonesia which is owned by DBS in Singapore. In the UAE too, most digital only banks are owned by traditional commercial banks.
Others have originated from popular messaging applications such as Kakao Talk in Korea and WeChat Pay in China.
Many of the digital banks use new technologies to confirm the identities of clients and to meet Know Your Client (KYC) requirements. In theory, digital only banks could radically transform the financial services landscapes of the countries in which they operate. But for most, licensing, scale and profitability are the three key issues they face going forward.
One of the early successes was Jibun Bank Japan. The bank broke even within four years of market inception in 2012 and relied heavily in the first years on their mother company UMFJ client base. The bank accumulated more than 500,000 new customers in its first year. In 2015, the bank reported two million mobile banking accounts, the highest number of mobile banking accounts in Japan. In terms of productivity, the bank is able to cater to its two million customer base with about 200 employees.
DBS Singapore aims to scale up its retail banking presence in China, India and Indonesia using its digital platform called digibank. The success of digibank India will impact DBS decision-making process on how to proceed in on its market expansion efforts. The bank aims to acquire more than five million bank accounts in India with digibank in the next two to three years.
MoMo in Vietnam which is a mobile wallet solution by M Service which became the largest airtime top-up provider for all telcos in Vietnam, has 2 million registered mobile wallet users by end of 2016, owning approximately 70-80% of the mobile wallet market. Its fee based revenue model is based on merchant charges and the mobile wallet service. MoMo customers comprise roughly 50% mobile wallet users and 50% over the counter clients served by its agent network. It has a network of over 5,000 independent agents, through whom customers can load cash into their accounts, make withdrawals, bill payments and other financial transactions. It plans to grow its network eventually to 11,000 agents and more than seven million active e-wallet users.
With its expansive user-base and digital capabilities, it was not surprising that Tencent launched WeBank in 2015, the first online bank in China. The company received a licence to operate from China’s banking regulator together with five other institutions including Alibaba. Although it struggled on its first year, reporting a net loss of $82 million from May 2015 to December 2015, WeBank recovered in 2016 with a net profit of $5.9 million. This is mainly driven by microloans lent to blue-collar workers and small entrepreneurs in the country.
In Israel, The Leumi Group, the country’s largest financial institution launched "Pepper" in July 2017, an entirely mobile only application without branches and no current account fees. Pepper’s on boarding process takes in enough information to underwrite loans purely on the mobile platform.
In South Korea, two domestic digital only institutions one operated by telecoms company KT and the other by the country’s dominant messaging app Kakao are signing up new customers by the millions in 2017.
About 300,000 new accounts were opened with Kakaobank in the 24 hours following its launch in late July 2017— more than traditional banks in South Korea get in a year through online channels. With more than 4 million bank users by end of 2016 it is about 10% of its registered user base.
Rival K-bank, the country’s first web-only bank, has attracted just over half a million users since its April launch. However pure telecom run mobile banks failed elsewhere in the past, a case at hand is the well-established telecoms brand T-Mobile was unable to make a mobile banking proposition work in the US in 2014. The combination of a payment card and mobile application that gave customers the opportunity to bank through their phone failed to resonate.
If we look at the total digital accounts by the largest technology companies vis-à-vis the commercial banking industry, commercial banks are falling increasingly behind. This is not only happening in China and India but increasingly so in Korea and Vietnam
Front end technologies, better user interfaces and relevant offerings made technology companies overtake the combined strength of commercial banks.
As for China, there were approximately 900 million mobile banking subscribers in 2016 and mobile banking accounts by commercial banks will overtake internet banking accounts in 2017. Please note that customers can have more than one account – so the data reflect this.
India’s mobile banking accounts are only a portion of China’s account volume or about 9%. For India, about 70% of the Internet access is through mobile and the rest through desktops. Enablers for fast digital penetration is a decrease in cost of delivery to customers (fall in cost of high-speed access and smart phones) and fast turnaround time, 24*7 banking, personalised user experience and ease of use.
Inter-operability of the payments system in India would be critical for the further success of digitisation. The other key part is that banks and payments processors are able to offer a competitive rate to merchants in the processing of small value transactions. In most cases those rates are not compatible what merchants are willing to pay. The Unified Payments Interface (UPI) created by the National Payments Corporation of India (NPCI) is the technology platform that will be the basis for ensuring Interoperability.
With a high portion of digitally active retail customer base banks address the needs of an increasingly tech-centric customer base
Globally, best banks have breached already the 70% ceiling in regards to active digital customers
Top banks in the Excellence acquire more than 35% of their total customers (retail+SME) via digital channels.
In the same vein, the best banks are able to acquire between 15 and 25% of their affluent base via digital channels
First tier banks in developed markets handle on average 17% of products digitally end to end
The ratio is even lower when it comes to the contribution to total gross income from retail banking. We have most banks in a small range between 1-3%, regardless whether they are operating in mature or emerging markets.
In addition, banks struggle to offer end-to-end digital sales for new to bank customers. Exceptions are countries with strong national ID infrastructures such as Korea, Taiwan, Australia and Japan
Those countries have also seen banks moving into selling of more complex products such as insurances and mortgages online.
In emerging markets, financial institutions are moving fast to introduce end-to-end digitised services too.
Cases at hand are VP Bank in Vietnam and CIMB in Malaysia:
Since 2015, Vietnam Prosperity Bank has built up a substantial position in the consumer finance market with a market share of 60%. The bank initially launched online origination for leads generation, but has moved quickly into an end-to-end digital process, including online disbursal, which is fully integrated with the credit bureau and its core banking system to allow certain segments to approve loans in less than ten minutes. The bank expects between 40% and 60% of all new bank applicants to be processed with this fully automated process.
CIMB Malaysia originates and processes close to 50% of all consumer finance loans via digital channels. Its web and mobile platforms are fully integrated and systems are integrated directly to the host system and transactions are processed on a straight-through basis.
As for 2017, we will see the extension of full straight through processed digital sales capabilities into digital current account openings and remote deposit generation. From paper-work, multiple signatures and having to access dozens of systems, the relationship opening experience at branches varies by markets and even within the same bank. In its efforts to standardise and automate the back and front end processes further, banks reduce account opening time to a few minutes and afford more time for the relationship manager to engage with the customer. Most Australian banks are already offering those options, but an increasing number of banks from the United Arab Emirates (UAE) to Taiwan are working on this.
CTBC Taiwan offers conventional account opening at the branch within 15 minutes, including filling forms, KYC and document processing. The bank uses optical character recognition (OCR) identification technology for identity card scanning, and automatically detects column information through imaging in the application form. In 2016, the Taiwanese bank launched online account opening in four steps, including the uploading of certification documents.
To sum up the key take away for this TABRadio Finance session.
While digital is becoming core proposition banks find it hard to make radical changes. In most cases banks spin of their digital only proposition based on separate core system and managements.
Compared to Europe and the US, Asia has seen very little pure non-bank mobile/internet only plays launching. More than 80% have banks or messaging applications behind them.
In theory, digital only banks could radically transform the financial services landscapes of the countries in which they operate. But for most, licensing, scale and profitability are the three key issues they face going forward.
Cards in wallet still make up a tiny fraction in overall payments. Those platform works well in mature markets with high credit card penetration but for emerging markets, other payments solutions are required. A series of national payments agendas is aiming to standardise payments and speed up adoption in micro payments. Increasingly QR code payment platforms become the platform of choice. The key question is can China’s success in micro payment based on the QR code framework be replicated in ASEAN?
First tier banks in developed markets handle on average 17% of products digitally end to end but eventually aim to bring more than 80% of all services and products online.