A Fintech Decade to Define Challenger Banks

A Fintech Decade to Define Challenger Banks

February 25, 2020

Finastra Senior Vice President & GM Wissam Khoury unpacks the top five Fintech trends driving the banking and finance industries in 2020 and beyond.

By Wissam Khoury

The fintech industry is set to have a transformative year in Asia. Just into the start of the year, Singapore-based digital bank TONIK announced that it secured a license from Bangko Sentral ng Pilipinas to operate in the Philippines. The announcement made TONIK the first licensed digital-only bank in Southeast Asia.

Elsewhere in the region, markets are gearing up to receive digital banks into the financial services industry. Singapore earlier announced that it has received 21 applications from companies including Grab, Razer and Ant Financial, for digital banking licenses – of which only five will be issued.

Regulators in the Philippines and Malaysia have also announced that they are reviewing plans for digital banking licenses.

As the wider fintech industry prepares itself for rapid shifts in regulation, new entrants and more, the following trends will drive the industry in the coming year and beyond:

Open Finance and collaboration will become mainstream

As we move into a new decade, the banking industry will see its incumbents and entrants facing a choice: either improve their value chain by innovating and restructuring their business models or become commodity players by knuckling down and concentrating on particular focus areas.

The line between technology and financial services has become increasingly blurred – according to McKinsey & Co, 30% of global revenues are anticipated to stem from ecosystems by 2025. Fintech partnerships will be key to remaining relevant and enhancing customer experience: such collaborations will guarantee both the industry experience and trustworthiness of traditional banks as well as the agility and innovation of fintechs.

These open collaboration models, driven by forensic attention to the customer experience, are creating relationships that transcend traditional financial services – in turn creating new sources of growth and revenue, and new relevance for banks.

The platform movement enables strategic choices; to act as aggregators of financial services by collaborating with fintechs, to become a ‘source of trust’ of fundamental services and data, or to actively build, innovate and monetize products, benefiting the ecosystem and forging new revenue streams.

Legacy banks must act fast in order to avoid Gartner’s continued warning of 80% obsolescence by 2030.

An inflection point for challenger banks – consolidation through collaboration

The race is on between incumbent and challenger banks. As highlighted by the World Retail Banking Report 2019, 50% of consumers anticipate using technology giants for financial services within the next three years, but it is no longer sustainable for challenger banks to continue losing money in pursuit of customer acquisition.

Incumbent banks are fast playing catch-up as they launch new digital services, while challenger banks will be looking to sell higher-margin loan or insurance products. Not all challenger banks will survive a downturn, however – I expect consolidation in the form of M&A over the coming year.

This year will mark an important chapter for digital challengers, as they face profitability challenges and the escalating threat of new technology players. Exacerbating this is the paradox of regulatory ‘mobilisation’ to stimulate competition, giving way to the mounting call for standardised regulation across the entire ecosystem, particularly the use of cloud and emerging technologies.

With half of consumers expecting their financial providers to offer products and services that address their needs beyond traditional financial services, greater collaboration with other fintechs could fortify this connection to the customer, propelling challengers from second place to the primary account provider

Data intelligence will drive competitive advantage

We now live in a world where data is often touted as the new currency, a new growth engine for economies around the world. Data intelligence will be a key competitive differentiator, both across other industries and in financial services.

For example, the recent acquisition of Fitbit by Google has given the tech-giant access to a huge source of anonymised health data. The rise of super apps in this part of the world – WeChat, Grab, Gojek – lies on the premise of the huge amount of consumer data and, subsequently, insight into every aspect of the consumer’s life.

Similarly, banks hold a wealth of customer financial data. The challenge is how best to use it effectively. While agile challenger banks and fintech companies are already experimenting here, traditional banks remain behind the curve.

According to the Boston Consulting Group, “for every USD 100 billion in assets that a bank has, it can achieve as much as USD 300 million in revenue growth by personalising its customer interactions”. Data intelligence will be a key focus as they aim to personalise their services and become more embedded in customers’ lives.

But even for digital-native organisations, artificial intelligence (AI) in data analytics continues to raise concerns. Calls for AI explainability continue to dominate discussions both within the industry and with regulators.

In the race for data-driven insight and predictive capabilities, all organisations using AI are facing increasing scrutiny over their practices, models and ethical usage. Organisations which can address these concerns in applying data intelligence will continue to retain trust with consumers.

Regtech in the spotlight

For a large financial institution operating in multiple countries across Asia, regulatory compliance is an overly complex and costly affair. Each market in Asia has its own regulations and unique requirements due to the varying stages of financial development in each country. Furthermore, many financial institutions are hamstrung by legacy systems.

In 2020, I expect to see a drive to deliver efficiencies in this area. Reports predict that the global regtech market will reach USD 55.3 billion by 2025 from USD 4.3 billion in 2018.

Challenger banks are already partnering with cloud-based technology providers to handle KYC, customer verification and other regulatory requirements. For example, ZA Bank, the first digital bank launched in Hong Kong in December 2019, claims that customers can open a bank account with it within 5 minutes and using only a Hong Kong identity card. This is done using a third-party KYC and customer identification, which is critical in keeping costs low.

Fintech industry groups across Asia are also boosting regtech development with fintech associations from Singapore, Hong Kong, and Japan jointly launching the APAC Regtech Network in 2019.

Incumbents need to transform and simplify the myriad of systems they have in place to perform tasks like customer verification, and to agree on common standards. Only then can they embrace regtech and benefit from the associated efficiency savings.

IoT boom will produce wealth of tech innovations

Lastly, the uptake of smartphones, voice-activated assistants, the Internet of Things (IoT) and edge computing will continue to grow, supported significantly by 5G technology that is being rolled out and commercially tested in 2020. APAC is forecasted to lead the world in this area, accounting for 65% of global 5G subscriptions by 2024.

“BigTechs” such as Amazon and Google are working to roll out voice-activated devices across households as possible, making them a potential interface for all kinds of things in the future, including conversational banking.

This may not yet happen in 2020, but the journey to get there is well underway. Phase one is about getting users familiar with the technology and its capabilities and for businesses to explore how they can leverage on the even smarter, faster, more connected devices to delight their customers.

(Ed. Wissam Khoury is responsible for Finastra’s regional growth strategy in APAC and the Middle East.  Khoury has over 20 years of experience in banking and finance. Finastra is a member of the World Economic Forum. Image of Khoury provided courtesy of Finastra.)


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