Interviewed By TAB RadioFinance
What will digital banks need to succeed in the post COVID-19 landscape? We have invited industry experts to address this question and more in this session.
Our RadioFinance session with TONIK’s Greg Krasnov, AmBank’s Sugumar Munisamy and SAP’s Hadi Wijaya has been an insightful one. Krasnov discussed the challenges that new digital banks face and what they will need to do to thrive in a post-COVID-19 environment. Munisamy talked about how his bank is leveraging digital technology and new business models to transform itself and challenge the status quo. Wijaya, meanwhile, identified pitfalls and challenges that banks face in their digital transformation journey and suggested ways to navigate around them.
The discussion also revolved around these main points:
Here is the full transcript of the session:
Grace Chng (GC): Good afternoon, welcome to RadioFinance. We are coming to you live from Singapore. This is Grace Chng, your host. Our topic for today is “Who will be the winners in Southeast Asia's quest for digital banking licenses? And how COVID-19 will change the equation”. In this session, we want to explore what it takes to win in this new digital and post COVID-19 landscape. What are the different propositions being offered by the competition? How to overcome challenges of the traditional industry boundaries and create seamless customer experience to stay competitive?
I'm pleased to introduce my co-host, the managing editor of The Asian Banker, Foo Boon Ping.
Foo Boon Ping (BP): Thank you, Grace. We are pleased to have guests who will give a diverse range of perspectives today, from a new digital bank, an incumbent bank that is looking to apply for a digital banking licence and an information technology expert.
First of all, Greg Krasnov is thefounder and CEO of TONIK, which is reputedly the first digital-only bank in Southeast Asia. In the past year, it was licensed by the Bangko Sentral ng Pilipinas to operate a digital-only bank in the Philippines.
The Philippines has a population of about 100 million people spread over 7000 islands, 70% of which are unbanked. Tonik is looking to serve the estimated $140 billion retail deposit and $100 billion retail lending market there. Having built and sold a successful digital bank in Eastern Europe, Greg has deep insight on what it takes to win as a digital bank.
Next, we haveSugumar Munisamy, who is the senior IT business architect at AmBank and manages the digital delivery for the bank.
With total assets of over $31 billion, Ambank ranks sixth among the domestic banks in Malaysia. It intends to bid for one of the new digital banking licences that Bank Negara will be issuing sometime either this or next year. Ambank is one of the small nimble banks that is leveraging digital technology and new business models to transform itself and challenge the status quo.
Finally,Hadi Wijaya advises financial services companies on their digital transformation journey. He is responsible for SAP’s go-to-market strategies, value proposition development, customer co-innovation and digital thought leadership in Southeast Asia.
At the heart of many banks’ digital transformation is technology transformation, perhaps one of the biggest challenges in the process. It is fraught with pitfalls that Hadi – who has worked with SAP’s clients globally – is familiar with and will help us identify and provide insights on how to navigate them.
GC: Thank you, Boon Ping. We have seen a wave of digital banking licensing framework (introduced) across Asia by central banks and financial services regulators. Australia, Hong Kong, Korea and Taiwan were the early movers. Singapore and Malaysia jumped in and they are rolling out or about to roll out. Coming up are Thailand and the Philippines.
There's a clear direction to embrace digital and now the regulators are also coming on board. Then there is the question of payments. And we have real-time retail payments, P2P payments and payment innovations, such as QR collection for corporates. Amongst all of this, we have the current COVID-19 environment where social distancing is the norm.
With digital banking in the mind, what is the adoption of digital financial services and migration going to look like, amid this pandemic? Is it going to accelerate, albeit inadvertently? Or how is it going to move?
Hadi, what are the trends you see and how will they impact the industry?
Hadi Wijaya (HW): We are perhaps in the most disruptive time in banking history. The industry is at the nexus of several major forces, where fintech, for the last 10 to 12 years, has been shaping the landscape where customers are now more willing to engage with banks that provide a unique experience.
Now with COVID-19, we are entering what we call the contactless economy, where physical contact is becoming unwelcome and human touch, in the literal sense, is getting unpopular here. So, COVID-19 is inducing more actions to accelerate digital transformation. During the global financial crisis in 2008, banks were widely seen as the troublemakers, the culprit. In this crisis, banks can be the central part of the solution, the stablising force in our societies. In this background, I see a few trends emerging.
Number one is experiential banking. As banking is shifting the (operating) model from physical to virtual, customer experience is becoming the new ground. Key differentiators for banks and customer experiences are becoming more important than the products.
Number two is about the digital ecosystem. To create that customer experience, a bank may need to open its offering to recognise that customers not only as banking customers, but also as a human being. Banks need to embed banking into customers’ daily lives around their needs. Some of SAP’s innovative bank customers already go beyond the traditional products into the ecosystem that caters to customer daily needs to make them more relevant every day.
Finally, this is a great region in the world for a digital bank. This is a region that is home to 650 million people, where half of them is under 30 and half of them do not yet have a bank account. From a B2B perspective, around two-thirds of the micro companies and small and medium enterprises (SMEs) do not yet have good access to loans and credit. Combined with high mobility, high mobile connectivity, and internet penetration, this region makes a promising place for digital banking.
GC: Greg, would you like to briefly pick on one of these trends and give us your thoughts on how it will shape the future of this industry?
Greg Krasnov (GK): There is a major shift to digital that will be happening as a result of this virus development. We're already seeing a major shift in the payment trends and retail service strands.
For example, in the Philippines, certain banks have been reporting that their payment services have tripled to quadrupled since lockdowns began. This is going to be a secular trend. As people get more used to the services on their smartphones, it will then, in the future, drive them to just continue using the services much more conveniently. We're about to see a major power shift where penetration of digital services on a steep vertical line is going to do that over the next few years.
Another thing is the delivery channels – or retail bank services, in particular – are going to get increasingly integrated with other digital platforms for delivering other services. This has been a major trend in China already, but hasn't really gotten that big in other parts of Asia or the world yet.
In China, for example, digital lenders are integrating their loan offering with anything that can be sourced through digital retail. You can pay with a loan that's approved, on a spot at McDonald's, for a burger.
I think these types of trends, where the digital services were really put at the fingertips of the people through digital technology integrated with the retail experience, that's going to be another very powerful trend that we all should be preparing for.
Banks that are now gearing up today to provide the type of integration and those who are not operating with a very robust API platform are going to have real trouble adapting to that.
GC: That's an interesting observation integrating with retail. Sugu, as the incumbent bank, how does COVID-19 impact you? What is your key priority today?
Sugumar Munisamy (SM): Banks are now concentrating more on how to enable a lot of things that we do physically more online, from onboarding to investment, how we can enable people or enable the customer to go online. It's a big transformation. Bank Negara, central banks should come up with a lot of initiatives to enable this like e-KYC, digital onboarding, or digital ID to support this trend or this transformation.
GC: Greg, when we went through the global financial crisis and the quantitative easing that happened after that, that partially gave birth to fintechs. With post COVID, what do you think will happen to fintechs? Will the reverse happen, will funding dry up for fintechs? Or will the acceleration in digital adoption drive more investor interest in digital players?
GK: Definitely more of the latter than the former. We talk to venture capitalists (VCs) quite a lot. We're actually in the process of closing a larger round after having closed a $6 million round in the first quarter this year. We’re continuing to see very strong interest from financial investors in financial services that are delivered digitally. The trend that people have expected before that the traditional branch-based banks will come by the way of the dinosaur, they’re just going to be accelerated by COVID.
GC: Hadi, what do you think? In the context of COVID-19, how do you see your banking clients responding to the crisis?
HW: We have around 16,000 customers in the financial services alone. They are in the commercial banks, insurance, capital markets, investment management, even central banks and payments among others. In terms of size and scale, they vary from banks that run global operations like JP Morgan, HSBC, Citi and PayPal, to regional and local banks and to fintech startups and neobanks. We have plenty of stories here to share.
One is what we call the “world's first behavioural bank,” Discovery Bank in South Africa. The bank rewards customer with dynamic interest rates based on individual financial behaviour. The bank runs an ecosystem of loyalty programme in the form of dynamic promotion and services to deepen the customer relationship. You don't even need to leave your house to be a customer. Just download the app and get onboarded instantly with your mobile phone at home.
Separately, currently, we are helping one of the largest banks in Southeast Asia to move into agile financial platforms. Also, several central banks in the region are engaging us for the digital human capital solutions in the future of works projects.
Now moving to your question in how they respond to COVID-19, many of our clients are moving quickly to put the wellbeing of customers and employees first. For instance, Ping An bank in China launched no contact banking in February. Using their ecosystem, they launched a “do it at home” service for customers to be able to do a basic banking and insurance from the mobile app.
Banks like Discovery Bank offer free medical consultation online during this period. Other banks like National Australia Bank, Commonwealth Bank of Australia and others are safeguarding their employees with new work practices.
BP: Greg, with what's happening with COVID and the shift in consumer and business behaviour, there is a marked and noticeable trend of telecommuting, more contactless payments, even digital transactions, because of safe distancing requirements and not leaving their homes. How are you preparing your operations? Is everything going on plan?
GK: Most things are on plan. We are a digital organisation, so our employees operate from multiple countries. I think, currently, our staff of 40 is based in eight or nine countries. I lost track at some point. So, in terms of implementation or our integrations on the IT side or the product side, that stuff is proceeding on plan.
The stuff that’s not proceeding on plan is symptomatic of the way the world is going to be post COVID-19. It's the physical stuff. Our licensing, for example, has been held back by the fact that we can’t go and physically pick up a particular piece of paper from a government office. Unfortunately, without the paper, the other government office that does not accept online applications cannot process either – another physical thing which I think is going to go away in the future.
A bank needs to have a headquarters and that headquarters needs to fulfill certain requirements, including server rooms and business continuity. We have a facility in Manila, which we need to refurbish, but I physically cannot get a construction crew on site.
But interestingly, all the other work streams are proceeding. We're onboarding people, we're proceeding with product and the IT integrations. We're perfectly capable of launching remotely off of our platform when the time comes in August or September. It's interesting how the world has changed. This will continue to change over time. People will be looking at these physical constraints and will be trying to get rid of those.
BP: Anything that you've learned that will be applicable as you start that you haven't foreseen before COVID-19?
GK: Before I moved to Asia about five years ago, I built and sold a large consumer retail bank in Eastern Europe. Interestingly, Eastern Europe during that time went through a number of crises.
A lesson I learned is banking, including retail banking, is a very cyclical business, where liquidity comes in waves. Southeast Asia hasn't really gone through these types of liquidity waves, because the whole retail banking is at a much earlier stage of development here, especially fintech. What we are observing now is something that people in some other parts of the world – Eastern Europe, Latin America – have seen before and adjusted to before. But in Southeast Asia, it will take some adjustment.
For example, wholesale funding for digital lending now has basically disappeared. All the risks that have come out in the portfolio of digital lenders, of the people that were lending wholesale to these digital lenders were not prepared for those risks. Basically, all the digital lenders that are financing their facilities from banks or credit funds will have trouble renewing these facilities and will have trouble growing or even maintaining their portfolios.
BP: How are you addressing this funding issue?
GK: Wholesale funding hasn't been a sustainable way of funding a retail loan group from the beginning. That's a reason we're standing on the retail deposit funding leg as an institution. We're launching retail deposits as well as retail loans. Those two have to be done in conjunction with each other.
We will see more people doing more balanced strategies and also looking more at the profitability of their products. Because, for example, in digital banks around the world, a lot of VCs have been able to fund these companies based on multiples of price to customers instead of multiples of profitability, or even revenue. All of that is going away at a higher rate. All the guys that have been growing their customer bases with effectively negative gross margin after CAC (cost of customer acquisition) will have to think very long and hard. There's got to be a bunch of digital banks in the world that will not survive, because they don't understand how to move from current account which is un-monetisable through lending and deposits. It's a big shift in branding, customer positioning and skillset. A bunch of people are not going to make that cut. So, we're going to see a reshuffle as well, but that's for the better.
BP: Sugu, what are some of the opportunities that you're seeing, that allows you to be different as an incumbent bank from the way that you're offering, being fully digital?
SM: We are having a lot of loan facilities that we want to give to SMEs. Malaysia’s government is offering a lot of loan relief for the next six months – for auto finance, housing loan. These are the opportunities that we should take to these people. Banks need to be ready to offer this kind of online investment for the customers to maximise the usage of the money.
BP: Hadi, based on SAP now, you are more known as an enterprise resource planning (ERP) solution provider. How can you leverage on that experience of providing ERP solutions for businesses to make the transition to helping banks to help their SME customers and to innovate during this time?
HW: We did start as an ERP company many years ago. Over time, we have been building our relevance with new developments as well as acquisitions. This gives us a comprehensive portfolio not only to address the SME and micro companies, but also at the retail side of the business, to address the bank's needs end to end, from the front office to the back office.
GC: Hadi, as banks proceed on their digital transformation journey, there must be common pitfalls. Can you share from the experiences you have seen working with banks? What is the one biggest pitfall that people should look out for? Give one example of how you can effectively navigate this pitfall.
HW: Let me reframe that into pitfalls and opportunities and share our observation from helping our clients navigate on their digital journey.
Companies typically come to us for a change of technology. From what we observe, what separates a successful initiative from a failed one often has nothing to do with technology. It is the shortcoming of organisational culture having been operating in a certain way for a long time, mainly with legacy systems. Though it contains so many gaps and patches and customizations, people understandably have this risk aversion to process change. So, overcoming this mindset and cultural barrier is perhaps the most important thing in addition to other issues, like the lack of digital talent, the lack of senior management support. I'm not saying this is not important. This is important, but the cultural issues, the silo mindset are the biggest roadblock to real transformation.
Secondly, banking is in a regulated industry. Banking has undergone several changes, and more changes will come. If your digital bank is not ready to endure the changing regulations and licence requirements, it will be challenging to operate in the long term. When building a digital bank, it is important to make sure that we can quickly adapt to the changing regulations and use this to our advantage, because the end goal of this regulation and licensing eventually is to ensure that the customers are provided with innovative value propositions in a controlled way to benefit both the banks and the customer.
BP: What kind of changes to regulation (will come) as a result of COVID-19? What will be the long-term impact in how it will change our banking? Greg, can you share your thoughts with us?
GK: This movement of the banking services into the digital space is going to be accelerated because of COVID. It'll fundamentally change the competitive differentiation. If you think of the 6Ps, the kind of the competitive dimensions of 6Ps, product, price, place, etc., banks have historically been competing on price, on promotion. But, they haven't really been competing that much on process.
Place is becoming lately irrelevant because everything is now people. In terms of price, people will be delivering purely through a digital platform, it will be able to offer much better pricing as well. The bank that doesn't have to run a network of branches can offer a much higher interest rate on deposits. A bank that originates purely online and uses customers’ digital footprint to underwrite is able to run its loan portfolio with a very different cost structure both on the origination and on the cost of risk.
You're able to offer customers very different price points for their loans than non-digital players or capture customers that previously the regular banks haven't been able to serve at all. Most of the banks in the region don't know how to underwrite loans to non-bank customers, because they have no idea how to work with a digital footprint and have a vague idea of how to work with predictive analytics.
BP: Greg, you mentioned one of the key challenges for digital banks to be in terms of funding, especially from the wholesale side. How are you looking to address that? What would be the winning strategy? How do you win post COVID in the digital space?
GK: There are basically a few things that customers look for when they're looking to make deposits. The number one thing is trustworthiness. That's a matter of branding. Some people think that's a matter of physical infrastructure, but it's not. People have been showing all over the world trusting towards online brands as well, as long as these brands demonstrate that they care deeply about the safety and security of the customer. So, trust is something that you can definitely build.
The deposit rates are typically the number two thing that people care about. A digital contender can offer a much more aggressive proposition typically than an incumbent. In the context of the Philippines, banks’ cost of funding is 1.9% right now, because their average cost of deposit funding, what they're paying to the customers, their deposits, and their risk appetite is so low, their net interest margin right now is 3.5%. This is bank system wide. So effectively, a bank cannot offer 1.9% plus 3.5%. Banks cannot offer 5.5% deposit rate, because it's going to be upside down with the gross margin and the net interest margin. This is something that you can definitely compete on.
Finally, the customer experience. Banks really have proven themselves incapable of innovating on the customer experience on using the digital medium through which they're delivering the product, to fundamentally innovate the product features, to make the product more relevant to the customer, to make it easier for the customer, to make it fit better into the customer's lifestyle. Because a bank is very unused to the concept of asking the customer: Dear customer, what do you need? And then, try to define the product experience around that, this is more a process that banks have in their DNA. Those are the competitive characteristics that we're planning to adopt.
BP: Sugu, from AmBank’s perspective, how are you designing your business to win postCOVID-19?
SM: From a bank point of view, we should transform rather than (keep) the traditional way of thinking. We should go into partnerships and working together. The small banks should join all the operations together to have shared services to reduce costs. This is how banks should start thinking rather than going into this “my bank, my legacy.” (Banks) must start working with fintechs and see how we can collaborate with each other to support SMEs and customers.
BP: We have covered so much ground in this session. There are a lot of issues to cover, and we have covered many and some we can probably only cover in depth in subsequent sessions. COVID-19 is unfolding and has already provided some useful lessons for banks that are going through their digital transformation journey. This time round, banks are not the culprit of this public health crisis, but they are in a very good position to help get the economy and businesses out of it. You have a big part to play to help small businesses, especially.
I want to thank Greg, Sugu and Hadi for joining us today. We hope that our audience has benefited from your insights and the stories you have shared about the experiences of your institutions and partners.
The recording of this session will be available on the RadioFinance and The Asian Banker websites, and are available for download and playback. Until next time, we wish all a very good day and thank you again for joining us today.
Managing Editor, The Asian Banker