The Digital Banking Revolution: Why ASEAN Needs to Get Behind Digital-Only Banks

The banking industry is on the edge of a digital revolution. ASEAN must act now to ensure that when it comes, ASEAN banks can cash in.

By Oliver Ward, Edited by Isabel Yeo

With the global economy slowing and the banking industry staring down the barrel of heavier regulation after the 2008 Financial Crisis, innovation has taken a back seat in the retail banking sector. Almost ten years later, the lack of innovation and improvements in the banking industry have prevented it from meeting the demands of an increasingly digital population.

Where are traditional banks falling short?

An annual report released by FIS, the world’s largest provider of financial technology services, revealed that 77% of banking consumers felt that their bank had fallen short of their expectations.

The results of the survey showed how consumers were dissatisfied with the areas of security, fairness, reliability and transparency in current banking models. It also emphasised that financial institutions did not cede full control over their finances to customers, did not value customers, did not anticipate customers’ future needs and were slow to customise banking product offerings.

Digital-only banks are ideally positioned to address these concerns

Digital-only banking systems could resolve the majority of these issues. An Omni-platform service which provides instant credit decisions would give customers more control over their banking services and provide added convenience to an old industry.

But a new digital-only bank could address far more than just convenience issues. Without physical branches, digital-only banks would have 40% less staff, which would mean a 40% decrease in wage costs. These banks would be able to pass these savings onto the consumer in the form of lower mortgage and loan prices and higher interest rates on accounts. Digital-only banks could undercut established incumbent banks and seize the market.

The most significant advantage of a digital-only bank would be their ability to access unprecedented levels of consumer data. By introducing a centralised e-wallet, digital-only banks could gain access to consumer spending habits and finances in a way that traditional banks could not. Understanding consumer habits would allow digital-only banks to design consumer driven packages and tailor-make products far more in-line with consumer demands than those offered by traditional banks. An e-wallet would also enable customers to easily see where they were overspending and where they could cut back, putting customers at the forefront of their financial planning and management.

Transparency could be another area where digital-only banks one-up the incumbents. Craig Ily, Managing Director of Atom Bank, one of the UK’s leading digital-only banks, said that “transparency is the battleground for banks over the coming decade”. The incumbent banking model has hidden costs and charges. Digital-only banks could offer more transparency in their costs and address all grievances consumers had with high street retail banks.

Timo is Vietnam’s first mobile-only bank

The services provided by new players in the industry reflect the benefits of the digital banking revolution. Timo, a digital banking platform and a subsidiary of the National Bank of Vietnam, offers a multitude of services on one platform– from managing bills to topping up mobile phones and organising finances. While Timo’s CEO, Cameron Warden has refused to release exactly how many users the bank has, he has expressed his satisfaction with the bank’s 60% active user rate.

Because of their lower overheads, Timo can offer competitive interests rates. They currently offer 6.8% interest on a 12-month deposit, increasing to as much as 7.4% on a 36-month deposit. In contrast, HSBC in Vietnam offers just 3%.

ASEAN has the right conditions for digital-only banks to flourish

Timo has been expanding in Vietnam thanks to the country’s ideal conditions. Vietnam has the 18th highest number of internet users in the world and the eighth lowest fees internationally for web services. In March, 500 Fintech start-ups launched a US$10 million fund to invest in more than 100 other domestic Vietnamese start-up businesses.

McKinsey has estimated that the consumer class in ASEAN will more than double from the 81 million today to 163 million by 2030. A growing consumer class would see more people needing mortgages and banking products. The digital banking industry can step up to meet these requirements.

Moreover, mobile penetration levels in Southeast Asia have been increasing at a rapid rate. The number of people using online personal banking from their phones and tablets has already doubled between 2011 and 2014, with countries like Indonesia and Vietnam increasing their penetration by sevenfold. Future numbers will dwarf these figures.

(Source: eMarketer)

With 40% of the ASEAN demographic under the age of 30, the population would quickly adapt to a digital-only banking system. Timo’s core clients are between 25 and 40 years old. Moreover, as the chart below shows, a significant portion of the younger population has already adopted online banking.

(Source: McKinsey)

There are some obstacles to overcome before ASEAN can achieve a digital-only future

Before consumers can fully enjoy the benefits of digital-only banking across ASEAN, there are two significant barriers to overcome. The first would be a lack of regulatory harmonisation across ASEAN. With such a large quantity of sensitive data widely available to digital-only banks, regional privacy laws need to be implemented and enforced to the highest degree.

Currently, only Malaysia, Singapore and the Philippines have any privacy laws in place at all, and even these are not identical. There has also yet to be any ASEAN-wide initiatives to establish a unified e-payment system or unified regulations concerning the digital-banking industry.

The second obstacle to overcome would be winning over consumer trust. Established banks have created a perception of security over their years of service. Digital-only banks have yet to establish this. Before we can expect to see the large-scale adoption of these digital-only alternatives, the public would need assurances that their finances were safe and secure in the hands of a digital-only provider.

The road to creating a consumer-centric, digital-only banking system requires cooperation

The only way to overcome these challenges and further drive digital innovation within the retail banking sector would be to increase ASEAN-wide cooperation. With the establishment of clear ASEAN e-payment regulations, harmonised privacy laws and digital banking regulations, the region can ensure that there are no legal loopholes open for exploitation across ASEAN.

Beyond the harmonisation of privacy laws, having some national e-identification system, with stronger security measures than regular password protection would help prevent cyber crime.

When more people embrace digital-only banks, and these banks amass more data, cyber security protections would be improved. With more data, analytics would be better positioned to notice irregularities in consumer behaviour and implement more robust real-time fraud detection algorithms. Nations could also achieve better cyber security with more integration and collaboration in the form of data sharing between ASEAN banks.

Global app-only banks are already going from strength to strength

There have already been a few successful digital-only banks outside of ASEAN. Germany’s Fidor Bank is one. It was founded in 2009 and has since gained 300 thousand users in Germany. It had also been looking to enter the US and UK markets. It has already changed the way money is being transferred – it has teamed up with Ripple, a currency and remittance network, to offer an all new money transfer service. Simple Bank is another example. It is a digital banking service in America that has gained so much traction that Spanish bank BBVA bought it for a cool US$117 million.

With a revolution set to occur across Europe and the US and big money already changing hands to get ahead in the digital-only banking sector, ASEAN would be well served to come together and eliminate the obstacles as soon as possible. ASEAN countries need to ensure ASEAN owned companies are the first to cash in on the coming digital banking revolution.

The customer need is present; the conditions are ripe, all that stands in the way of ASEAN becoming a pioneer in the digital-only banking industry is a lack of regional harmonisation. ASEAN has recently begun looking into increasing banking integration, and there would be no better way to start than to come together to shake up the retail banking sector, promote innovation and give consumers a banking sector that can work for them.