Digital banking is gaining momentum across the Asia Pacific (APAC) driven mainly by forced lockdowns, mobility restrictions, and people’s fear of COVID-19. As affirmed by Backbase’s latest study titled “Fintech and Digital Banking 2025, which revealed 60% of bankable customers in the Philippines are willing to shift to digital banks.

The study also showed that the proportion of the unbanked and underbanked will be cut by about half to 20% of the country’s bankable population.

Backbase said banks in APAC are recalibrating their digital transformation program after realizing that “digital banks (are) enjoying three times the growth in customer bases compared to traditional banks.”

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“The events of 2020 have shown the resilience of the financial services industry, and organizations must refocus their efforts on becoming even more customer-driven and platform-oriented,” said Michael Araneta, AVP of IDC Financial Insights, Asia Pacific. “The insights from this report will help banks, neobanks, and fintech identify key areas of investment in preparation for 2025 and beyond.”

The report was conducted by industry analyst International Data Corp. (IDC) as commissioned by Backbase, a fintech software provider for financial institutions.

In response, incumbent banks are reinvigorating digital transformation initiatives, having had to accommodate at least a 50% growth in the quantity of digital customer transactions and interactions. Backbase said it is expected that organizations will undertake a comprehensive realignment of customer engagement projects, with the report having highlighted that digital capabilities are the key to resilience and winning the race to recover from pandemic-related setbacks.

Neobanks

As the effects of COVID-19 forced some banks and fintech companies to cease operations, also because of much stiffer competition among the more established competitors, the report predicts that there would 100 new challengers across the region by 2025.

“With new challengers presenting stronger post-pandemic propositions, there will be at least two digital banks in every APAC market that will pose a significant challenge to incumbents,” Backbase said in the report. “The remaining neo banks and second-round players are expected to compete on being digital-first. At the same time, 6 of the top 10 banks in the Philippines will launch their own digital banking brands in the market.”

The report saw two digital banks in the Philippines have enjoyed significant growth, and are anticipating their customer cases to grow by at least 80% every year until 2025. Some fintech firms that had gained sufficient size by 2019 also found success, gaining more market share than expected. Fintech categories that have typically shown success include payments, wealth advisory, alternative data, lending platforms, and account origination.

“To thrive in a post-pandemic world, organizations will need to keep their customers at the center by focusing on the removal of silos, providing greater levels of convenience, overcoming financial literacy challenges, and improving accessibility to lender and payment products,” said Riddhi Dutta, regional director for ASEAN & South Asia, Backbase.

Traditional banks

The Backbase study also saw APAC traditional banks are eyeing to become digital-first banks with innovation initiatives expected to re-accelerate in 2021 and “will most likely have a higher chance of success as banks restructure their agile and DevOps teams. 50% of Tier 1 banks already have agile frameworks in place.”

Digital transformation also allowed unbanked and underbanked and the report revealed banks acquired news customers or now have larger market share compared pre-COVID-19. It means, the report said, that investments in digital channels have paid off.

With this, the report saw that 44% of the top 250 banks in APAC will leverage platforms with componentized modernization and API-enablement.

The latest edition of the Fintech and Digital Banking 2025 (APAC) report found that 60% of banks in APAC will leverage artificial intelligence (AI) or machine learning (ML) technologies for data-driven decisions, compared to 48% from the previous year. One result of this is a more humanistic type of customer centricity, as the economic downturn required banks to communicate with customers in empathetic, trustworthy and reliable ways. This has been complemented by the increased integration of human agents into customer engagement strategies, as contact centers saw surges in usage.

A back-to-basics trend has also overtaken the need for new revenue sources. Banks will be focusing on digitalizing their core business of lending with some focus, subsequently, on deposits. New capabilities will be acquired from fintech partners: IDC predicts by the middle of 2021, 50% of lending decisions in retail banking will be supported by fintech propositions, underscoring accelerating bank-fintech collaboration[1]. Banks in the Philippines are expected to partner fintechs and telcos to improve distribution and availability of banking offerings, especially for payments and lending.