Banks of the Asian region enjoy a particular advantage when it comes to digital payments. As a result of customers’ familiarity with app-based services, uptake is likely to remain strong in the coming years.

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

Sanjeev Jain, Citi’s Asia Pacific payments and receivables head, treasury and trade solutions, says: “The digital payments revolution continues to lead the way in Asia Pacific. The pace of transformation is quickening on the back of advances in technology, progressive regulation, a range of competitive participants including traditional providers and new fintech entrants, evolving consumer needs, and the accelerated digitisation on the back of the pandemic.”

What’s more, real-time payments - both domestic and cross-border - are increasingly becoming a reality. Transactions that are frictionless, global, and ubiquitous in nature will define digital banking in Asia, with capabilities being agnostic to payment methods or forms of storage across cards, digital wallets, bank accounts, and open banking. “We at Citi are already working to connect clients to wallets, and enable our corporate clients to accept consumer payments,” says Jain.

Given these rapid upgrades in the region’s digital payments, Asia is likely to remain at the vanguard of electronic, mobile, and social commerce. This phenomena will be catalysed by the continued penetration of the internet in Asia, thanks to the roll out of 5G across South Korea, Taiwan, Japan, China, and Thailand. Countries such as India, Indonesia, Vietnam, the Philippines, Malaysia, Sri Lanka and Pakistan, meanwhile, will implement their own policies in the near-future.

Broadening the reach of internet access are smartphones - the penetration of which, especially in China, holds a lot of potential. And, thanks to social media apps, consumers are connected to online retailers more readily than ever before. These factors, combined with increasingly efficient last-mile delivery infrastructures - such as drones in more rural areas - will have a big role to play in boosting the prevalence of Asia’s e-commerce, m-commerce and s-commerce spheres. According to Statista, 2.15 billion people used e-commerce in Asia in 2020. By 2025, e-commerce user count in the region will increase to 3.13 billion people.

“Digital payments are at the heart of e-commerce, which has hit almost 50% of card purchases from where it used to be 3 years ago,” says Bhatia. “Customers can now do one-click checkouts with Apple Pay. Peer-to-peer and merchant payments have also soared, with rapid adoption of these services across Unified Payments Interface (UPI) in India, and Faster Payment System (FPS) in Hong Kong.”

Evidently, technological innovation holds the key to the continued success of e-commerce in Asia. Better mobile internet access and widespread smartphone ownership - along with the roll out of cloud native-enabled technology architecture - will also turbocharge Asia’s uptake of Quick Response (QR) codes. These machine-readable matrix barcodes make transactions seamless by transferring information instantly between mobile phones and other devices.

Helped along by the pandemic-induced hyper-awareness of health and safety, as well as the proliferation of 5G, QR code usage is likely to take off in a big way in Asia in the near-future – particularly in countries with comparatively low adoption rates, such as India, Vietnam, Thailand, Singapore, South Korea, and the Philippines.

This trend will oversee the Asian market’s transition to a cashless, contactless world - already being witnessed in traditionally cash-based economies, such as Japan. Indeed, as everyday payments become increasingly seamless, mobile transactions will soar.

But QR codes offer a near-endless number of applications beyond pure payments. They may, for instance, enable customers to interface easier and safer with automated teller machine (ATM)s and shared kiosks, by triggering their mobile banking apps. Once the user enters a pin code on their smartphone, they could remotely control an ATM and receive all the services that would be expected from a physical bank branch.

However, the real clincher of the QR code’s success in Asia will be the quality of the user experience and user interface design. The process must be seamless and feel low-tech in order for widespread usage to reign supreme. The ubiquity of smartphones also means that digital banks will be able to onboard customers faster and cheaper than ever before. David Sun, CEO of livi bank says: “Digital banking is playing an increasingly important role in Hong Kong, accelerated by Covid-19, with consumers growing ever more familiar with transacting online.”

Already, 97% of Asia–Pacific consumers either consider the digital channel the best of several ways to interact with their bank, or use it as one of several channels in a multichannel or omnichannel offering. This percentage will only increase in the coming years.

However, in the future, there is even more land for digital banks to grab. Financial institutions in Asia should do more to convert customer interest in digital products into digital sales. A September 2021 McKinsey survey, for example, revealed that while 70% of respondents expressed an openness to using digital channels for services beyond transactions, only 20-30% of respondents report they have purchased a banking product – for example, a savings account, loan, or credit card – via a mobile app or online.

The future of digital banking in Asia, therefore, will see banks extending more tailored products to a broader range of customers, with the help of smartphones. This will support financial inclusion prospects on the continent - a prominent enabler of the United Nations’ Sustainable Development Goals.

So, not only will the future provide more business opportunities to seize when it comes to existing customers, but brand new customers will be more easily reached. Indeed, it is easier than ever before for banks to bridge the financial inclusion gap, thanks to the continued roll out of technology.

According to the World Bank, the market size for unbanked and underbanked individuals and enterprises is estimated to be between $55 billion and $115 billion in the Asia Pacific region. With these figures in mind, digital banks in Asia will compete to dominate the underserved portion of the market - developing increasingly bespoke and sophisticated financial services and products to win over consumers. Regulators, in turn, will move to support this trend through the supply of new licenses that foster competition, accelerate innovation, and broaden financial inclusion.

Financial inclusion, however, does not stop at the individual. If the pandemic taught us anything, it is that businesses – particularly small and medium-sized enterprises (SMEs) – need support with their liquidity and working capital management; especially during economic downturns.

According to McKinsey, China’s digital banks already have more than a 7% share of the country’s online SME loans. This percentage will steadily rise in the coming years as banks recognise the potential of this market, and seek to deliver better, tailored products to small businesses.

Informed by transactional and sentiment data, artificial intelligence (AI) engines will be leveraged by digital banks to generate alternate credit underwriting models. Sales channels operated by consortium partners will provide instant financing at the point of sale, via APIs. These innovations will enhance financing success rates for many enterprises.

Malaysia-based MyBank’s new financing solution for SMEs, for example, helps small businesses in the region to secure financing online, in under ten minutes. Over the next three years, the bank will disburse over RM35 billion through the platform.

One of these many ‘possibilities’ includes the Buy Now Pay Later (BNPL) scheme. Already thriving in southeast Asia, uptake is likely to continue at pace across the continent in the short term. Coherent Market Insights predicts it will hit $33.6 billion by 2027 – having been just above $7 billion in 2019.

A recent example of the BNPL scheme is livi bank’s ‘PayLater’ initiative. “livi PayLater is a great example of a smart digital tool leveraging our technology,” says Sun. “As the first bank in Hong Kong to offer this new payment concept, we are meeting a proven need of our millennial customers to manage their finance in a simple, flexible and controlled manner, while benefiting from personalised features.”

Payments are just the first step for digital banks. As with livi, the range of digital products and services available to make customers’ lives easier will only grow. These fundamental and unprecedented transformations are changing Asia’s digital payments landscape forever.

Looking ahead, Bhatia notes that while certain digital payments in most domestic and certain cross border corridors are now instant in Asia, there is still a lot of room for improvement. Indeed, digital payments are more important now than ever before “as the world recovers from Covid. Fast and convenient cross border payments will be key to reviving business.”

“With new technologies like 5G coming to the fore, there is potential for many more possibilities in the area of financing and payments for corporates,” comments Jain.