Banking Sector Must Focus on Digital Fitness to Tackle Challenging Environment

By Riddhi Dutta

Digital transformation might be the new norm in the wake of the pandemic, but staying digitally fit will be another challenge that financial institutions in the Asia Pacific region have to overcome. In the latest edition of the Fintech and Digital Banking 2025 Asia Pacific IDC Infobrief, commissioned by Backbase, it was found that digital banks in the region experienced over 300% customer base growth compared to traditional banks.

At the same time, incumbent banks had to accommodate at least 50% growth in the number of digital customer transactions and interactions. We’ve also seen regulators in the region pushing initiatives to support growth and innovation in the industry.

Emerging fintech players and challenger banks are leading the charge to adopt digital financial tools and services. From the implementation of digital banking licences to the rollout of open banking initiatives, banks in the region face an increasingly competitive landscape. They are being forced to rethink their digital transformation programs and strategies to stay relevant with their customers.

Challenges Are Forcing a Restart

Covid-19 has drastically shifted priorities for banks as they look to navigate the ongoing crisis. As banks in the region rushed to meet the rapid growth in digital transactions, it was found that maintaining the quality of these interactions has been a challenge.

Moreover, while the crisis was a catalyst in accelerating digital banking adoption, it also led to a temporary slowdown in innovation as banks focused on mitigating the risks brought about by an uncertain economic climate. According to IDC, technology spending, governance, risk, and compliance (GRC) saw double-digit growth in 2020/2019 – to the disadvantage of other spending areas.

Yet as banks look to transit towards a recovery cycle, it is an opportune time for banks to go back to the drawing board on their digital transformation programs and apply the lessons learnt from the pandemic.

This will allow banks to improve on the shortcomings of their pre-existing digital tools, identify the opportunities for growing their market share, and develop better digital experiences for their customers.

Digital First

Investments in digital channels have paid off. With digital banks seeing three times the growth in customer bases compared to traditional banks, there is a window of opportunity for banks in the region to digitalize their core business of lending and deposits for faster turnaround times and more personalized interactions.

As banks look to embed themselves into the new digital lives of their customers, there is a need to understand that being digital-first is about integrating digital technologies with agile business processes, customer-driven engagement strategies, omni-channel banking, and sound business models to maximize the value of their technology investments.

As such, banks have to shift from a product-centric strategy towards a customer-centric approach to meet the demands of a changing banking landscape.

Digital Challengers or Collaborators?

The rapid adoption of digital technologies has led to many opportunities for emerging fintechs to fill the gaps left by incumbents. IDC predicts that 100 financial institutions will emerge across the Asia Pacific by 2025, with new players presenting stronger post- pandemic propositions.

This is hardly surprising as fintechs, with their agile approaches to development and innovative capabilities, have delivered exceptional users experience for niche and underserved markets, which incumbents have struggled to address in the past.

While some financial institutions are already accelerating their digital-first strategies, the IDC report found that mid-and small-tier institutions – particularly in the Philippines, India, and Indonesia – are still behind due to the lack of investment in “right-fit” technologies, platforms and frameworks.

For these banks to stay ahead in the digital race, the best alternative will be to partner with fintechs, technology firms, or even other banks to strengthen their technological infrastructure, expand their banking ecosystems and access broader markets across the region.

The report also predicts that 60% of banks in the Asia Pacific will continue to grow their ecosystems, integrating fintech solutions from cloud marketplaces to enrich transactions. Furthermore, it is also expected that by 2025, 4% of the top 250 banks across the region will be working on platform-based and componentized modernization, as well as API- enablement.

Banks can leverage the potential of these collaborations through as-a-service and on- demand modes of technology acquisition to grow their service stack. For this reason,we can

expect the future of banking to be increasingly dynamic as payment networks, shared services, and financial community associations contribute to the race to digital by creating frameworks of cooperation and new business models.

The next five years will be crucial for banks in reaccelerating their digital propositions. To ensure success and resilience for their business models in this digital arena, there will have to be a relentless focus on investing in the right tools, technology, platforms, and frameworks central to their unique brand of digital.

Banks that can orchestrate the best value for their customers and keep them engaged throughout their banking journey will be able to scale their margins and revenues to rise above the uncertainties ahead.

Riddhi Dutta is the Regional Head for ASEAN & South Asia at Backbase