In Asia, big tech and new digital banking challengers are rapidly gaining traction, forcing incumbent banks to rethink their business strategy and become part of the super-app ecosystem, according to a new report by Finextra, in association with Infosys Finacle and OneSpan.
The document, titled The Future of Digital Banking in Asia 2022, explore The booming digital banking ecosystem in Asia and highlights emerging trends.
Asia has emerged as the leader in banking innovation over the past two years, a trend spurred by the region’s large unbanked population, demand for inclusive and accessible banking services, and growing internet penetration.
In Asia-Pacific (APAC), digital banking has reached a new level of maturity with 88% of consumers now actively using digital banking, an increase of 25% from 65% in 2017, according to the 2021 survey of McKinsey on Personal Financial Services (PFS). Non-traditional financial services, like fintech apps and e-wallets, are also seeing growing adoption, with penetration rising from 40% in 2017 to 51% in 2021.
These market changes have been driven for the most part by governments, which have introduced a number of amendments and regulations in recent years to promote competition and drive innovation in banking.
hong kong welcomed eight digital banks, Singapore obtained four digital banking licenses at the end of 2020, the Philippines emitted six digital banking licenses, and Malaysia unveiled in April the five highly anticipated winners of its digital banking licenses. Thailand has also started working on guidelines for virtual banks.
Indonesia, on the other hand, lacks a dedicated digital banking framework, having instead introduced new rules to facilitate the introduction of digital banks through acquisitions.
The Boston Consulting Group (BCG) estimates that APAC was home to around 50 digital banks as of mid-2021, including some of the most successful in the world.
The rise of super apps
In addition to the entry of new market players facilitated by enabling regulations, the region has also witnessed the emergence of so-called super apps, a breed of tech giants that act as gateways to consumers, offering everything from carpooling, logistics and food delivery, to digital payments and loans.
Superapps are disrupting traditional methods of engaging underserved market niches and retaining current customers with mobile apps that offer functionality beyond traditional financial services, wrote Samuel Bakken, director of product marketing at OneSpan, in a commentary on the report.
WeChat supported by Tencent, for example, is one of the most advanced and sophisticated super-applications in APAC, bringing together online messaging, social media, marketplaces and services. Through its integrated digital bank WeBank, the group serves more than 200 million retail banking customers and 1.2 million small and medium businesses, making it the largest digital bank in APAC, according to a 2021 report by Swiss digital banking technology provider Banking, Payments: Context (BPC) and Dutch fintech consultancy Fincog.
In South Korea, Kakao adopted a similar strategy to Tencent, starting out as a messaging app before adding an e-wallet to the platform and eventually becoming a full-fledged digital bank. Leverage network effects and KakaoTalk’s huge customer base 53.3 million monthly active users worldwideKakaoBank was able to achieve profitability after less than two years of operation.
KakaoBank started listing in August 2021, becoming the first Asian neobank to go public. With 34 million customers, KakaoBank is the fourth largest neobank in APAC, according to the report.
The road ahead for incumbents
Superapps are putting increasing pressure on incumbents due to their scale, resources and capabilities, Bakken wrote. When considering developing a super-app, FIs must first consider the value and services they want to deliver to their audience in the digital journey, and second, they must ensure the security of that service.
Incumbents should leverage application programming interfaces (APIs) to enable faster payments, simplify service unbundling and improve data sharing for open banking, the report says. They should also make more use of cloud computing to improve customer experience and financial accounting in areas such as payments and credit scoring.
However, when developing financial super apps, banks should keep in mind that an expanded digital ecosystem also means a wider attack surface for criminals and more potential vulnerabilities they can take advantage of, warned Bakken.
Therefore, it is extremely critical for banks to ensure the security of their digital services and to partner with experienced security partners to implement effective protections that will not hinder the user experience.
As mobile banking services grow in popularity and mobile apps run in a potentially hostile environment, client-side mobile app protection with mobile app shielding is also imperative.
Cyber attacks and breaches surge in Asia. In 2021, the continent became the most attacked region in the world, receiving 26% of attacks detected by IBM’s security offering, X-Force. Financial and insurance organizations were the most frequently attacked in the region, accounting for 30% of incidents remedied by X-Force.