From Singapore to Mumbai, the digital banking landscape across Asia is as diverse technologically, as it is culturally. The one consistent factor, however, is the region’s increasingly recognised reputation as a leader of banking innovation.

This is an extract from Finextra's The Future of Digital Banking in Asia 2022 report.

McKinsey’s recent Personal Financial Services (PFS) Survey shows that adoption of digital banking in emerging markets has caught up with that in developed markets. Additionally, almost nine in 10 consumers across the emerging and developed markets of the APAC region actively use digital banking, and most are open to purchasing more services through digital channels.

The Covid-19 pandemic has served to reinforce the strength of digital banking across the region and provided the necessary impetus for the sector to mature. This has been assisted by a new wave of regulatory involvement in the space, building trust and credibility which both consumers and banking technology providers are leveraging with success.

Jayant Bhatia, chief product officer, Mox Bank, explains that the banking industry in Asia is in the “midst of an evolutionary change.” Bhatia cites demanding consumers and the pressure to provide easy access to daily banking, payments, lending or investments, as key factors in this evolution. Further, because of Covid-19, “digital demands have accelerated with how customers shop, work and bank. The key differentiation would be personalisation rendered digitally and with a simplified customer experience.”

While the region has developed a broad range of regulatory approaches to digital banking, the introduction of digital banking across Asia can be seen as being driven largely by two key forces: the regulation-led approach exemplified with great success in Singapore, and the market-led regimes seen in Indonesia and Malaysia.

The issuance of digital banking-licences by governments including Malaysia and Singapore - among others has paved the way for non-bank challengers to step into the market, introducing a new layer of competition for financial incumbents.

While technological advancements mean that digital banks are able to expand at break-neck pace across Asia, concerns around their ability to manage risks while maintaining profitability have been circulating, and supervisors appear unbending in their expectation of firms meeting regulatory requirements.

Despite this apparent hard-line approach, Deloitte argues that regulators ultimately wish to support new entrants as these players will serve to enhance competition to the benefit of consumers. This mirrors the UK’s Competition and Markets Authority’s (CMA) desire to open the door to open banking and inject competition into financial services.

Australia’s approach to open banking is arguably the APAC region’s most similar to that taken in the UK, mandating the sharing of consumer data by financial institutions, compared to Singapore and Hong Kong’s focus on the creation of ‘open API playbooks’ for instance.

This injection of competition must be balanced however, and regulators are focused on ensuring that any competition or evolution must not emerge at the expense of financial instability.

McKinsey states that by the second quarter of 2021, over 500,000 customers had signed on to the eight virtual banks of Hong Kong, with momentum building and the impact of digital banking services likely to further shape the overall dynamic of the financial services sector.

Through the example of Mox, Bhatia explains that the bank is able to provide “Hong Kong residents with the ability to open a banking relationship along with a credit card in less than 5 minutes.”

“Future of banking is all about redefining and simplifying client experiences. We see that as customers see the value, they are more active with you and increase their share of wallet accordingly. As regulators open up licenses to virtual banks across geographies, these banks will be faster to roll out services with differentiated experiences as they are not burdened by legacy technology. Digital Banks can also generate high revenues at low costs and have the advantage to scale up if backed with a captive customer base.”

BCG explains that APAC is home to around 50 digital banks, most of these being “consortium players backed by technology giants and nonfinancial institutions such as tech and telecom companies.” Additionally, 13 of the 249 digital banks worldwide are profitable, and a whopping 10 of these are based in APAC.

Echoing the statistics, Bhatia adds that active digital banking users have grown rapidly across Asia and the banks that will succeed “are those with better user experience, better use of partnerships and ecosystem players, ability to leverage data to customise offerings and adopt emerging technologies to drive safer, faster experiences.”

The region’s high internet penetration plays a significant role as a foundational factor allowing digital banking services to reach their market with ease and more efficiently than ever before.

Bhatia notes that in the near future, digital banking will need to embrace emerging technologies across open banking to review and make financial decisions in one app. “One can leverage digital KYC towards faster onboarding, harnessing data with a cloud first approach across touchpoints to customise offerings. Simplifying investments through robo-advisory services is an area which is expected to see massive growth. Adopting emerging payment technologies making payments invisible and a seamless part of the shopping experience would be a key play.”