Redesigning banking for the digital age

Prevalence of interbank cards has been spreading in ASEAN. Next up, we have digital banks and applications.

By Joelyn Chan

Although the digital-only bank, Monzo, is only available in the United Kingdom (UK) now, its investment deck hints of overseas expansion. The deck states: “Additional capital will allow us to expand into Europe, the US and Asia”. Monzo has also secured £71 million (US$95.5 million) in its latest funding. In 2017, the bank’s user base increased five times to almost 500,000 users. Slowly but surely, this number will rise with growth in users from its home country and other regions.

The incumbents – Barclays, HSBC, Lloyds Banking Group, and Royal Bank of Scotland (RBS) – have approximately 75% market share in the UK. Their new challengers are fintech firms, such as the UK’s first mobile-only bank Atom, Monzo, Revolut, and Starling Bank. A recent survey by P.A.ID Strategies and Mitek System shows that few traditional banks had made progress towards a 100% digital experience through the mobile channel.  The fintech firms are slowly winning over market share. From January 2018, the UK’s open banking project will force its nine largest banks to share their data with licensed startups. This regulation will further develop the retail-banking scene, and steer it ahead of many countries.

Source: UK Bank Account Opening Survey Dec 2017

 The dominant local banks are not going down without a fight

In the face of impending competition from fintech firms, dominant private banks are not going to sit back and watch. Instead, they try to innovate and launch their own platform to keep the hearts of their customers. For instance, Timo is a digital banking platform of National Bank of Vietnam, which offers residents in Vietnam a multitude of services on one platform.

DBS’ Digibank also prides itself as the digital transformation in banking. In 2016, it was initially launched in India. Subsequently, it was Indonesia. Now, it is expanding to Hong Kong. “With digibank, our intention has always been to be digitally embedded in our customers’ evolving financial lifecycle and offering them a differentiated customer experience,” said Shantanu Sengupta, Head of Consumer Banking in DBS Bank India. As banks build their reputation and digibanks in regional markets, the US or the UK’s mobile-only banks may find it challenging to tap into the rising economies in ASEAN.

The challenger banks need to overcome their own set of struggles first

While the concept of mobile-only banks sounds exciting, it also encompasses a different set of risks, accessibility and security concerns. Monzo and Revolut have reported technical problems in the year 2017. When their payment processing suppliers go down, the banks’ services get disrupted too. With no physical bank outlets for customers to rely on, the digital banks have to get their system up fast. Constant downtime will erode customers’ confidence and receptiveness to subsequent product offerings.

Observing the widespread rise of interbank cards in ASEAN

In ASEAN, the focus is more towards the usage of interbank cards. Initiatives by banks and regulatory changes help to fuel the adoption of interbank cards. Bank Indonesia launched its integrated payment channel – National Payment Gateway (NPG). NPG unites the different payment channels, simplifies the electronic payment process and lower the cost of interbank transactions in Indonesia. The bank’s governor Agus Martowardojo says “currently there were 140 kinds of debit cards in Indonesia and 90 percent bear foreign switching network logos”.

Indonesia’s progress is not an anomaly. The Philippines’ central bank, Bangko Sentral ng Pilipinas (BSP), has also pushed for online interbank transactions. It offers a platform that covers 33 banks and other mobile payment institutions. The rise of interbank cards is apparent even in poor developing countries like Myanmar. Although there were hiccups and installation delays, interbank cards are set to go live in 2018.

People living in Myanmar can perform functions such as interbank money transfers and withdrawals at the ATM (Automated Teller Machine) without going to a bank. All they need is a single ATM card issued by any of the 23 local banks under the Myanmar Payment Union (MPU) network.  “If the MPU card system is successful, the MPU will next make efforts to promote mobile interbank remittance services,” said U Mya Than, non-executive director and former chair of MPU. ASEAN nations are not going to stop improving after achieving mini successes in payment milestones.

Some ASEAN countries are looking beyond transfers using national currencies and experimenting with innovative ways of cross-border payments. The crux lies in blockchain technology. For instance, Monetary Authority of Singapore (MAS) initiated Project Ubin to challenge the current processes by using a blockchain-based digital representation of the Singapore Dollar. The project is extending beyond Singapore, evident from a collaboration with Bank of Canada.

All in all, banking in the digital age emphasises a lot on convenience for customers. To win in this era, the winner does not require a network of bank branches. But, it must provide a seamless banking experience. It is only a matter of time before startup banks and digital bank applications reach all corner of the world.