The financial services landscape has changed more in the last two years than it has in the previous 10, with new technologies rapidly transforming banking and financial service industries the world over. While the Covid-19 pandemic has certainly been responsible for some of the acceleration in adoption of new technologies, in many cases it is the benefits gleaned from these technologies that have been the catalyst for such rapid take-up.
However, a recent research report,“Evolve or be extinct,” by Financial Times Focus in partnership with Mambu identified that banks in the Asia-Pacific region are lagging behind their counterparts in other regions when it comes to digital transformation, with less than one-third of banks describing their digital transformation strategies as “mature” or “advanced.” One-third of APAC banks are concerned that their legacy platforms are holding them back, and three in five banks believe they will cease to exist within five to 10 years unless they change their business models.
Tech-enabled financial solutions offer speed and cost savings
Whether traditional APAC banks like it or not, technology is at the heart of modern financial services, with data analytics, artificial intelligence (AI), cloud, machine learning (ML) and blockchain all playing a significant role in most of the contemporary financial solutions on offer across the globe.
AI, in particular, has proven particularly useful in financial services in assessing loan risks, with this technology able to analyze consumer behavior more accurately — and significantly faster — than the humans who were previously tasked with these activities. AI simplifies process automation, which in turn leads to reduced costs for banks and lenders, who then subsequently pass on these cost savings to consumers. Tech-enabled financial assessment processing is faster, cheaper and more accurate than manual processing, so it’s no wonder that forward-thinking financial service providers across the globe are committing large chunks of their budgets towards technology upgrades.
Cloud, too, is now much more widely accepted as safer, more agile and superior to traditional data storage, with many financial service providers now operating solely in the cloud.
Improved access to financial services through embedded finance options
E-commerce has increased exponentially in recent years, and as online transactions become more commonplace, consumers’ expectations around speed, security and simplicity have also grown. There is now an expectation that all online purchases and transactions will be seamless, swift and performed in as few clicks as possible.
For example, a consumer looking to make a purchase with a reasonably large outlay — think a big-screen TV or the latest release smartphone — now expects to be able to source financing solutions for their item at the time of purchase. They won’t visit a store, then visit their bank for financing, and then head back to the store with their approved funds — they want their item and financing at the same time. While there are definitely implications around the risk of increased debt and ensuring consumers understand their financial obligations, the ease and simplicity of these embedded financing solutions means that they’re here to stay, and traditional financial service providers need to ensure they’re on board so they don’t lose market share.
Embedded finance, while a hot topic right now, has been around for some time, albeit under different names. Tech giants like Uber, Facebook, Google and Amazon have been offering embedded finance solutions for many years, but what is interesting is that now we are seeing companies of all sizes — and from all industries — make a play for this lucrative space. As the world’s economies begin to recover from the Covid-19 pandemic, these embedded finance solutions will provide low-cost, practical and accessible financing opportunities, particularly to those micro, small and medium enterprises (MSMEs) that will play such a crucial role in our economic recovery.
Low risk approach to digital transformation
So just what is holding APAC banks back from fully embracing technology? For some, cost is certainly a factor, with the initial outlay for many new technologies considerable. These banks may have also invested heavily in their legacy technology and feel they need to prolong its life for as long as possible, even though this technology may already be 20 or 30 years old. However, for many banks in APAC, the reluctance to evolve digitally can be blamed more on a culture of stagnation and fear — a sense of “we’ve always done it this way” — rather than any concern about cost. The perceived risks of a digital transformation are just too high for some banks to seriously consider. But what these banks also need to consider is the risk of doing nothing, as it is the banks that fail to evolve digitally that will ultimately cease to exist.
When assessing the risk of a digital transformation, it is important for banks to understand that a “rip and replace” approach is not the only way, and in fact has been proven to be relatively slow, significantly more expensive and the highest risk. A more measured approach to digital evolution, which minimises the risk of core banking platform modernization, is to run a dual core, migrating to the new core over time. Another lower-risk approach established banks may consider is launching a “digital speedboat,” setting up a greenfield tech stack under a new brand.
Whichever approach is selected, banks need to begin moving on their digital transformation strategies sooner rather than later.
Technology has enabled such rapid evolution in financial services that it can be difficult to truly grasp its impact. What we do know for certain, however, is that the use of technology in financial services is only going to increase as technologies improve and customer expectations evolve, so it is vital for banks and financial institutions to embrace the change, and ensure they have a viable and actionable plan for digital transformation. If they fail to evolve digitally, these banks risk becoming a cautionary tale before the end of this decade.