As neobanks and digital challengers continue to advance and become increasingly more popular, incumbents must modernize their architecture by embracing cloud-native digital platforms, a new article by consulting firm Bain & Company and fintech provider Mambu says.
Evolving consumers habits, advances in technology and changing regulatory landscape are revamping the banking industry, opening the door for a new generation of digital banks.
Hong Kong has welcomed eight digital banks, Singapore awarded four digital banking licenses in late-2020, the Philippines has begun issuing digital banking licenses, and Malaysia is expected to issue five digital banking licenses in Q1 2022.
This evolving landscape is forcing incumbents to adopt an agile approach to technology transformation and capitalize on the speed offered by so-called “shared legacy” infrastructure, the firms say.
A shared legacy approach involves combining cloud-native digital platforms with a bank’s existing digital capabilities. One way to carry out this strategy is to adopt a banking-as-a-service (BaaS) model, including open cloud platforms, orchestration and APIs, the article says.
BaaS refers to a business-to-business (B2B) service where a financial services company leases its infrastructure, allowing third parties including fintechs and challenger banks to connect with their systems and build banking offerings on top of their regulated infrastructure.
By adopting a BaaS model, banks can leave the legacy core as a system of record and layer on software-as-a-service (SaaS) solutions. This allows them to make most of their existing investment and create specific solution architecture for a targeted audience, product, or geography, the firms say.
The strategy not only gives banks greater agility and speed to launch new products, but also allows them to provide a unified, superior customer experience across different products and regions more easily and economically, a critical characteristic incumbents must hold to compete against new tech-savvy entrants, they say.
Digital banking penetration soars
In Asia-Pacific (APAC), the digital banking industry reached a new level of maturity last year, fueled by the COVID-19 pandemic and social distancing rules.
McKinsey’s 2021 Personal Financial Services Survey, which defines digital banking as the use of online or mobile channels to conduct banking operations, reveals that nearly nine in ten consumers in the region now use digital banking actively, up 33% points from 2017.
Findings from the study suggest that the digital shift will likely be long-lasting. About 80% of APAC consumers expect to maintain or increase their use of mobile and online channels post-COVID-19, and 42% anticipate to visit their bank branch either less or not at all when the pandemic ends.
While traditional banks have been beefing up their digital capabilities, the study found that direct banks, or banks that offer their services remotely without a branch network, are increasingly posing a threat to incumbents. Approximately 60% of consumers across APAC say either that they would consider or that they might consider switching to a direct bank, such as a virtual bank.
A separate 2021 survey by EY shows that APAC has one of the highest rates of neobanking adoption in the world, with 35% of consumers surveyed last year indicating having a relationship with a non-traditional neobank.
Competition will further increase as large ecosystem companies and fintech innovators are launching digital-only banking propositions. Just last month, Hong Kong fintech unicorn WeLab announced its acquisition of Bank Jasa Jakarta (BJJ) in Indonesia to launch a digital bank in the Southeast Asian country. WeLab started out in 2013 in the consumer lending space before expanding into virtual banking in 2019.
In Singapore, super app Grab is teaming up with the city state’s biggest telco Singtel to launch a digital bank. Grab is Southeast Asia’s largest ride-hailing company, operating across 465 cities in the region. It began in the transportation space but later expanded into offering other services such as digital payments and financial services. The Grab-Singtel duo is also amongst the contenders for Malaysia’s five digital banking licenses.
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