Mon, 25 Oct 2021

By Lee Kah WhyeSingapore, September 27 (ANI): Consumer use of digital banking has risen sharply recently and the driving force behind this is the soaring adoption rate in emerging markets, including India, due to product and service innovations.

A McKinsey and Co. research report published last week titled "Emerging markets leap forward in digital banking innovation and adoption" revealed that the adoption of digital banking among consumers in Asia-Pacific's emerging markets has caught up with that in developed markets. Whereas active use of digital banking services in the developed regions has remained stable at 90 per cent, users of these services in emerging markets has grown from 55 per cent in 2017 to 88 per cent in 2021.

McKinsey believes that the shift to digital banking happened quickly and was likely accelerated by existing digital trends aided by technology and the increasing use of digital channels for transactions including financial services. This has also intensified since the pandemic. It added, "the broader adoption of digital banking during the COVID-19 pandemic has brought the industry to a new level of maturity, opening new opportunities and challenges for banks and nonbanks alike."This trend is not expected to abate.

The 2021 report was based on McKinsey's Personal Financial Services (PFS) survey, last conducted in 2017, and involved approximately 20,000 urban banked respondents in 15 Asia-Pacific markets. The eight emerging markets covered were mainland China, India, Indonesia, Malaysia, the Philippines, Sri Lanka, Thailand, and Vietnam and seven developed markets were Australia, Hong Kong, Japan, New Zealand, Singapore, South Korea, and Taiwan.

Another startling revelation is fintech apps and e-wallet penetration is higher in emerging markets than development markets - 54 per cent compared with 43 per cent. McKinsey suggested that this is due to the enthusiastic use of solutions developed by fintech innovators in emerging markets that offer compelling value propositions.

This should not have been surprising since fintech firms are uniquely positioned to take advantage of an underbanked class of people who have been underserved by financial institutions.

While traditional banks in the past geared their services towards the middle class and wealthy, fintech companies with their smaller physical footprint and lower costs are able to reach out to the masses including the less affluent. The wealthy tend to look to banks to provide investment and insurance services, while the less well-heeled tend to use digital financial services to make payments safely and for convenience.

The survey discovered that although touchpoints made through digital channels increased from 41 per cent in 2017 to 72 per cent in 2021, banks are not doing enough to convert customer interest in digital products into digital sales. Despite 70 per cent of consumers in the survey indicating their willingness to buy banking products through digital channels, only 20 to 30 per cent report that they have purchased a banking product--for example, a savings account, loan, or credit card--via a mobile app or online.

This discrepancy between interest and actual behaviour is likely the result of many banks having a limited digital offering and not engaging effectively with digital users to deepen relationships.

This is where the new fintech and digital-first players are filling the demand gap for such services.

While in India, digital banks and neobanks have been around for some time, Singapore only awarded digital banking licenses last year. The Grab-Singtel consortium and digital powerhouse Sea Limited were awarded full digital banking licenses and wholesale banking licenses went to Jack Ma's Ant Group and a consortium formed by Greenland Financial Holdings, Linklogis Hong Kong, and Beijing Co-operative Equity Investment Fund Management. They are expected to start operations next year.

McKinsey says that despite being challenged by new fintech disrupters, top-tier financial institutions have largely held their positions in their primary markets. In approximately 80 per cent of the markets examined, the top five banks for 2017 have remained in the top five in 2021. They held their positions by creating new customer interfaces, streamlining customer journeys, and modernising middle and back offices. Some are launching new digital propositions and business models.

Singapore's DBS Bank was cited as an example of a bank that embraced digital processes that enhanced customers' experiences, shifting from a branch-centric strategy to a model anchored in digital ecosystems. DBS was also one of the first banks globally to measure digital value creation by behavioural segment.

Another example was SBI Yono launched by the State Bank of India in 2017. By focusing on the digitally savvy segment of SBI's 448 million customers, Yono grew rapidly to become the world's largest digital bank, with 24 million accounts. SBI has also leveraged the digital capabilities of Yono as a digital attacker in other markets such as the United Kingdom.

Consumers in the McKinsey survey indicated an interest in using digital channels beyond transactions and this offers banks the opportunity to leverage existing assets to strengthen and diversify their digital offering. The consulting firm proposed that traditional banks can focus on three key areas to get ahead of their customers' expectations - the value of branches, customer engagement, and the bank's overall competitive positioning.

With the emergence of a new generation of tech-enabled competitors in the financial services market that is leaner and nimbler, no aspect of the banking business is insulated from radical changes brought about by advances in technology which include analytical prediction engines, machine learning and artificial intelligence.

McKinsey concluded that, "To deliver on this report's calls to action, banks need to make fundamental changes in how they operate. They also need to build the capabilities required for an AI-powered digital-first business model, including a new sales and service model, modern operations and technology, and an agile operating model. Any bank that intends to remain relevant and thrive must become an innovation leader." (ANI)

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