The era of digital banking is well underway in the Asia Pacific (APAC) region, and is set to accelerate in the next five years, with 63% of customers willing to switch to neobanks and challenger banks between now and 2025.
That’s according to a joint report released today by IDC and Backbase, which also found that APAC is expected to see an explosion in new financial institutions in the same time period as new banking licenses are issued and markets become increasingly liberalised.
The research was made through review of 55 banks, 20 challenger banks and 40 fintech disrupters in markets throughout APAC.
Data from the report shows that the rise of digital banking can be partially attributed to the conservative view of the value chain maintained by many traditional banks – leaving them unable to take advantage of potential ecosystem partners.
80% of the top 250 banks in APAC still prefer to own the entire value chain of banking, with third party-contributed business at a mere 2%.
Meanwhile, more than 35 neobanks or new digital challengers across APAC are built on modern technology foundations following agile best practices, giving them an edge over traditional models when it comes to self-service capabilities, customer needs, personalisation and more.
The combination of these factors means that 38% traditional banks’ revenues could be at risk in the next five years, according to the report.
In Australia, established banks will seek to reverse recent erosion in cost-to-income ratios in part using open API platforms.
These platforms not only promote internal agility and efficiency but also enable third-party partners and fintech capabilities to be integrated into seamless digital customer journeys across all channels.
These changes should also delight customers, as a significant majority (70%) of APAC banking customers continue to view banking processes as tedious.
Having said this, it is expected that the ‘big four’ Australian banks (ANZ, Westpac, Commonwealth Bank, and NAB) will maintain their dominance through 2025, the report says, as small and mid-tier banks continue to be challenged by legacy systems, competition for digital talent, and lack of experience in executing large-scale digital transformation.
“From a digital banking perspective, the rapidly unfolding pandemic will have a profound and enduring effect in Australia,” says Backbase regional director for A/NZ Malcolm Macnaughtan. “Transforming to a digital-first business will be key to survive the persistent challenging conditions. “Increased customer adoption of digital together with the launch of open banking present significant opportunities for banks with the capabilities to adapt,” says Macnaughtan. “Incumbent banks and new challengers in Australia must innovate at a rapid pace to emerge on top in the race to be digital-first.”
Research from the study also suggests that the success of future banks will depend largely on customer experience (CX), unlocking personalisation at scale, and embracing emerging technology – especially artificial intelligence (AI).
In fact, by 2025 44% of the top 250 banks across APAC will complete their ‘connected core’ transformation — working on platform-based and componentized modernisation, and API-enablement.
At the same time, 48% of banks in APAC are also expected to leverage AI or machine learning (ML) technologies for data-driven decisions.
Specifically in Australia, revenue is expected to increase by 15% through the heightened use of AI for customer management.
Prediction of customer behaviour and better usage of customer data is the key to unlocking new revenue streams, the report says, by bringing banks into the realm of ‘smart banking’ and subsequently becoming a more active part of the customer’s decision-making process.
“Being digital-first calls for the integration of digital technologies with the comprehensive transformation of business processes, engagement strategies, channels, and business models of banking,” says IDC Financial Insights associate vice-president of APAC Michael Araneta.
“With the insights from the report, banks and neobanks can be well-positioned for the future.”