According to the EY Future Consumer Index, consumers in Southeast Asia have turned to digital channels to meet their financial needs following restrictions on mobility and physical contact. To the credit of traditional financial institutions, these have responded by leveraging new technologies to broaden customer engagement across customers’ preferred channels.
Similarly, insurers have ramped up their digital efforts, shifting to online and migrating to the cloud. Fund houses and distributors have tapped into Fintech to improve the customer experience, beef up direct-to-consumer capabilities and gain access to the broad range of data needed to decode today’s fast-moving and interconnected markets.
In reflecting on how the financial services industry in Asia, and around the world, has evolved since the start of the pandemic, Junta Nakai, global industry leader of financial services and sustainability at Databricks, noted that trends get accelerated significantly in times of great change.
“It (COVID-19) forced institutions, insurance companies, asset managers, to start thinking about agility, resilience, innovation, in ways that they hadn't been thinking about before, in a greatly accelerated need to become much more data-driven, rather than data supported,” he elaborated.
The call for personalisation
Nakai believes that personalization, and how it relates to money, is going to be instant, inclusive and invisible.
He opined those consumers expect the same level of instant gratification from their financial services institution that they get from other parts of the economy, like retail or media.
Inclusive simply means a greater proportion of the population, in any market developed or underdeveloped, will have access to financial services.
Invisible means that financial services and the institutions that provide these are running the risk of becoming like utilities with low brand awareness.
He argues that the financial app owns the eyeballs and mindshare (of customers) and that it is the window into the organisation. Institutions are left competing on price.
He opined that the trends of instant, inclusive and invisible are fuelled by data.
“If you want to provide instant services, you need far more understanding of your customer. You will need things like machine learning you are able to provide the right level of service while preventing fraud and managing risk,” he continued.
Outsourced financial services business model
Asked whether it is possible to operate a mostly outsourced financial services business model, Nakai pushes back saying it depends on the regulatory environment of the country.
He goes on to add that in emerging markets, it is possible to create banking services without the onerous regulatory frameworks that many developed countries operate. It is this environment, he opined, that has led to the creation of financial super apps in regions like ASEAN and China.
He acknowledged that as a business model, he doesn’t see any reason why entirely outsourced operations couldn’t succeed.
“If you think about it, what is the most important metric that a bank CEO cares about? I would argue it is Return on Equity (ROE),” he added.
ROE drives the share price of most financial services. The higher the ROE, the higher the price to book, the higher the share price is going to be. The ROE can be distilled into three components: leverage, profitability (net margins), and productivity,
He believed that the says of highly leveraged business models will be difficult to achieve these days – at least for financial institutions. Which leaves only profitability and productivity.
He concludes that an outsourced model offers an opportunity to have fewer assets, meaning a leaner cost structure, which would equate to higher net margins. From this perspective, it is extremely feasible to operate an institution that outsources as much as possible.
He went on to cite examples like PayPal and Square (in the US) which have better market capitalization than their traditional peers like Goldman Sachs and HSBC. These digital-native, digital-only, cloud-based business models have shown it is possible to be successful where regulation allows.
“These (digital-only companies) targeted the most profitable or less regulated areas of a bank. For incumbents, they are put in a difficult position with the only way to compete is on innovation and thinking differently,” he opined.
The incumbent trump card: experience
Nakai acknowledged that incumbents have one big advantage over startups and digital-only businesses: “Having been there and done it and have the benefit of historical data.”
That said, he contends that many of these incumbents use only a fraction of this data at their disposal. This is where legacy hinders the ability to innovate. He compares spending on research and development by the top 100 companies.
“Not a single (incumbent) financial services are on that list! As a sector, financial services rank about 11th in total R&D spent. This is, despite being the second-largest sector by market cap or maybe being 16% of global market cap in the world,” he laments.
He conceded that banks spend lots of money on technology. But most of this is going to keep the lights on, maintain that complexity, maintain costs. Less money is spent on more products, innovative new services,” he concluded.
It is this approach to operating a bank that has limited the ability of incumbent banks from taking full advantage of what their data and technology can deliver.
Click on the PodChat player to listen to Nakai share his opinion on the direct digital transformation is helping guide the financial services industry.
- What is the difference, if any, between what digital transformation in the financial services industry looked like before and during COVID-19?
- There is a greater use of big words like “hyper-personalised experiences”, banking-as-a-service, and now wealth-as-a-service, what do these trends really mean from the perspective of (a) the customer; (b) the regulator; and (c) the financial institutions themselves?
- There is a lot of musings around data-driven financial services. What does a data-driven financial service look like, and how do you make this operational at a financial institution?
- Is this concept of an entirely outsourced model of banking operations sustainable?
- How will it stack up against the incumbent that is able to direct its resources to a narrow focus?
- When talent is a scare resource, and employees look for stability. How can these digital-native, outsource everything business-models compete for talent?
- For incumbents, how do they attract and retain talent that is receptive to the use of data to drive business growth?
- We’ve started to see tech companies and non-financial services enter the market starting with payments and loans. How can financial services compete and thrive in such a marketplace?
- When technology has such a strong influence in how financial services is delivered, will it dehumanise the banking experience?