The Rise of Digital Banking in Southeast Asia Boston Consulting Group partners with leaders in business and society to tackle their most important challenges and capture their greatest opportunities. BCG was the pioneer in business strategy when it was founded in 1963. Today, we help clients with total transformation—inspiring complex change, enabling organizations to grow, building competitive advantage, and driving bottom-line impact.

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JUNGKIU CHOI

PRASANNA SANTHANAM

PAULINE WRAY

SHOBHIT SHUBHANKAR

JEROEN VANDENSTEEN

Comissioned by:

DECEMBER 2020 | Boston Consulting Group CONTENTS

3 EXECUTIVE SUMMARY

5 THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA

7 CHARTING THE BANKING EVOLUTION

11 UNDERSTANDING EMERGING CHALLENGER BANKS

17 TRADITIONAL INCUMBENTS REACT AND RESPOND

21 SOUTHEAST ASIA’S DIGITAL BANKING OPPORTUNITY

23 SHIFTING ATTITUDES TO E-ADOPTION

25 FIVE ENABLERS OF DIGITAL BANKING ADOPTION

28 IMPERATIVES FOR BUILDING A SUCCESSFUL DIGITAL BANK

37 SUMMARY: NOW IS THE TIME TO ACT

2 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA EXECUTIVE SUMMARY

igital banking adoption is growing across Southeast Asia, Ddriven by evolving customer expectations and enhanced digital penetration. The COVID-19 pandemic has accelerated this trend, as enforced digital transitions have embedded a more immediate impetus for change.

These drivers will see Southeast Asia’s digital banking opportunity expanding significantly in coming years, reflecting a trend which has seen over 200 new digital banks established globally over the last decade. Since 2015, the number of digital banks has grown by 190%, supported by significant investment and positively evolving regulation.

Understanding Emerging Challengers Institutional banks are now facing a new era of digital-first competition. Customers looking for more personalized and targeted offerings are turning away from incumbent operators towards a new breed of digital-first challengers, launched by financial technology (fintech) operators and non-financial institution (NFI) players. These operators are unified by a focus on superior customer experience, branchless design, and use of technology.

Emerging Digital Challenger Banks can be broadly slotted into two main categories — those with, and those without, a full banking license. Those institutions without full banking licenses are categorized as Neobanks. Those with a full banking license are identified as Challenger Banks. In this changing environment, traditional operators face a growing pressure to transform. These legacy incumbents must adapt if they are to defend, grow, and win in this evolving landscape.

Imperatives For Digital Banking Success Despite this remarkable landscape of opportunity, profitability remains a major challenge for digital banks. Of the top 10 digital banks by users globally, just five have achieved profitability.

Boston Consulting Group has identified six key ingredients for success in building a profitable digital bank. It must be customer-centric and respond to evolving customer needs. It must have an operating model that leverages an effective digital ecosystem approach. It must be built on the right tech principles and strategic choices to innovate fast

Boston Consulting Group | 3 and scale quickly. It should leverage big data and analytics to ensure an informed pathway to personalization. It should operate on a digital start-up culture and talent base rather than legacy banking culture. It should communicate with regulators to create competition and meet the needs of underbanked segments. These six key imperatives offer the most effective pathway to unlock the full value of this emerging opportunity.

4 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA CHAPTER 1 THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA

IGITAL BANKING IS ENJOYING a period trillion today. Mirroring this impressive Dof remarkable growth in Southeast Asia. economic expansion has been growth within Evolving customer expectations combined the region’s digitally-connected population. with growing digital penetration are driving There are now over 400 million internet users the accelerating adoption of these innovative across the region, with a digital penetration new banking models. of 63% set to rise rapidly in coming years. Smartphone penetration has also been Southeast Asia presents fertile ground for this central to this digital growth, with the region banking revolution. The diverse but digitally- largely a mobile-first digital economy. More connected population of over 650 million than 90% of the region’s 400+ million internet citizens is ripe for disruption, as agile users connect via mobile phones. Expanding emerging banking players compete against 4G penetration, alongside emerging 5G incumbent operators striving to adapt to the opportunities, unlocks further potential for rapidly evolving landscape. connected digital banking customers.

The region’s continued growth frames a The COVID-19 pandemic undoubtedly lucrative environment of opportunity. presents challenges to Southeast Asia’s Southeast Asia’s population is projected to decades of unbroken economic growth. Yet it reach 542 million by 2030, positioning it has also delivered a remarkable catalyst for behind only China, India, and the EU as most digital adoption both regionally, and globally. populous regional markets. Economic growth While a firm projection remains difficult to continues to outpace global averages in this ascertain, we at Boston Consulting Group dynamic emerging region. The combined (BCG) estimate that the impact of the gross domestic product (GDP) of major pandemic has accelerated digital adoption by economies in the ASEAN 5 — Malaysia, several years globally. Indonesia, Philippines, Singapore, Thailand — could reach an estimated USD4.3 trillion This accelerator has been a clear driver of by 2030, positioning it as the sixth-largest deepening digital banking adoption. In BCG’s global economic bloc. June 2020 REBEX Pulse survey of 17,600 respondents across 30 countries, 16% of those By any measure, Southeast Asia is a growth surveyed enrolled into online or mobile success story. Regional GDP has expanded banking for the first time as a result of the from USD2.02 trillion in 2010 to USD3.11 COVID-19 pandemic. This period of

Boston Consulting Group | 5 transformation has driven even reluctant branches less frequently, or stop visiting all digital adopters to embrace digital banking together once the crisis is resolved. More than for the first time. half of customers also noted a willingness to open an account digitally if branches were Use of digital channels increased significantly unavailable rather than delaying a purchase during COVID-19 restrictions, with one in or opting for another provider. three customers having used mobile banking more than they did prior to the crisis. This Increasing connectivity, accelerating digital rises to one in two for the 18-34 age group. adoption, and expanding economic wealth Digital channels were also seen to have offer the foundations for extraordinary delivered the highest satisfaction levels market potential. While innovative disruptors during the crisis, smoothing the pathway to are likely to trigger rapid market change, this sustained migration from physical to digital fast-evolving landscape presents a picture of channels in the wake of COVID-19. One in opportunity for incumbent and emerging four customers is expecting to use physical players alike.

6 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA CHAPTER 2 CHARTING THE BANKING EVOLUTION

ORE THAN 200 NEW digital banks These characteristics enable digital banks to Mhave been established globally since reach untapped market segments at scale, a 2010, with uptake largely driven by growing major factor in the growing penetration of customer expectations, digital familiarity, these challengers. Since 2015, the number of and evolving regional regulations. Southeast digital banks has grown by 190%, in part Asia is already deeply engaged in the early thanks to encouraging intervention by stages of a digital banking evolution. regulators. Equity funding to start-ups in the space has reached USD7.7 billion. This has Legacy operators have initially been slow to led to Digital Challenger Banks rapidly react to this changing landscape, with increasing customer bases, competing on traditional financial offerings evolving far too lower cost to serve, speed of innovation, and slowly in this environment of rampant differentiated propositions designed to meet consumer expectation. Lack of personalized the identified needs of the modern banking advice, high fees, and unattractive brand customer. images have driven customer leakage away from incumbent operators towards emerging digital challengers. Evolving Customer Expectations Evolving customer expectations have been a This structural shift has given rise to a new core driver of digital banking adoption. breed of digital-first challengers, launched by Customers are no longer content with simple financial technology (fintech) operators and financial products, and are increasingly non-financial institution (NFI) players. looking to engage with banks that offer Emerging consortiums have also entered the relationships and experiences as part of their market, adding greater competition for banking journey. incumbent players looking to progress their own digital banking initiatives. The modern digital world breeds expectation of rapid resolution that digital banks have While the propensity towards a particular leveraged through smart product offerings. digital banking model varies by market, these That landscape of consumer empowerment digital banks are broadly united by key can be summarized in six key expectations: unifying traits — branchless design, superior customer experience, and use of technology. • Targeted and personalized experiences

Boston Consulting Group | 7 • Frictionless omnichannel interaction a baby, which trigger customers’ engagement with product offerings and services. • End-to-end two-way communication Technology companies on the other hand have taken a more demand-oriented • Consistent response, anytime, anywhere approach, where customer-centricity accelerates revenue growth above that of • Authentic value-additive offering legacy institutions.

• Transparency, anticipation, and protection This changing customer landscape has against risks generated significant demand for new banking experiences that are highly The expectation of a customer-first approach accessible and easy to use, particularly has become deeply embedded in society, among millennials (Exhibit 1). Digital largely resulting from growing exposure to banking services represent the most responsive technology companies. These tech important drivers for the millennial market, players have raised the bar on customer with customer-centricity and ease of account service across multiple industries, including opening offering equally crucial financial services. Amazon and Taobao have considerations. transformed the retail commerce experience, with the likes of Netflix and Facebook doing Across all respondents of BCG’s REBEX Pulse the same in the media landscape. Uber, Grab, Survey, social responsibility, mobile and Airbnb, Agoda, all represent tech-first internet banking offerings, and monetary innovators that have transformed an existing considerations around cost and return on industry vertical to a more customer-centric savings represent the top three drivers of approach. digital banking adoption. The most notable change from legacy expectations is perhaps In the banking space, incumbent players have that three-quarters of respondents believe a largely operated on principles of a business bank actively contributing to society and or product-centric strategy oriented around exhibiting high moral standards is a major supply. These revolve around key life events motivation for engagement. such as job promotions, marriage, or birth of

Exhibit 1 | Changing User Expectations Demands for a New Banking Experience

Source: BCG REBEX Customer survey

8 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA Exhibit 2 | Lack of Personalized Advice, High Fees, and Unattractive Image Are Top Reasons for Shifting from Traditional Banks in SEA

Source: BCG Center for Customer Insight 2019 payments and digital banking survey of 3,250 consumers and 1,350 merchants in Indonesia, Malaysia, Singapore, Thailand and Vietnam

Turning Away From Traditional At the same time as incumbent operators Operators are wrestling with these challenges, The transformation of consumer expectations emerging structural changes are generating is creating significant challenges for even greater complexity. Technology incumbent operators who have been slow to evolution continues at a pace that rivals meet evolving consumer needs (Exhibit 2). changing consumer expectations. Cloud infrastructure allows IT systems to be Banks face a number of hurdles in fulfilling simple and scalable, which challenges changing customer demands. Traditional legacy in-house systems that traditional mindsets have hampered evolution, as operators once relied on. User-interfaces evolving operational understanding is (UI) are becoming ubiquitous — you can outpaced by the rapid transformation in now interact through large screens, small customer expectations. Changing mindsets is screens, voice, and even gestures. The only part of this challenge, with rigid and ability to process big data brings new complex operating models presenting an insights, making it possible to introduce equally intractable force. Changing the course heavily personalized product offerings. of incumbent banks is somewhat akin to turning an oil tanker, with the inexorable Regulation is also changing, with pace of forward motion presenting a mechanisms such as open banking now significant challenge in charting a new threatening to replace traditional models. course. A highly regulated market and New types of licensed players are emerging. analogue governance structure create Regulation for competition continues to additional barriers for agility in evolve to fit the changing landscape. transformation, embedding rigid approval pathways that limit speed of change. The final piece in this puzzle comes from our modern digital world itself. Digital Lack of digital talent has furthered hampered life is now mainstream, and with it the this transition, as incumbent operators expectations of instant gratification struggle to manage transformation projects inherent in our digital world. Society is with existing talent, and are faced with used to queries being answered at the complex hiring needs in a notably end of a Google search. A taxi is just a competitive talent landscape. button tap away through Grab, Gojek, Uber,

Boston Consulting Group | 9 or any one of these major on-demand economy players. Directions are available at the swipe of a screen through Google “Banks, governments, Maps. The emergence of fresh technology offerings provides a background excitement and tech players need to to all that is ‘new’, creating an inherent work together to digitize marketing burden for ‘old’ institutions appealing to a modern audience enthralled economies and increase by exciting new trends. financial inclusion.” While this modern environment — Caesar Sengupta, General undoubtedly offers challenges, it also presents an unprecedented opportunity to Manager & VP, Payments and expand banking access and provide vital Next Billion Users, Google. financial services to wider populations across Southeast Asia. That is an opportunity which can be best unwrapped in partnership.

10 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA CHAPTER 3 UNDERSTANDING EMERGING CHALLENGER BANKS

EW DIGITAL BANKS ARE emerging to • Challenger Banks. Fintech Start-ups. Naggressively challenge for market share These are fintech start-ups that have in this disrupted landscape. Since 2010, more navigated their way towards attaining a than 200 Digital Challenger Banks have full banking license. Some of these been established globally, with 46 of them operators will have started out as a founded in the Asia Pacific region. In its Neobank report Southeast Asia: Coming of the Digital Challenger Banks, BCG Expand Fintech • Challenger Banks. Non-FIs Backed, and Control Tower, a subsidiary of the Boston Consortiums. These challenger banks Consulting Group, identified four main types emerge from non-financial institution of Digital Challenger Banks (Exhibit 3). players, and predominantly originate from big tech companies, telecom companies, Emerging Digital Challenger Banks can be and consortium-led players. They operate broadly slotted into two main categories — with a full banking license those with, and those without, a full banking license. Those institutions without full While the possession of a full banking license banking licenses are categorized as and route towards market might vary, these Neobanks. Those with a full banking license Digital Challenger Banks share some unifying are identified as Challenger Banks. traits that reflect their particular market proposition: • Neobank. Partnership. These are fintech start-ups that partner with incumbent • Branchless. Customers can complete all banks. They provide financial services via of their everyday banking needs online, a sponsored banking license via web or mobile, with 100% digital delivery covering all products and • Neobank. Independent. These are services. This includes electronic know fintech start-ups that operate without a your customer (KYC) capabilities which legacy banking sponsor. These allow customers to sign up without independent operators rely on their visiting a physical branch product license and/or marketplace strategy to provide ‘bank-like’ services to • Customer-focused. Superior customer their customers experience is at the heart of their offering.

Boston Consulting Group | 11 Exhibit 3 | Four Types of Digital Challenger Banks

Source: BCG x Expand FinTech Control Tower

State-of-the-art user experience (UX) • Innovative value-added products. design, instant and hassle-free service, and Neobanks are offering a number of responsive customer service are core to innovative value-added products directly delivery within their application such as insurance, cryptocurrency purchases, and investment • Tech-driven. New players utilize modular products technology design, advanced analytics, and agile governance, providing a service • Niche and underserved markets. Digital which can rapidly respond and scale as banks are offering banking services to demands change. Cloud-native focus, open SMEs, freelancers, and sole traders. These architecture, and data-driven processes all areas are underserved by incumbents, complement this approach enabling challengers to generate revenue through fees charged on these accounts. These core principles enable digital banks to Players are targeting specific niches such reach a wide range of customer segments as migrants, young people, and the rapidly and at scale. Revolut and KakaoBank underbanked provide examples of digital banks serving millennial segments, with strong personal • B2B banking-as-a-service (BaaS). Players financial management (PFM) tools focused who have built their own infrastructure on budgeting and saving. Monese and are now offering their platforms to be WeBank offer solutions such as cash deposits used by other challenger banks, at convenience stores to reach underbanked incumbents looking to expand to new customers. Novo and Penta offer integrated markets, and financial institutions who accounting tools and tax tracking for small need banking services for their customers and medium enterprises (SMEs). • Marketplace integration. Some These digital banks are offering a range of challengers are offering marketplaces for differentiated services, utilizing a set of financial or lifestyle products. These allow strategic approaches that engage with core customers to compare and purchase customer segments: products easily and securely from within their banking application as part of a lucrative ecosystem approach

12 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA The Changing Face Of Counting The Benefits Of Digital Competition Banking Digital Challenger Banks are fundamentally Alongside meeting changing customer changing the face of banking competition. expectations, digital banking is providing The success of this evolution has other key benefits that are driving customer demonstrated impressive results to date. adoption. All four of these key drivers are There has been a 190% increase in the enabled by wider trends in expanding digital number of Digital Challenger Banks since adoption and digital technology capabilities. 2015, initially spurred by pioneering changes in regulation in the UK and Japan. Other Accessibility continues to be a critical factor countries have followed suit, with 45% of in the rise of digital banking. Digital banks digital banks now based in the Europe and are able to provide affordable and accessible Middle East (EMEA) region, 35% in the services to traditionally underbanked Americas, and 20% in the APAC region. population segments — for example 75% of WeBank’s customers are blue-collar workers Investment trends paint a revealing picture that have traditionally been unbanked or of growth. More than 70% of equity funding underbanked in the Chinese market. rounds have been funneled to early stage firms, with Digital Challenger Banks This ability to tap underserved segments is a dominating equity funding in EMEA and major benefit in Southeast Asia, where APAC in the two decades between 2000 and financial access varies significantly across the 2020. This reflects an encouraging investment region. In its 2019 report on digital payments landscape for digital banking players. — Southeast Asian Consumers Are Driving A Digital Payment Revolution — BCG revealed Charting the growth of Digital Challenger that while 90% of Malaysian consumers and Banks reveals impressive early growth after 98% of Singaporeans own bank accounts, only launch, typically acquiring customers rapidly 61% of Indonesians and 40% of Vietnamese and leading to an exponential growth in their actively utilize these services. Equally customer base. Korea’s KakaoBank on- revealing is that while 85% of Singaporeans boarded 300,000 customers on its first day of have credit cards, the figure drops to 30% in launch, and 1.5 million in its first week of Thailand, 11% in Vietnam, and a mere 6% in operations. Revolut’s users nearly tripled Indonesia. While 42% of respondents in between 2018 and 2019, up from 3.5 million Malaysia take out loans from banks, only 27% to 10 million, with daily active customers do so in Singapore, and just 14% in Thailand. growing by 231%. These two players reflect a This reveals the stark differences in financial trend seen throughout the digital banking engagement across the region. space. Digital banks not only potentially offer better There is a clear propensity towards certain access to bank accounts, but also digital digital banking models in different payment channels which can unlock greater jurisdictions, reflective of, and encouraged by, accessibility where credit card uptake is low. the particular local market and regulatory Credit card penetration across Southeast Asia factors. American markets are dominated by is estimated at ~4%. The COVID-19 pandemic Neobanks leveraging partnerships with has also revealed how tech resilience can legacy banking institutions. The EMEA is further enable accessibility in scenarios or driven by fintech start-up challenger banks. geographies where physical branch access is challenging. The more digital the landscape In the APAC region, initial signs are that NFI is, the more accessible banking products are players are leading the digital banking for a greater share of the population. charge. More than half of established players in Southeast Asia fit into this category, and Value realization is another key benefit of almost two-thirds across the wider Asia digital banks, which typically generate better region. unit economics than more traditional

Boston Consulting Group | 13 operators. Through better product pricing, as adaptive credit limits on cards, and instant digital banks are often able to pass that value feedback through chatbot features. on to customers. Examples include Digital Challenger Banks leveraging new data sources to define better credit scores, Risks And Challenges Of Digital reducing risks when handling out loans. Banking Digital banking is an exciting and valuable Product features also present an important emerging opportunity, but it is not without its draw for customers. Digital banks offer risks. Consumer protection is perhaps the heightened personalization, largely enabled most prominent of these challenges, by the technology focus of these operations. particularly in light of the rapid evolution of This wider variety of product features is the landscape. likely to be further enhanced as the market expands, with a growing number of players Financial regulations on fintech players tend strengthening the proposition for users. to be less restrictive than on the heavily- These include smart saving solutions that regulated established institutions. Many allow personalized and responsive features. founders come from non-banking backgrounds, and may not fully understand Customer experience is also a key benefit, the market risks. Fintech customers also and particularly when considering the disproportionately belong to previously- expanding expectations of customers unbanked segments, where financial literacy highlighted as a catalyst for the changing tends to be lower. This can mean they are less landscape. Digital banks are heavily focused informed on how to independently negotiate on customer experience, leading to enhanced risks. ease-of-use and convenience, making offers increasingly accessible to users regardless of Cybersecurity breaches present an inflated their digital confidence. This is evidenced risk to these tech-heavy offerings, with through frictionless onboarding processes significant potential disruption from without any need for hard copy successful attacks. Data protection is also a documentation, as well as mechanisms such major concern, with multiple consumer data

Exhibit 4 | Few Digital Challenger Banks Globally Are Profitable Today

1. Top 10 Digital Challenger Banks in terms of users (Consumers) Note: Indicative timelines and not to scale Source: BCG FinTech Control Tower

14 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA points and large volumes of data used for emerging digital players. Of the 10 top Digital service personalization. This raises questions Challenger Banks globally by user base, just of appropriate and secure data storage and five have achieved profitability (Exhibit 4). usage. We estimate that since 2000, there have been The potential for long-term value erosion in a approximately 150 new digital banks competitive market presents a further risk. established in developed markets. Of those Many digital banking players are competing 150 banks, we identify seven which have on price, potentially triggering a race to the started to generate profit. If we expand our bottom style approach which leads to large- analysis beyond developed markets, we scale value erosion in banking markets. assess that there have been 212 new digital banks established globally since 2015. These This value erosion feeds into a larger point include both licensed and unlicensed around business sustainability. Digital banks operators. While major APAC players such as focus on building scale through customer WeBank, Mybank, Kakao, and PayTM offer acquisition. Profitability is typically achieved inspiration for success, there is still a long only after 5-7 years of operations. Business way to go for most digital banks on the road sustainability is not guaranteed, and there are to profitability. as of yet limited successful examples in the Asia region. Many players are oriented to The key drivers to profitability are a success metrics based on achieving higher combination of fee-based and interest-based valuations or greater volume of app revenue streams, together with a lower cost downloads, which may not necessarily structure due to their app-centric approach. transition into financial sustainability. This ensures lower operational costs due to elimination of manual processing steps, and The Digital Challenger Banks Reference reduced customer communication Guide analysis undertaken by Singapore commitments. The absence of costly legacy FinTech Association and BCG Expand IT infrastructure and branchless setup are FinTech Control Tower shows that also important differentiators. profitability remains a real hurdle for these

CASE STUDY KAKAOBANK, SOUTH KOREA

South Korean digital banking player KakaoBank achieved 25% market KakaoBank has been a notable winner penetration within just two years of launch, amongst digital banks, meeting customer reaching 10 million users by June 2019. On needs, creating financial viability, and the first day of launch, more than 300,000 maintaining a competitive edge that accounts were created, USD5 million positions it as an exemplar in the space. deposited, and over 652,000 app downloads undertaken. The bank now has an asset South Korea is a highly mature banking base of over USD12 billion. What sets market, with an average of two bank KakaoBank apart is a model which quickly accounts per person. Credit cards are achieved break-even, with projections widely used, with an average 3.6 per person suggesting the bank achieved a profit of in circulation in the country. Just 20% of over USD20 million in 2019. payment value is transacted in cash. Crucially, it also boasts 95% smartphone Crucial to KakaoBank’s strategy has been penetration, making it ripe for digital leveraging an ecosystem approach to digital disruption. banking (Exhibit 5). The bank targeted the

Boston Consulting Group | 15 50 million users of partner platform typically delivered better returns than KakaoTalk, and 22 million of payment existing major banks. Easy loan solution KakaoPay, addressing a significant applications were offered with lower pool of users with limited marketing interest rates, such as emergency loans investment requirements. Familiar UI/UX allowing users to borrow emergency cash from existing platforms also provided in as little as one minute. simple engagement for transitioning customers, with the design of the KakaoBank succeeded by combining this KakaoBank app incorporated as part of the robust ecosystem approach with directly existing ecosystem app interfaces. controlled governance, creating an agile institution that could rapidly on-board new KakaoBank also took a unique approach to customers. It incorporated clear branding, extending brand engagement communication, an existing ecosystem user into the banking market with Kakao base, and simple and effective product Friends. This popular group of cartoon offerings to generate rapid growth. This led characters helped engage audiences in an to per user acquisition costs of less than industry that’s not traditionally known for USD25, reaching over 20% market accessible branding, particularly appealing penetration and break-even by the third to millennial groups. year of operations.

An aggressive pricing strategy rounded off this successful launch. Savings accounts

Exhibit 5 | Kakao Has a Huge Ecosystem That KakaoBank Could Leverage

Source: BCG x Expand FinTech Control Tower, company press releases and publications

16 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA CHAPTER 4 TRADITIONAL INCUMBENTS REACT AND RESPOND

HILE INITIALLY SLOW TO react, each imperative framing a particular banking Wtraditional incumbents across model: Southeast Asia are gaining momentum as they seek to penetrate the growing digital • Defend. Defend market position in an banking market, protecting market share increasingly competitive landscape that against incursions by emerging challengers. comprises traditional banks, established digital banks, Neobanks, and possible Incumbents are transforming to meet platform players. This applies changing customer expectations in the predominantly to digital banks and direct rapidly evolving landscape, catering for a banks seeking growth marketplace where digital is increasingly mainstream. These operators are aiming to • Grow. Tap into new demand spaces create their own low-cost operating models arising from changing customer that can win in a low-growth future expectations that are not currently being environment. met by offerings from traditional banks. Digital-only subsidiaries are the segment The number of digital banks launched by primarily driven by this imperative incumbents globally has doubled over the last decade, with offerings largely driven by • Win. Create a low-cost model that can win mobile-first digital banks. One example is in a low-growth environment with more Union Overseas Bank’s (UOB) TMRW, which stringent compliance requirements. This operates a mobile-first approach with a full reflects the partnership relationship suite of banking solutions, looking to engage between existing incumbent banks and the essential millennial market segment. emerging fintech operators Players such as mBank, ING, and Openbank all represent existing players transforming to Incumbent players are typically taking one of a new digital-first model. three different paths towards a digital banking model. Digital bank or direct bank Digital banking is self-evidently not a passing models have been adopted by players such as phase, and incumbents are facing increasing HSBC and ING. Digital-only subsidiaries have pressure to build their own home market been established by others, with examples digital challenger. These pressures can be such as UOB’s TMRW, and Bank Leumi’s summarized with three key imperatives, with Pepper. Partnerships between incumbent

Boston Consulting Group | 17 banks and fintech operators are the third comprising 90% of all digital banks strand, demonstrated by the likes of Chime launched by incumbent operators. Over the and Up. last decade that story has changed, with domestic banks driving growth. Of the 38 This is not the first period of digital digital banks launched by legacy operators disruption experienced by incumbent banks. over this decade, 14 have been launched The first such wave emerged with the advent from domestic banks, and 16 from regional of widespread internet use in the late ‘90s banking operators. and early ‘00s, offering an important learning template for incumbents as this new wave of Regional banks are commonly launched digital transformation hits (Exhibit 6). by players who are already leaders in their home market such as DBS and UOB. The first wave of digital disruption Their core market tends to be targeted triggered a scramble for new market share. at disrupting themselves to address an Many incumbent operators transitioned emerging pool of digital native customers. towards internet-based offerings. Some A second approach can be seen in of these offerings were successful, while those regional banks challenging local others faded away over time. incumbents despite having a more limited physical presence in identified target The new wave of digital banks are markets. increasingly mobile-first, driven by rapid global mobile adoption. While the first Domestic banks however tend to launch wave of digital disruption emerged in a smaller domestic players, typically in less broadly level playing field, the new wave developed markets. Digital banks such as of digital banking sees technology and EON Bank, ME, and Timo are examples of technical capabilities being an increasingly this strategy. These incumbent domestic important differentiator of success. players digitize in order to compete with local leaders by targeting the growing Global and regional banks led early digital and youth customer segments. adoption in the period 1990-2008,

Exhibit 6 | Early Innovators Launched Online Banks in Response to the Internet While Recent Players Immediately Adopted a Mobile-first Strategy

Source: BCG x Expand FinTech Control Tower

18 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA Three Approaches For Success operator UOB embraced an in-house build Broadly speaking, incumbent operators are to successfully launch its TMRW digital taking one of three distinct approaches to bank in Thailand in 2019. It plans to successful launch of digital banking roll-out across other markets in Southeast operations: Asia in coming years, thanks to the underlying architecture and • Acquisitions. Acquiring and investing in personalization capabilities powered by existing tech assets to build up digital tech providers Personetics and Meniga reach and digital capabilities. BBVA utilized this strategy by acquiring Simple • Partner. Providing banking licenses to in 2014 for USD117 million, going on to create a joint digital bank with technology invest in a 39% stake in UK-based Atom partner(s). European VPBank partnered Bank in 2015. In 2016 they acquired with Timo to offer banking license and Finnish bank Holvi, and invested in core banking systems, as well as KYC German SolarisBank in 2018 functionality as part of a revenue sharing agreement. In turn, Timo enabled VPBank • In-house builds. Leveraging tech to experiment with building a new providers to power digital capabilities for technology stack, as well as adopting new a new digital bank. Singaporean legacy on-boarding methodologies

CASE STUDY UOB TMRW, THAILAND

Singaporean UOB bank is an incumbent notifications. Smart saving functionality operator with over 90 years of banking offers personalized saving advice, and legacy behind it. In 2019 it launched digital gamifies savings through a virtual city banking subsidiary TMRW, a mobile-only game which grows as savings increase. bank designed to tap into the lucrative Customer service is complemented through millennial segment of emerging banking a 24-hour chatbot. This smart functionality markets through a core focus on customer- is enabled through partnership with AI centricity. experts Personetics and Avatec.ai, as well as tech company Meniga. UOB’s TMRW offers a full suite of banking solutions through a smart mobile-only app, TMRW leverages Personetics as a leveraging the parent company’s extensive technology solution which supports digital industry experience through a digital-only banks through an assist, act, engage model. approach. The advanced AI provides an assistance chatbot that can interact in The TMRW offering is based around a natural language, with deep financial user-friendly app that directly appeals to domain proficiency, incorporating customer the millennial market segment. It boasts a data to provide both a reactive and focus on a good on-boarding experience, proactive solution. It can engage customers with users able to open a TMRW account through analysis that flags unusual in just seven minutes. The TMRW app transactions, offering smart saving alerts includes features that analyze and predict and financial guidance. It acts through cash flow in accounts and patterns of defined decision pathways to automatically upcoming payments. Spend tracking allows move funds or pay credit card balances simple budgeting and payment and spend based on cash flow needs and predicted

Boston Consulting Group | 19 human behavior, offering unique benefits to February 2020. TMRW’s future plans are to customer-centricity at the heart of the to achieve a 35% cost-to-income ratio TMRW offer. within five years, with a customer base of up to five million across that same This advanced technology approach has timeframe. contributed to TMRW delivering impressive early results, tripling its customer base in Thailand in six months from August 2019

CASE STUDY BANK BRI, INDONESIA

With more than 10,000 offices across approach enables the bank to on-board Indonesia, Bank BRI has the largest new partners in less than an hour, physical network of banks of any bank in compared to up to six months for previous the Southeast Asia region. Now Bank BRI legacy technology systems. Partners can is transforming its legacy operations with a use the Bank BRI Apigee developer portal digital banking solution designed to to register, browse APIs, conduct testing increase financial inclusion in Indonesia within a sandbox, and produce new through smart use of a cloud-based API products. approach. This cloud-based API approach provides Bank BRI launched a digital banking automation and agility which allowed Bank operation as part of a target to achieve 84% BRI’s offering to integrate with platforms banking system participation by 2022. Its such as the Indonesian Government’s ID innovative digital strategy has seen it database, providing automatic verification leapfrog fintech competition, with and rapid on-boarding while tackling indications that it has achieved 70% important fraud or identity concerns, financial inclusion across the country by enabling quicker, more confident lending the end of 2019. decisions. An open API marketplace makes it easy to serve fintech operators, with Bank BRI utilized a web-native approach more than 50 monetized open APIs and 70 using open application programming ecosystem partners benefiting from the interfaces (APIs) to create and monetize bank’s wealth of big data insight and products. Adopting this cloud-based API financial experience.

20 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA CHAPTER 5 SOUTHEAST ASIA’S DIGITAL BANKING OPPORTUNITY

NCUMBENT BANKS AND DIGITAL the total Digital Challenger Banks in the IChallenger Banks are both seeking to region. access a remarkable opportunity in Southeast Asia’s growing market. In Korea, KakaoBank represents a successful NFI approach with over 10 million users. Southeast Asia’s population is expected to China’s WeBank is an NFI/consortium player grow from 487 million today to reach 542 which generated USD570 million profit and million by 2030, positioning it behind only served 300 million customers in 2019. the EU, India, and China as most populous MyBank is another Chinese challenger regional markets. Indonesia alone — the following a similar path, serving 12 million largest regional market — is the fourth users in 2018. largest country globally by population, with a population of nearly 300 million. The volume of investment in fintech operators reveals a real appetite for funding The gross domestic product (GDP) of major innovative financial models. Analysis by BCG economies the ASEAN 5 — Malaysia, indicates there are currently 1,587 fintechs Indonesia, Philippines, Singapore, Thailand operating in Southeast Asia, which have — is expected to grow to reach USD4.3 attracted a cumulative total of USD4.8 billion trillion by 2030, up from around USD3 trillion of equity funding. By far the greatest share of today. That positions the ASEAN 5 as the those start-ups emerged in Singapore. sixth-largest economic bloc globally, a figure which grows further when the economies of A breakdown of investment figures reveals Brunei, Cambodia, Laos, Myanmar, and that fintech funding is largely driven by retail Vietnam are added to the total. banking. Retail banking fintechs represent 35% of total businesses, and 60% of equity funding. The Evolving Financial Landscape Southeast Asia and the wider APAC region Innovation-enabling regulation has been are in the midst of a banking evolution. There fundamental for this expanding tech-driven are now more than 40 Digital Challenger financial landscape, with important Banks across APAC, largely driven by backing implications for fintechs such as Digital from tech giants, NFIs, and consortium Challenger Banks. Singapore and Malaysia operators. These style of NFI and consortium- introduced privacy regulations in 2012 and backed operating models account for half of 2010 respectively, laying the groundwork for

Boston Consulting Group | 21 a digital finance landscape. Both e-money coming years, as first-mover Singapore is set regulation and open banking reform were to grant five digital banking licenses for introduced in following years. Thailand operation in its banking markets by the end meanwhile introduced E-KYC regulations in of 2020. Bank Negara Malaysia recently 2016. These three countries have been released its own draft framework for licensing regional pioneers in adopting activity-based digital bank operators. Thailand, Indonesia, and digital-enabling regulations over the last and Vietnam have all indicated that further decade. Recent regulations introduced in enabling digital banking regulations will Philippines, Vietnam, and Indonesia offer an likely be introduced in the next 12-24 months. encouraging outlook in other key regional These enabling regulations will be important markets. in ensuring the region can leverage the greatest possible value from emerging digital Southeast Asia approaches a seminal banking opportunities. moment in its digital banking journey in

22 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA CHAPTER 6 SHIFTING ATTITUDES TO E-ADOPTION

OUTHEAST ASIA’S DIGITAL BANKING Singapore to 14% in Vietnam. Expansion of Sopportunity is energized by a wider this coverage will accelerate digital adoption trend of digital adoption witnessed in recent further. years. This is now a dynamic and digitally- connected region, with digital channels Growing smartphone penetration has led to forming a central part of everyday life. significant growth in e-payment solutions, revealing a strong regional appetite for digital A consumer might wake up in Kuala Lumpur, financial products. This is a global trend with call a taxi with the tap of a button through significant regional ramifications. BCG Grab, and during transit log in to their online estimates that up to USD23 trillion of global check-in booked through Traveloka for a payments are set to shift online within the flight to Indonesia. While awaiting their next 10 years. Between 2017 and 2019 the plane they order some gifts for a family number of e-wallet users globally exploded member through Lazada, or browse Facebook from 500 million to 2.1 billion. Crucially for or Instagram to check in with friends. On the digital banking, e-payments provide a flight they use Google to search the location gateway opportunity to digital financial of their hotel, identify nearby attractions, and products which can have a lasting impact on assess local weather conditions. Upon arrival digital banking adoption. they use the Gojek app to hail a ride, digitally check-in at the hotel, and book dinner E-wallets such as Boost in Malaysia and Ovo through restaurant booking app Qraved. in Indonesia are now household names. The gross transaction value (GTV) of electronic This digital mindset is an essential part of the and mobile payments is expected to reach fertile landscape for digital banking players. USD130 billion by 2023. At least 10% of the Central to this growth has been the adult populations of Malaysia, Vietnam, accelerating penetration of smartphones and Thailand, Indonesia, and Singapore already 4G data services. Southeast Asia is a mobile- use e-wallets, and penetration rates are well first digital ecosystem, with 90% of the ahead of those in advanced economies. Just region’s 400+ million internet users under half (49%) of urban consumers in the connecting via mobile phones. The region who are commercial bank customers prevalence of 4G-connected smartphones use e-wallets, with that figure expected to rise ranges from 116% of the total population in to 84% by 2025.

Boston Consulting Group | 23 COVID-19 has accelerated this transition Asia. The value of the region’s internet globally, with digital payment usage economy is expected to triple in coming expanding by more than 20%, and cards by years, from USD100 billion in 2019 to more than 10% during this period according USD300 billion in 2025. E-commerce is a to analysis from BCG’s REBEX Pulse survey. major driver of that growth, with active The role of regulation in enabling this e-commerce users growing from 49 million in opportunity is an important lesson for the 2015 to 150 million in 2019. The substantial digital banking space. Several governments in growth value of the market for ride hailing, Southeast Asia have released policy online media, online travel, and e-commerce documents or frameworks to increase non- all reveal deep and significant trends towards cash usage in the economy. For example, growing digital usage in everyday lives. Malaysia introduced its Financial Sector Blueprint 2011-20. The Philippines crafted a Southeast Asia is ripe for digital disruption, national strategy for financial inclusion in with rising digital preparedness and low 2015, and Thailand introduced its National penetration of traditional financial products. e-Payment Master Plan in December 2015. This positive customer sentiment towards digital journeys is compelling, and one which E-wallets aren’t the only area of digital life has major implications for the digital banking which shows impressive growth in Southeast industry.

24 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA CHAPTER 7 FIVE ENABLERS OF DIGITAL BANKING ADOPTION

IGITAL BANKING ADOPTION IS • Technology adoption, and talent. Cloud Dpoised to benefit from growing digital adoption and the presence of technology acceptance across Southeast Asia. While this talent are key enablers of growth for journey is encouraging for operators, there digital banks remain several key pre-requisites which ecosystem stakeholders should both • National digital ID system. Presence of a recognize and nurture in order to further national digital ID system can be a strong enable this opportunity: enabler through easing verification and KYC processes, further boosting • Unmet customer need. The rise of digital transparency banking is enabled when traditional incumbents are unable to consistently meet consumer needs The Critical Role Of Digital Id Digital ID is a particularly crucial enabler of • Smartphone and internet penetration. digital banking opportunity. This mechanism High smartphone and digital penetration provides a foundation to trusted identity generate wider accessibility, and a greater services which allow operators to quickly addressable market. The presence of identify and assess customers. The role of digital payment systems offers a platform digital ID offers a boost to four core areas of on which wider digital banking service: engagement can be built • Enrolment and verification. Providing • Cloud availability and acceptance. identity while on-boarding to a new Supporting regulation that allows product or service, enabling rapid ID for operators to host banking systems on the later interactions cloud is essential. This opportunity is contingent on cloud providers having • Authentication. Providing identity in sufficient presence in a country or region order to simply and securely access an to comply with relevant data sovereignty existing product or service through a regulations variety of channels

Boston Consulting Group | 25 • Delegation. Providing authority for a and boosting the all-important regulatory third-party to act on another’s behalf compliance for operators. Consumers benefit through more traceable digital cash • Notification. Proving identity in order to transactions that reduce their exposure to update identity information such as data losses, as well as a more transparent tax sharing or service provision system. There do however remain privacy concerns which should be tackled in The existence of a digital ID framework can implementing such measures. greatly enhance digital banking adoption, providing a crucial accelerator for a cashless Simplifying authentication and financial on- society that feeds into a wider digital boarding also makes transactions a more financial system. Security and trust obviously accessible and seamless experience. This can offer an important part of this. Digital ID have important implications around financial reduces the burden on financial institutions accessibility for underbanked populations. for KYC processes, allowing trusted real-time authentication through a highly secure There are a range of national ID frameworks network. Secure digital ID also reinforces in operation or testing across Southeast Asia. consumer confidence in digital transactions, Thailand is exploring a blockchain-based increasing use of products such as e-payment database that offers real-time identification and digital banking while at the same time verification alongside facial recognition tackling key fraud concerns. technology. Meanwhile Singapore’s digital ID program looks to build on existing Digital ID offers an important contribution to frameworks such as SingPass and MyInfo critical anti-money laundering (AML) efforts, with introduction of its National Digital increasing transparency in financial systems Identity (NDI) program.

CASE STUDY SOUTH KOREA

South Korea offers a valuable case study of portability that incorporated aggregated success in enabling the rise of digital banks GIRO payment information across in its market. Financial system reform and multiple accounts offered by 18 banks supportive infrastructure were introduced and 54 fintech operators. Any citizen that provided a strong enabling with a mobile phone was instantly able atmosphere for digital banking adoption to access open banking services. This and growth: tackled issues around funds left in dormant bank accounts, providing full • National ID system. Korea rolled out consolidation and control by enabling a a national digital ID system that began centralized infrastructure for open with a photo-based ID in 2015. This banking. This open banking spurred enabled digital enrolment, innovation, creating a seamless bank authentication, and led to a rise in account transfer process that deepened online transactions. It reduced the risk competition. Open banking provides a of ID fraud and thus increased convenient and consolidated view of confidence in digital banking solutions accounts that further empowers personal finance management that • Open banking. Korea implemented an benefits customers, at the same time open banking approach to accelerate enabling digital banks to more rapidly innovation and boost banking services. innovate PFM solutions. Emerging This included elements such as account challengers are also now better able to

26 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA integrate new offers and services thanks program in 2017, with the aim to to an open API, at the same time become coinless by 2020. This program reducing costs and eliminating market generated increased awareness of access barriers digital payments and banking solutions, and helped further promote adoption • Coinless Korea program. Bank of Korea launched a coinless society pilot

Boston Consulting Group | 27 CHAPTER 8 IMPERATIVES FOR BUILDING A SUCCESSFUL DIGITAL BANK

NLOCKING SUCCESS FOR DIGITAL Digital banks can look to these leaders in the Ubanks remains challenging in a complex technology field in order to understand and operating environment. While there is no adapt their own customer experience focus. defined recipe for success, BCG’s analysis An organization like Google provides an reveals that are a number of key ingredients aspirational template, with a wide range of which are essential in ensuring a digital products offered across a user base of more bank can prosper. These six imperatives than 1 billion global customers. represent a valuable framework for a successful digital bank (Exhibit 7). Building solutions that are customer-focused is a core component in the rise of digital banking. Offerings should be designed to Customer-Centricity address unmet customer needs, remove Digital ID is a particularly crucial enabler of friction in processes, promote interaction, and digital banking opportunity. This mechanism offer a unique or differentiated product. provides a foundation to trusted identity These benefits represent some of the key services which allow operators to quickly ways in which leading digital banks are identify and assess customers. The role of differentiating from incumbents, building digital ID offers a boost to four core areas of significant traction through key service. functionalities:

Customer-centricity is at the heart of our • Low friction app downloads and rapid modern digital world. Digital technology on-boarding. Customers can sign up for a leaders have nurtured an environment of bank account from anywhere in a matter rapid convenience, where products and of minutes. On average it takes just five services are designed to deliver frictionless minutes to open a typical digital banking customer experience across a broad range of account day-to-day activities. Global tech giants such as Apple, Alibaba, Tencent, and Google are • Engaging user experience. Well- exemplars in this digital journey, with designed apps allow customers to integrated offerings spanning from effortlessly carry out their banking needs communication and entertainment to and gain insight into their spending mapping, augmented reality information behavior. All leading digital players offer services, and e-payments. PFM tools with their current account products

28 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA Exhibit 7 | Imperatives for Building a Successful Digital Bank

• Key ‘anchor products’. Products such as and shared social payment account allows commission-free FX provide customers members to easily share and track funds, with more competitive services than while also offering quirky reminder messages traditional banks for outstanding transfers. TMRW utilizes PFM tools and smart savings, alongside a 24-hour • Value-added services. A data-rich chatbot, to ensure frictionless and customer- relationship and added services such as focused functionality. PFM tools and integrated marketplaces create platforms that provide an enhanced Excellent user experience (UX) and user but personalized banking experience. interfaces (UI) are critical prerequisites of a Value-added services can be easily digital bank offering, not a differentiating purchased, saving users time and effort factor. Simple, user-friendly design is searching alternative providers. fundamental in effective delivery. Marketplace platforms also offer instant choice and financial lifestyle products Customer obsession is realized by leveraging directly within the app human-centered design, developed through a lean start-up approach that embraces agile Digital bank Revolut offers an example of an sprints and a DevOps mentality, enabling emerging digital bank driving growth through digital banks to build and maintain solutions this proposition. Commission-free FX helped that customers want across all stages of the simplify travel and address an unmet need. product lifecycle. Explore what customers Simple and fast on-boarding and free want, experiment and understand, build the accounts were designed for frictionless user right thing, and ensure continuous support experience. Unique card branding and for the end product. innovative cryptocurrency exchange offers a unique attraction for customers. An online community and daily banking needs added Operating Model And Ecosystem that element of interaction. Digital banks need to leverage digital ways of working and build a proprietary ecosystem in KakaoBank and TMRW showcase two other which they guard their freedom to operate. digital banks employing customer experience Banks without these propriety ecosystems or as an important differentiator. Both banks assets are at risk of being replicable, and seek to leverage the idea of customer eventually supplanted by emerging new obsession and engagement as a model to challengers. drive adoption. KakaoBank’s Eat Lover Club

Boston Consulting Group | 29 Operating models should be based on an Operators should look to ways to benefit end-to-end digital process that ensures a from an ecosystem approach, leveraging the fully-digitized pathway for both internal and data from a wide range of functionalities to external user experience (Exhibit 8). feed into an increasingly personalized product and service offering. For example, A best-practice approach means internal leveraging a telco ecosystem offering will users would be enabled to perform credit risk provide a rich vein of data around payment assessment and application processing modes, mobile behavior, address verification, through automated and AI-enabled processes. and KYC insight. An e-commerce ecosystem Transaction reconciliation will provide solution will deliver insight on spend and instant access across accounts. Product transaction history, demographics, and rating manufacturing and integration is fully and review preferences. digitized, with integrated APIs providing an open access pathway across the product There are numerous examples of successful range. External users are enabled through technology ecosystem players across global digital self-service on-boarding. Customer markets. In Southeast Asia, ride hailing data delivers personalization, as well as unicorns Grab and Gojek represent platform providing adaptive and optimized pricing players which have rapidly scaled to become models and tailored product offerings. household names, moving from early Products will be accessed through an operations in ride hailing to a range of omnichannel product suite. adjacent and non-adjacent areas. These two operators reflect a trend by ecosystem players Polish digital bank mBank was launched as a in entering the e-wallet space as a gateway to branchless online-only offering in 2000, with financial services, with Gojek’s Gopay and an end-to-end digital journey as a core Grab’s Grabpay offering a valuable entrance element of its operating model. In 2013, point for early customer insight. These mBank relaunched online and with mobile operators then go on to expand into further offerings through e-commerce and digital financial product offerings in areas such as advertising channels. Continuous investment lending, insurance, wealth management, and in a lean, flexible, agile business model and retail banking. technology has seen it positioned as the third biggest bank in Poland today, and is one of Chinese giant Alipay is an impressive the most profitable and successful digital example of ecosystem success, leveraging the banks globally. value of its extensive ecosystem to penetrate

Exhibit 8 | Operating Model Must Be Based on E2E Digital Processes

30 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA into a wide range of consumer activities. It others such as fintech partners. boasts product and service offerings in a diverse range of areas, from traditional Digital Challenger Banks are leveraging mobile wallet and marketplace applications, partnerships to reduce time-to-market and transportation and ride hailing, dining and quickly launch new products and features. delivery, discount vouchers, entertainment (Exhibit 8.) Examples include instant P2P and movie tickets, to bricks and mortar loan approval in partnership between retailers. Through leveraging mobile apps, Revolut and Lending Works, international Alipay has created a payment platform transfers with transparent fees in partnership present across many verticals, with high between N26 and TransferWise, and fraud customer adoption. 40% of customers use and AML monitoring features through Alipay in four or more active scenarios, and partnership between Featurespace and Contis 78% in two or more active scenarios. (Exhibit 9).

Successful Neobank players are establishing marketplaces for third-party products to Tech Principles And Strategic quickly expand offerings. This is a fast and Choices affordable way to add product offerings, Traditional incumbent banks often struggle retain customers, and diversify revenue to rapidly adapt to change, in contrast to streams. It enables operators to easily digital banks where agile delivery remains a translate their user base into profit. Players fundamental part of their DNA. Establishing such as Revolut, N26, Monese, and Atom a successful digital bank requires a Bank have all adopted this approach to boost commitment to this agile approach, revenue opportunities. supported by smart strategic choices in building the right technology foundations to Revolut partners with pension disruptor flourish. PensionBee, insurance provider Lending Works, and many others to diversify its IT stacks need to be effectively organized in product offerings. N26 takes a similar order to support rapid change, providing a approach through partnership with payment responsive and scalable solution. This companies Barzahlen and TransferWise, requires a comprehensive approach to insurance company Clark, and others. This technology capability throughout a business, approach also highly values monetizing data incorporating applications and platforms with through charging for its use, or selling it on to clear ownership and control.

Exhibit 9 | Digital Challenger Banks Leverage Partnerships to Reduce Time-to-market and Quickly Launch New Product and Features

Source: BCG x Expand FinTech Control Tower

Boston Consulting Group | 31 Cloud is a valuable enabler which all digital Technology stacks are often standardized to banks use to some degree. It provides a current technology offerings. These features flexible opportunity to trial new outline a checklist of key lessons which functionalities with limited investment, operators should recognize: offering both scalability and reliability. The level of innovation by public cloud providers • Architecture is owned by the bank, and is remarkable, with new modules such as represents an important competitive edge artificial intelligence or machine learning capabilities allowing banks to innovate faster. • Open source is safe to be used in a bank Banks benefit from the latest technologies at when properly governed and supported. It their fingertips, with limited effort. should be used to safeguard costs and to Developers are currently concentrated access a larger developer pool. Support around public cloud technologies, with and expertise can be outsourced professional training programs offered by providers to keep them up to date. These • Infrastructure is virtualized and tend to be offered through a self-service automated, so that developers can model, allowing small multi-disciplinary self-provision infrastructure for their teams to deliver real value. needs

Assessing the role of technology in successful • Build vs. buy is considered as a strategic digital banks reveals some core decision. Building or using open source commonalities. They tend to use open source products is often preferred over buy software, libraries, and frameworks. This open architecture enables easy integration • All processes are automated and paperless and avoids potential bottlenecks in integrating bespoke design. They often utilize • Technology is always current. Legacy microservices, and containerize to make technology is discouraged or not allowed components portable, reliable, scalable, and easy to maintain. Cloud is often a core part of • The software development lifecycle deployment, on either public or private cloud (SDLC) is agile and automated infrastructure. Simple, high performant, standard integrations are the norm. Agile • Integration is based on industry standards development and deployment is critical.

CASE STUDY REVOLUT

Revolut is a digital bank which has enjoyed ease of use, automated deployment, and significant success through placing control over security. The company also technology at the heart of its growth. Since adopted comprehensive use of cloud APIs its launch in 2015, Revolut has grown to with third-party automation to achieve a handle over 230 million transactions, and fully automated infrastructure-as-code on-boarded more than three million provisioning and platform management customers. It has gradually incorporated solution. This has enabled Revolut’s more features into its offering, leveraging developers to accelerate deployment of scalable architecture to include integration features and functionality, while enabling of more than 50 applications through its easy rollback of features if necessary. platform. Through integrating use of cloud identity Revolut built its core infrastructure through and access management tools, Revolut was compute engine virtual machines, giving its able to easily set up highly secure, engineers the perfect balance between compartmentalized infrastructure that

32 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA enables it to assign resources simply and Revolut’s use of this cloud-based approach quickly. That’s particularly important for has allowed them to build infrastructure digital banks, with the security of Revolut’s that can scale at speed without sacrificing large dataset a key part of its technology stability, automate deployment without decisions. The cloud-based solution compromising control, and help maintain allowed Revolut to ensure backup of data the security standards that are required of in a secure but less resource-intensive a financial services company. fashion.

Big Data And Analytics enabled through a platform which engages Big data and analytics provide the strategic with use of chatbots or virtual assistants, backbone to decision making for successful automated notifications, and dashboards. digital banks. This incorporates elements from product design right through to The potential of modern data analytics customer service and satisfaction. however goes beyond this more traditional Understanding and incorporating this data is approach, and unlocks potential around critical to personalized, customer-centric usage behavior, time-sensitive decision approaches that are crucial to digital banks. making, and even interests, motivation, and There are three key components of a psychology of customer journeys. This can personalization strategy — platform, features, inform even greater use of features provided and data (Exhibit 10). by digital banks, with aspects like smart credit decision making, time-sensitive offers, Data is the foundation for personalized third-party promotions, and a range of other intelligence, with advanced analytics on product and lifestyle features. This also forms transaction, customer, and other data types part of an optimized platform design that has allowing digital banks to build understanding UX personalization as a core functionality. of customer desires and expectations. Features can be adapted to deliver Data and analytics capabilities may be built personalized services based on this data, in-house, or acquired through partnerships ensuring that customers are served with with third-party providers. There are hyper-relevant content, products, and offers. numerous examples available on the market A data-driven platform then offers a today, for example The Waay, Persado, and personalized user experience, with intuitive Flybits all represent third-party operators interface that provide both positive which have engaged in successful partnership engagement and simple ease of use, with digital banks. alongside an adaptive approach that builds insight from data. The Waay is a third-party partner which boasts an ability to help banks understand Financial technology companies typically individual customers, analyzing and target different behavioral segments to offer presenting insight into their particular traits behavior-based personalization. As a result, and values. That enables digital banks to they often differ in data required, features target particular features or products, as well enabled, and the platform enhancements as align promotions with content that possible through analysis of that data. engages what’s important to customers. AI- powered technology partners Persado applies Utilizing more traditional behavioral data its understanding of language to create such as purchasing insights is enabled compelling messages for digital banks, through transaction data, which feeds into providing personalized messaging on landing standard personalization tools such as pages, apps, notifications, and customer personal financial management, balance communications that constantly evolves to warnings, and automated savings. This can be enhance engagement. That personalized

Boston Consulting Group | 33 Exhibit 10 | There Are Three Key Components to a Personalization Strategy

Source: BCG x Expand FinTech Control Tower

approach builds emotional engagement Such a start-up approach can present a real through language that boosts success for clash of ideals for incumbent operators digital banks. Flybits is another technology transitioning to digital banking. The partner that engages through data, using its management team is critical in steering the advanced analytics capabilities to provide a right trajectory, with a real need to recruit comprehensive insight into consumer appropriate management talent early on to demands and desires. That enables banks to steer the journey. Gather an appropriate pool incorporate contextualized offers and of leadership team candidates before promotions that speak to immediate needs of finalizing the consortium or organizational customers. approach where possible. Leaders must be comfortable with, and indeed enthusiastic about, this customer-centric approach. That Digital Start-Up Culture And means avoiding becoming tangled in a Talent culture of meetings in favour of an Embedding an appropriate start-up culture is operational focus on customers. Bureaucracy, essential to create a successful digital bank, a once an unflinching reality of banking, is particular challenge for incumbent players toxic to a truly effective start-up culture. transitioning into the space. This strategy should embrace a customer-obsessed A horizontal organization structure is critical approach, and seek to avoid traditional to agility. This should incorporate a strong IT elements of a legacy banking culture. team as key, and should not be siloed away from operational teams. Avoid fleshing out This approach is about remaining agile and organizations with team members from responsive, and being able to quickly add, existing consortiums or operational areas change, and improve products and services. where possible. Digital banks will thrive by The ability to react rapidly with speed and taking a new approach to banking, not by flexibility, enabled by a horizontal swamping positions with traditional organizational structure, is essential. mindsets. It is also crucial to have a good Innovation culture has been critical to success balance of technology experts and financial at tech giants like Google. Even during its experts. The more bankers you bring into rapid growth, this global giant has scaled your fresh, exciting digital bank, the more it innovation culture with focus on eight key will look like the legacy operation which pillars (Exhibit 11). businesses are attempting to transition away from.

34 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA Exhibit 11 | The Eight Pillars of Innovation

Source: Susan Wojcicki, CEO of YouTube

Obtaining talent in a competitive Communication With Regulators marketplace may not be easy. Digital skills The value of agility can only truly be enabled are in high demand, with digital disruption within an appropriate regulatory framework. now pervasive across all industries and Digital banks must work with regulators to geographies. Digital banks may have to look unlock the full potential of this remarkable to recruit outside traditional backgrounds or opportunity, ensuring that guide rails can markets. In BCG’s 2019 study Decoding steer transformation without limiting Digital Talent, Singapore was the only city innovation. within the Southeast Asia region to achieve a Regulators are seeking to assist digital top-20 spot in most attractive global banking growth, driven by two key destinations. Crucially however, a good work- imperatives. The first is to create competition life balance, learning and training for traditional incumbents, amplifying the opportunities, and career development need for better and more effective products possibilities reflected the most important and services. The second is the fundamental work preferences identified in the study. desire to drive better service delivery to Those are all features which an emerging underbanked segments. The latter is a digital bank could potentially leverage to particular focus in Southeast Asia. Regulators attract digital talent. are likely to examine five key factors in assessing the suitability of candidate digital How a digital bank staffs and governs is banks: critical. As they scale up, it’s important to think of traditional functions such as risk and • Path to profitability. Regulators will wish compliance differently. These digital banks to see a convincing path towards will need to combine technology and people, profitability for candidate digital banks. to provide the right balance of automated Many operators have shown impressive risk and compliance against the need to user growth, without truly achieving a constantly evolve and transform. The human breakeven which will be fundamental to factor will still be critical, with banks, the sustainable success of digital banking. operators, and regulators equally unprepared Many players have unproven business for a truly fully-automated compliance models, showing that innovation still vertical. requires recognition of financial demands

Boston Consulting Group | 35 • Key differentiation. With the priority • Ability to serve underserved. Regulators around reaching underbanked segments are likely to want to understand foremost in mind, regulators are likely to underbanked and underserved customer want to understand what differentiates a segments will be served by proposed digital bank’s proposition, and how digital banks unique it is in the marketplace. It is crucial for digital bank candidates to Technology platforms can be important communicate how they are different from partners in ensuring regulatory compliance. incumbents, and how they might employ These platforms have extensive experience transparent, robust technology building solutions that meet regulatory approaches and design to cater to the standards. In Singapore for example, Google demands of a customer-centric landscape supported cloud adoption solutions for partners that were uniquely designed to meet • Adherence to regulation. While enabling the requirements of the Monetary Authority digital banking opportunity requires of Singapore (MAS) guidelines on freedom to innovative to scale, it must outsourcing, creating a detailed mapping also cater to the underlying need to meet between MAS guidelines and Google Cloud existing banking regulation. That includes operations. These partnership approaches those which apply to existing incumbent leverage industry expertise from both sides of operators, as well as any evolving the technology and banking equation to regulation which may apply to digital design a solution that meets critical national banks and regional standards.

• Consumer protection. Regulators will wish to see how consumer protection will be ensured, cybersecurity risks mitigated, and data protection robustly implemented

36 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA SUMMARY NOW IS THE TIME TO ACT

IGITAL BANKING OFFERS HUGE as Google, Apple, AliBaba, and Tencent — DPOTENTIAL to the Southeast Asia organizations which have shown how region. Digital adoption has grown rapidly in substantial success can be leveraged from the recent years, with the region now home to a ability to adapt and rapidly scale to meet the digitally-connected population of over 400 needs of a diverse customer base. million citizens. This figure is likely to grow substantially in coming years, as mobile Customer-centricity is at the heart of a penetration and 4G coverage expands in a successful evolution. That will require region with a population expected to reach incumbent and challenger banks alike to 542 million by 2030. ensure user experience is central to both their business, and their unique technology This growing digital penetration, combined offering. Embracing the right operating with wider economic growth, reveals a model and ecosystem is critical to steering pressing need for innovation in banking this course, ensuring that the tools and services. Digital banking provides an functionality are enabled by the underlying opportunity to meet the demands of modern architecture and platforms. Selecting the right customers who are increasingly turning away technology is also fundamental to enabling from traditional banking products and this ethos of continual change. Equally services. This era of banking innovation also important however is embracing the right provides an important avenue to on-board data analytics and understanding to ensure unbanked or underbanked populations, in a that such evolution is built on sound strategic region where bank account adoption varies reasoning. This data-driven approach is also significantly across geographies. essential to unlocking the hyper-personalized products and features that can rapidly adapt While Digital Challenger Banks are emerging and appeal to a modern digital banking to disrupt the status quo, there is increasing audience. evidence of incumbent operators effectively entering the expanding digital banking Culture will be a major determiner of success. market. In doing so they face pressures to Digital transformation cannot succeed transform, moving away from legacy without embedding an appropriate start-up structures to a more agile form of operations. culture. Digital banks must think agile, and These transitions should be inspired by the act agile. That creates a particular challenge success of major technology companies such for incumbent banks, which will have to

Boston Consulting Group | 37 navigate the clash of new ideas against legacy With markets across the region exploring expectations. In all of this, digital banks pioneering digital banking licenses in coming should be careful to manage, monitor, and years, there has never been a more important respond to the regulatory environment in time to act for challengers and incumbent which they operate. Working in collaboration operators alike. The region is banking on with technology partners can provide a innovation to unlock greater access to a valuable opportunity to inform those choices future of customer-focused, personalized in a smart and effective manner. banking experiences.

38 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA FOR FURTHER READING

Southeast Asian Consumers Are Driving A Digital Payment Revolution A report by Boston Consulting Group, May 2020 Read the report

Decoding Digital Talent A report by Boston Consulting Group, May 2019 Read the report

Boston Consulting Group | 39 NOTE TO THE READER

Acknowledgments About the Authors For Further Contact The authors thank Selin Suntay and JungKiu Choi is a Managing Prasanna Santhanam Ian Loh from BCG Expand FinTech Director and Partner in the Managing Director and Partner Control Tower for their valuable Singapore office of Boston BCG Singapore contributions to the development of Consulting Group and a leader of [email protected] this report. the Financial Institutions practice JungKiu Choi The authors would also like to Prasanna Santhanam is a Managing Director and Partner thank Josh Turner, Belinda Hu and Managing Director and Partner in BCG Singapore Deepesh TK for their editorial, the Singapore office of Boston [email protected] design, and production support. Consulting Group and a leader of the Telecom, Media and Technology Pauline Wray (TMT) practice Managing Director and Global Lead BCG Expand FinTech Control Tower Pauline Wray is a Managing Singapore Director and Global Lead of the [email protected] BCG Expand FinTech Control Tower

Shobhit Shubhankar is a Consultant in the Kuala Lumpur office of Boston Consulting Group

Jeroen Vandensteen is a Senior IT Architect in the Singapore office of BCG Platinion

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