Southeast Asia Banks’ New Year’s Resolution: Stay the course on digitization

Written by Zennon Kapron || January 05 2022

Over the past few years, Southeast Asia’s traditional banks, which have historically been digital laggards, have become much more relevant. Leveraging their internal fintech capabilities, as well as best of breed external solutions, across the region, traditional banks are gradually becoming much more digitally adept and able to better serve users in everything from contactless payments to wealth management. The benefits are clear - a Fitch Ratings report argues banks with stronger digital transformation are more likely to secure recurring business and hit profit and innovation targets.

There’s a strong motivation to do so. Southeast Asia is very much a digital-first market where customers, due to preferences, limited infrastructure, or lack of alternatives, use their smartphones for everything from chatting with friends to buying milk. They also want that same anytime, anywhere, hyper-personalized experience from their financial institutions. With the smartphone being the device of choice, financial services, along with much of the rest of their daily activities happen on a consumer’s phone. Banks need to be there, not only through their proprietary apps and platforms but also through partner ecosystems such as Line, WeChat, Kakao, Grab, Alipay et al.

If banks won’t give it to them, there are a plethora of fintechs that will. Both international fintechs like Stripe and Wise, as well as local champions like Grab, GoJek, and Nium, have grown to capture significant market share in Asia and are offering a differentiated digital banking service that traditional banks have historically struggled to match.

It's all about payments

This is all in the context of a rapidly changing payments infrastructure. Nearly every Southeast Asian jurisdiction has moved to a domestic real-time payments (RTP) infrastructure and most have proxy overlay services such as PayNow and PromptPay that make sending money as easy as picking a contact’s details off your phone or scanning a QR code.

These platforms have grown rapidly to account for a significant amount of both domestic and cross-border payment flow and have also driven down fees. Payments have become a race to zero. Across the region, RTP-based P2P transfers are typically free, and retail POS payments are often less than 1%.

Finally, we’re at the cusp of what will likely be a massive digital banking wave with Singapore, Malaysia, and likely Indonesia all having digital banking launches in 2022. In developed markets, the discussion is more about increasing competition, whilst in developing markets, it’s all about getting people into the financial ecosystem.

What is the meaning of (banking) life?

So as we come into 2022, Southeast Asia’s traditional banks have their work cut out for them. Intense competition from declining fees, new market entrants, and more competitive value propositions will make the year challenging for banks, not even to mention the soul-searching that banks should be going through as they consider the implications of Banking as a Service (BaaS). At the end of 2022, a bank asked us “Should we just become a utility?” Err…

Although banks like DBS have taken a very confident stance that they will be able to compete with whatever the digital banks come up with, one has to imagine a certain amount of handwringing in the background as banks try to figure out their new year's resolutions. Much like the friend that always starts the new year with a gym commitment, will Southeast Asia’s banks be able to keep their commitment to digitization and stay ahead of the competition? It will be a key question for 2022.

Now if you'll excuse me, I need to go to the gym.