With increasing penetration of higher education levels, heightened living costs especially in financial hub cities, and increasing staff turnover especially during the pandemic, the global labour cost shot up by 11% between 2017 and 2022. In the same period, commercial rental cost increased in strategic locations in key markets such as Singapore. This has posed serious challenges for traditional banks which are still largely relying on their offline staff and networks of retail branches to compete, despite launching apps and websites with banking product-centred design. To reduce the operational expense, banks are closing physical locations, while the number of ATMs was also reduced by 101,000 globally in the same period.

The number of commercial bank branches declined globally by 12.3% between 2017 and 2022

^{Source: Euromonitor International}

The question is whether their digital channels can close the gap left by closed branches and removed ATMs.

The Rise of Digital Banks

The number of digital banks has increased to over 300 globally, thanks to supportive legislation with more licences (eg Malaysia granted five digital bank licences in 2022, while Thailand announced three digital bank licences to be released in 2024). They can be classified into a few categories: consortium banks, big techs’ subsidiaries, and neobanks. Leading incumbent banks have also launched their digital bank subsidiaries to experiment.

The number of digital banks has increased to over 300 globally

In Asia Pacific alone, there are over 100 digital banks, as of Q1 2023. Out of these digital banks, dozens have reported profits. The incumbent banks have been facing growing threats from those digital challengers which offer improved digital services and then competitive pricing. For example, a few digital banks (eg Discovery Bank, Money Lion) offer behaviour banking with dynamic pricing (the better the financial and physical behaviour, the better interest for the consumers). These digital banks have been gaining consumers’ confidence and, in turn, stealing share of wallet from incumbent banks and putting further pressure on their margins.

Traditional banks increasing fintech adoption

In response, incumbents have been investing in more digital solutions. A growing number of them have been working with financial technology (fintech) services, hoping to equip themselves with the best class of fintech engines to improve digital banking and defend against challengers. For example, One Connect Financial powers SBI group on credit, while Avaloq works with Mandiri on investment.

However, fintech partnerships alone do not guarantee success in market competition. There is much more to do for digital transformation in retail banking, and not everything can be acquired.

Acquisition vs change

What can be acquired?

• Market intelligence and consumer research to understand shifts in competitive landscape, consumer behaviour and priorities, and local knowledge to inform strategic planning and innovation.
• Strategic ecosystem partnerships to be established upon equity investment or corporate lending to accelerate customer acquisition and alternative data exchange for credit decisioning.
• Fintech engines to close the gaps on weak areas of banks’ technology, offering experiences of serving multiple financial institutions locally and regionally.
• Hybrid talents with knowledge and experience in both banking and technology can better bridge the business and tech divisions, deciding on the priorities of technology innovations to meet business goals.

What has to be changed internally?

• Corporate culture and ways of working need a top-down governance approach assisted by consultants, to drive the organisational transformation.
• Customer experience owned and improved by the banks, as customers can see the user interface (UI) and the product design, but cannot see fintechs behind the banks.
• Risk management is an art of artificial intelligence built upon superior models and huge data, as well as the core competency of each bank with different risk appetite.
• Management of banking agents for expansion in lower-tier cities and rural areas in emerging markets (eg India and Indonesia), to ensure that they have consistent performance.

The above analysis gives some flavour of key areas of digital transformation in retail banking, especially for the third generation of digital banking – mobile first/only. The banking industry is accelerating to move into the next generation, to achieve breakthrough in embedded finance, hyper-personalisation, block-chain and metaverse/holographic banking. Strategic planning at each bank may lay out its own priorities, based on its own strengths and weakness. With multiple priorities and limited resources, each bank may prioritise initiatives with higher and immediate impact, and then determine whether to build or buy.

Read our strategy briefing, Disruptive Trends of Digital Banks in Asia Pacific and Australasia, for more analysis on the digital transformation in retail banking.