Digital challenger banks offer promise of inclusion

THE promise of new digital challenger banks is to enable greater financial inclusion in South-east Asia and disrupt the current banking sector.

This is dependent on them achieving scale and building sustainable, profitable businesses.

The number of digital challenger banks worldwide has grown significantly over the last decade, to a cumulative total of over 200, attracting about US$15 billion in funding. This growth has been particularly strong since 2015, with almost a three-fold increase in the number of firms encouraged in part by supportive regulatory policies.

Upcoming digital challenger banks in Singapore have a tremendous opportunity across the broader South-east Asia region, which is set for strong economic and demographic growth in the coming decade.

By 2030, the Asean-5's GDP is projected to reach US$4.3 trillion, making it the world's sixth-largest economic bloc.

In terms of population, the Asean-5 will be home to 540 million people, putting it as a collective market behind only China, India and the European Union.

As for access to financial services, South-east Asia has seen some of the steepest improvements in bank account penetration and usage.

This is supported by advancements in internet infrastructure, high-levels of digital literacy and smartphone adoption.

Nonetheless, there remains a significant underbanked and unbanked population, especially in developing markets. For example, more than 50 per cent of Indonesians currently do not have a bank account, in a population of 270 million people.

Likewise, approximately 68 per cent of adults in Vietnam and 65 per cent in the Philippines are unbanked. South-east Asia thus offers a compelling market for new banking entrants.

We identify three imperatives for digital challenger banks to succeed.

Be customer obsessed

Digital challenger banks need to place the customer at the centre when designing their products, services and features. Across South-east Asia, this could mean being laser-focused on addressing unmet needs by providing basic financial products to the unbanked, based on low or zero-fees, or lending to small and medium-sized enterprises (SMEs) and micro, small and medium enterprises (MSMEs).

By identifying the right customer priorities, digital challenger banks can develop services that set them apart from traditional banks, which act as a "hook" to capture mindshare.

Customers must be able to sign up for an account from anywhere in a matter of minutes, making the onboarding process fast and frictionless. To enable customers to effortlessly carry out their banking needs, an engaging UX/UI that is simple, transparent and visually appealing is a pre-requisite.

Value-added services such as personal financial management should be integrated with insights gained from spending behaviour. Products offered should be personalised and provided in a relevant context.

Beyond banking, lifestyle products could also be integrated into the digital challenger bank's app to promote interaction and engagement.

Leverage modern technology stack

A significant part of a traditional bank's cost base is in maintaining a network of physical sites such as branches, ATMs and on-premises hosting.

Prevalent manual processes drive high operational costs and archaic technology systems inhibit the ability to introduce change rapidly.

On the other hand, digital challenger banks have the advantage of "assembling from scratch" a modern banking technology stack, unencumbered by legacy or physical infrastructure.

Whether a digital challenger bank chooses to build or buy, it should adhere to several key principles: Cloud-native, API-based, modular architecture with a strong emphasis on automation and facilitating data analytics.

Seek ecosystem advantage

Many of the aspiring digital challenger banks in South-east Asia are part of a broader consortium formed by established firms from non-financial services industries. They seek to tap on their existing customer base, embed financial services seamlessly into their current value proposition, and leverage data to support their banking ambitions.

Digital challenger banks with a track record in operating online platform businesses such as e-commerce, social media or ride-sharing have built up a large customer base of digitally engaged users, allowing them to reach and acquire customers for the new bank at a significantly lower cost.

These consortiums possess wide ecosystems that cover a range of economic activity across multiple aspects of a consumer's everyday life and/or SME's business needs.

This provides many ready-made scenarios for embedding financial services, enabling the digital challenger bank to seamlessly serve the financial needs of customers directly at the point-of-need.

Finally, ecosystems have access to huge amounts of users' activity data beyond spending behaviour. Digital challenger banks can use this to develop a deep understanding of their customers, build hyper-personalised products, provide contextually relevant offers and improve risk pricing.

For "thin-file" customers, where credit history is scarce, alternative data collected from the ecosystem may be used, thereby granting financial access to the millions of underbanked and unbanked in South-east Asia.