“Asia’s traditional banks are innovating in response to the rising wave of digitization.”

The Future of Banking: Beyond Digital Banks

Reading Time: 5:30 minutes

By Bambang Moerwanto — Regional VP at SAP, Head of Financial Services & Professional Services Industry, Asia Pacific & Japan

Digital banking licenses on the rise

Come August 2019, Singapore will invite applications for digital bank licenses. Its central bank, the Monetary Authority of Singapore (MAS), intends to issue up to five new digital bank licenses to non-bank players.

This effort to bolster diversity and competitiveness in Singapore’s local banking industry follows the issuance of virtual banking licenses in Hong Kong this March. Mainland China had already issued such licenses since 2014, and Japan since 2000.

Amid a wave of digitization across sectors in Asia, the move is almost expected. Nevertheless, the announcement is significant news for its players.

New value creation from digital bank entrants

What new value-add can digital bank entrants provide which traditional banks aren’t now?

Perhaps a peek at what Southeast Asia’s tech-savvy non-banks – such as Singapore’s Grab Financial (Grab), Malaysia’s BigPay (AirAsia), and Indonesia’s Go-Pay (Go-Jek) – have up their sleeves may give us an idea. Most are providing digital payment services and loyalty rewards at the moment. But those are just the beginning.

The new value creation really lies in the wealth of data these companies possess.

Mining data for innovative new offerings

Many of these fintechs are also digital businesses that have allowed them to collect a massive amount of data. They have details about where consumers are traveling to and who they are. These companies can harness big data and predictive analytics to structure innovative new products and provide frictionless services that consumers desire.

Take Ant Financial as an example. Originally conceived as Alipay to support online payments for ecommerce giant, Alibaba, it’s one of the largest fintech ecosystem globally today – with mobile payments service, credit scoring, wealth management, insurance, and lending.

The company recently made news by amassing 50 million users, most of them from lower-income segments, with a new health plan named Xiang Hu Bao. Xiang Hu Bao is aiming for 300 million users in two years. Its growth rate is speedier than Yu’e Bao – Ant Financial’s online spare cash management platform hit. The latter took more than six months to reach the 50 million user milestone after launching in 2013. Which tells us is that Ant Financial is learning from its data.

Driving financial inclusion

Many fintechs are also serving unbanked or underbanked customers. By doing so, they create opportunities for individuals, businesses, and economies. It’s a win-win, and one of the key reasons why central banks are issuing digital bank licenses in the first place.

For example, Grab and Japan’s consumer financing company Credit Saison formed a financial services joint venture (JV) to expand access to Southeast Asia’s unbanked and underbanked individuals, micro-entrepreneurs and small businesses.

Announced last March, the JV, known as Grab Financial Services Asia, taps into Grab’s massive cache of customer data to offer alternative data points to assess credit worthiness. By analyzing behavior and transaction data from the app – such as transport movements, geo-location, and GrabPay transaction data – the company fills the gap left by traditional credit scoring methods to provide a range of lending products and services initially aimed at fulfilling the needs of Grab drivers. This includes working capital loans, and financing for smartphones and durable goods.

Go-Pay plays a similar role in Indonesia – fuelling social mobility with access to credit. A heartstrings-tugging example was how it gave Achmad Darmawan, a former-street-food-seller-turned-Go-Jek-driver who was never considered creditworthy before, a newfound ability to buy a house. The mortgage application was approved via Go-Jek, which partners with state-owned mortgage lender Bank Tabungan Negara.

Traditional banks innovate

Asia’s traditional banks are innovating in response to the rising wave of digitization.

UOB recently launched its first digital bank, TMRW, in Thailand. Targeted at millennials, it aims to attract three to five million customers in the next five years. To realize its goals, it has partnered companies such as Pintec Technology to assess the credit of individuals and small businesses, especially those without conventional credit histories. It is also working with Personetics, an artificial-intelligence company that is helping it to serve customers with personalized recommendations.

DBS has also launched digibanks in India and Indonesia, with Indonesia proving to be a more successful market after the bank applied its learnings from India. DBS also tied up with Go-Jek, while UOB has done the same with Grab.

The transformation, and need for innovation continues

Having said that, the digital transformation is ongoing.

The current pace of technological advancements has already had a profound impact on the banking industry. But how incumbents and new entrants continue to transform themselves to respond to competition and the regulatory environment while improving the customer experience will be the key to sustainability and survival.

Australia’s digital bank (also known as neobank), Xinja, understand the need for rapid innovation cycles in this age of banking disruption. Doubling its size in July 2018 and expecting to double that again in the next three to six months, Xinja is already live on SAP cloud for banking solution it implemented in a rapid three-month period. On its way to becoming a fully licensed bank, the startup is not taking agility for granted. It appreciates the need to provide value and frictionless services to customers that may not be imagined yet. And for that, it recognizes the need to be nimble from the core.

Started as a health insurance provider with its world known and successful vitality program, Discovery launched the world first – shared value – behavioral bank in the beginning of this year.

In what is an industry first, in partnership with SAP as its technology provider, Discovery Bank is able to offer the world first – Dynamic Interest rates to clients – linking interest rates directly to their financial behavior; enabling clients to earn more interest on savings and pay less interest on credit as they improve their financial behavior with Vitality Money. Discovery Bank further leverages the Vitality partner chassis to create an attractive ecosystem of rewards for clients in the form of Dynamic Discounts that further deepen Vitality’s incentives.

In the world where rapid changes are inevitable, agility becomes one of the most important requirements to be successful as it will drive the organization to continuously innovate in reimagining and experimenting new business models as well as deploying innovative business processes to improve customer experience and satisfaction. The term of ROI these days does not only associate with the Return on Investment but also Return on Innovation. The future winner is for those which do not only innovate continuously but also those which are able to tightly measure their return on innovation. SAP’s vision is to transform a company to become an intelligent enterprise financial institution by applying intelligent technologies across its industry value chain; running front to back business processes on an integrate intelligent suite of applications and leveraging the power of big data from its Digital Platform.

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