As the digital transformation hits the banking industry, banks are in the grips of an identity crisis. Although some of the world’s largest banks’ leaders began to position themselves as technology companies with banking licenses, this is still aspirational.
More immense efforts are required to execute this vision. Investing billions of dollars, transforming and reimagining the banking technology, adopting a customer-centric business view, team restructures, and more efforts need to occur. In other words, the risk of failing in transform is relatively high.
According to Accenture, for incumbent banks that fail in transforming their gameplay, 35% of all bank revenues could be at risk from those more tech-savvy competitors.
In the current market, major banks announced multibillion-dollar and multi-year digitization projects. According to Celent, global banks’ IT budget will surge to $297 billion by 2021, up 14% from $261 billion in 2018.
In order to be part of this digitalization wave, many incumbent banks chose to relook into their budget allocation. Banks are reinvesting their resources in digital channels to modernize their technology stacks as part of this process. Instead of catering to current customer preferences, banks are enlisting the tech-savvy software vendor in this digital transformation.
Opportunities In The Digitalization Wave
As we can see, incumbent banks are intensifying their digitization efforts in the face of changing consumer demands and growing competitive pressures.
Consumers are emphasizing the need for better digital banking services and personalized products and tools. This has led to the number of US consumers considering switching banks in the next 12 months increased by 86% from a year before, from 6.9 million to 11.9 million, per Resonate.
Meanwhile, tech giants like Google and Amazon are poised to grab up to 50% of the $1.35 trillion in financial services revenue from incumbent banks, leveraging their tech expertise to lure away customers, according to McKinsey. Legacy channel usage is steadily dwindling, while digital channel usage is firmly on the rise. This turn to digital is being accelerated by younger, tech-savvy generations like millennials and Gen Zers quickly becoming banks’ largest addressable market.
Once the most widely used banking channel in the US, branch use will drop at a compound annual growth rate (CAGR) of -2.01% between 2019 and 2024, per Business Insider Intelligence projections. Meanwhile, mobile banking, the least-used banking channel in 2008, is expected to grow at a CAGR of 2.83% between 2019 and 2024. In other words, this will become the highest among all channels.
How To Transform Digitally
To digitally transform, banks need to join forces with partners, enemies, and frenemies alike. Vendors will be the key to the modernization of banks’ IT. Banks’ growing IT budgets reflect their changing priorities: By 2021, global banks’ IT budgets will surge to $297 billion, up 14% from $261 billion in 2018, according to Celent.
Banks’ digital transformations are already well underway, and incumbents are making massive changes to how they operate and plan for the future to compete in a digital economy. They’re doing this by embracing digital-ready innovation models, adopting new business models like open and direct banking, and reorienting their tech stacks around the digital customer experience.
Although the above contents (excerpt from Business Intelligence Report 2020) refer to the USA in general, however, to put things in perspective, whatever happens in the USA is only a couple of years away from the rest of the world to follow suit.
Future of the Digital Banking
As of writing, digital banks license has been awarded in Hong Kong, notably Mox (Standard Chartered), as a strategic move to defend and protect incumbent business and remain relevant in the region. The others include WeBank, Airstar Bank Limited, Ant Bank, Livi Bank Limited, Fusion Bank, Ping Ann OneConnect Bank, and ZA Bank Limited.
Hereon, the domino effect will fall towards the region’s biggest economies, usually landing in Singapore, Malaysia, and the Philippines. The rest of the Southeast Asian nations follow suit as the respective regulatory bodies figures out the framework and adapting it to their base on the local economic landscape.
Like traditional banks, there is no one size fit all model in banking as each country’s banking industry comprises many players serving many segments of the economy. Hence, going the digital banking route will also rely heavily on market research from the country’s digital maturity in terms of infrastructure, economic and education maturity, and the high growth areas in the economy, which usually consist of the un-bank and underbanked.
A robust ecosystem business model is the key to success in a digital bank comprising strategic and synergistic partners. This is evident with the award of Singapore’s digital bank’s license to Grab and Singtel, Ant Group consortium and US-listed SEA (have stakes in Shopee) and Garena (a mobile gaming and publishing platform).
The next wave of digital license awards will be from Malaysia by 2022, followed closely by the Philippines. With the recent conclusion of the RCEP (Regional Comprehensive Economic Partnership) accord, which includes China, Japan, and South Korea, the economies of the ASEAN nations are set to prosper to new heights as the digital banking journey accelerates and the ecosystem development by the players matures over the next 10 years.