Digital banking shift picks up

Digital banking shift picks up

Incumbents face stiffer threat from online 'neobanks' and other challengers, says Backbase

A mobile screen displays SCB's digital know-your-customer feature, allowing new bank accounts via facial recognition.
A mobile screen displays SCB's digital know-your-customer feature, allowing new bank accounts via facial recognition.

Digital banking in Asia-Pacific is poised to be adopted widely with more than 60% of customers willing to switch to "neobanks" and other challengers in the next five years, according to a report by the digital banking platform specialist Backbase and IDC.

As many as 100 new digital banking players are expected to emerge in the region over the same period, the report says.

The Covid-19 pandemic has also called into question the industry's readiness for digital banking as a significant majority (70%) of Asia-Pacific banking customers continue to view banking processes as tedious.

As a result of incumbent banks' extreme focus on legacy systems and disregard for digital-first integration, only 30% of the banking customer base in Asia-Pacific is active on digital banking channels, according to Backbase.

Incumbent banks face a pressing need to up the ante on digital-first banking amid intensified customer demand for availability, access and control of digital channel interactions. In Thailand, banks are preparing to migrate 50% of their new digital workloads to the public cloud in the next five years to meet demand.

However, incumbent banks have not been able to take advantage of potential ecosystem partners as they still hold traditional views of the value chain, according to Backbase. A full 80% of the top 250 banks in Asia-Pacific still prefer to own the entire value chain of banking, with third party-contributed business at a mere 2%.

Meanwhile, the average age of legacy core banking systems in the top 100 banks in Asia-Pacific is 17.5 years, far behind the rapidly developing digital economy of today.

On the other hand, more than 35 neobanks or new digital challengers across the region are built on agile, innovative best practices -- way ahead of incumbents in terms of flexibility, self-service capabilities, customer needs and personalisation.

Consequently, with the emergence of new players and further digital disruption in the industry, 38% of traditional banks' revenues are at risk by 2025.

In Thailand, 7% of retail business for tier-1 banks will be partner-generated by 2025, up from under 2% now. Many Thai banks are partnering with third parties to deliver lifestyle-oriented services.

Through open networks and application program interface- (API) driven collaboration, banks are hoping to take advantage of the network effect and grow faster as more customers are attracted to the ecosystem and creating more value within the network.

STRATEGIC INVESTMENTS

As the banking industry goes through a period of accelerated pursuit to be digital-first, the report found Asia-Pacific banks must unleash the potential of personalisation at scale and be more customer-driven and platform-oriented.

The key focus will be on digitisation and use of artificial intelligence (AI). By 2025, 44% of the top 250 banks across Asia-Pacific will complete their "connected core" transformation -- working on platform-based modernisation and API-enablement.

Some 48% of banks in Asia-Pacific are expected to use AI or machine learning technologies for data-driven decisions.

Digitisation provides a multitude of benefits, according to Backbase. Retail and consumer banking customers appreciate the instantaneous delivery of products, services and information. Automated processes and lower cost of operations can also enable banks to better serve their corporate clients.

Lastly, AI and machine learning also bring intelligence to wealth management decisions, boosting productivity. The top eight banks in Thailand are eyeing 50% growth of investments in the management of the wealth business.

"Thailand has the potential to be among the leaders in modern banking, as banks and fintech firms in Thailand have demonstrated repeatability and scalability of their digital capabilities," said Riddhi Dutta, regional head for Asean and India of Backbase.

"Thais are embracing technology, with record-breaking numbers for growth in digital payments, use of digital IDs, and use of social media for banking. Digital-first integration through modern and modular architecture and partnership with fintechs will enable banks to offer unique value propositions to their customers."

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