Shifts in consumer behaviour towards digital services are resulting in monumental changes for the banking industry. Highly anticipated digital banking licenses will be awarded in Singapore and Malaysia this year, while the first of the winners of Hong Kong’s new digital licenses has come to market. The pressure is on for incumbents to adapt to the new world by offering the digital experience that customers are starting to expect.
This trend has been accelerated by the dramatic start to this decade, with everyone facing the need to prioritise digital over physical. This new environment could drive a greater adoption of digital technologies across the whole banking sector: digital onboarding as standard, increased financial inclusion as digital solutions bring banking services to Asia’s vast underbanked and unbanked populations, and a shift to digital payments as a desire to touch and handle cash dwindles.
So far, digitisation efforts by incumbent banks have had mixed results. Unable to predict the scale and pace of today’s customer-centric innovation, many initial attempts to digitise were developed in-house. As the pace of market change and increasing customer expectations evolved, this transitioned to buying off-the-shelf solutions. Yet, far from creating competitive advantage, these approaches left established banks weighed down by vast amounts of legacy code – and technical debt. For big banks, this complexity impacts their ability to harmonise their service offering or easily connect new services such as robo-advisory or personal finance management, and the entanglement of multiple, complicated solutions makes it harder to deliver the hyper-personalised experiences the digital challengers are known for.
A digitized bank is not a digital bank
The problem faced by many incumbents has been that a digitized bank is not a digital bank. Customers have come to expect a seamless omni-channel experience and accessibility whenever they need it, but providing a digital front-office does little for customer experience if the back-office isn’t in order.
On the other hand, challenger banks have become known for building their services around the customer experience – enabled in large part by their use of the cloud. The new market entrants are cloud-native, which gives them faster, agile and scalable ways of building, creating, testing, and presenting digital offers to end-users. But it’s not just the creation of digital products and services that the cloud supports; challengers built on the cloud with an open platform not only accelerate the creation of bespoke or collaborative services using open APIs, but capitalise on the wave of non-financial market entrants by offering banking-as-a-service.
This freedom from legacy technology supports the agility that the Open Banking and open API movement has brought about. Cloud-based technology also aids the race for new customers and profitability.
These factors position digital challengers strongly, and incumbents need to respond by adopting a flexible and agile platform. But rather than just being defensive, banks in the region should see a cloud and open platform model as an enabler of transformation and growth. New digital banking capabilities can be scaled quickly on the cloud, whilst product development and testing can be more simple, faster and with reduced risk since banks can publish beta versions, use soft launches, or reverse these moves. This model also enables enhanced cost control by using an on-demand approach to scalability, as modern microservices architecture allow for automatic scaling during times of peak traffic using containerisation and orchestration.
The value of co-innovation is critical
The cloud also enables big banks to harness the wealth of structured and unstructured data they hold. The cloud makes data integration from multiple sources easier to handle, can scale to support increased datasets and exploit advances in machine learning to apply data science techniques, counter fraud, predict churn, and create hyper-personalised experiences for customers.
What is now critical is the value of co-development and co-innovation, as not all new market entrants need to be seen as competitors. The pace of change today means it is impossible to keep innovation in-house. Instead, incumbents are already starting to collaborate with fintechs and other third-party technology providers. This allows them to benefit from the expertise of companies which specialise in the innovative technologies that will help them compete, but which would be too expensive and take too long to develop internally. A cloud-enabled, platform-based approach is the launchpad from which banks and fintechs can collaborate and innovate more easily – creating new value and driving new market opportunities in an Open Banking world. Additionally, in a partnership ecosystem a cloud-based environment allows banks to safely test and explore partnerships – and to help regulators encourage innovation whilst ensuring consumer protection.
The current situation has brought into sharp focus the need for established banks to learn from the digital disruptors. Enhancing the customer journey, investing in understanding customer behaviour and innovating to offer a bespoke customer experience is key, as is the ability to bring new, competitive services to market quickly. The coming months are likely to create tough conditions for banks, but one advantage many incumbents have compared to challengers is the size of their balance sheets and ability to invest. Big banks should therefore use this time to accelerate their digital strategies, using cloud to drive their transformation.
Source: Fintect News