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Southeast Asia’s digital banks are a nascent but potent force

An Indian visitor gives a thumb impression to withdraw money from his bank account with his Aadhaar or Unique Identification (UID) card during a Digi Dhan Mela, held to promote digital payment, in Hyderabad on January 18, 2017. The Digi Dhan mela is a government initiative aimed at digital transformation in the country following the recent demonetization. / AFP / Noah SEELAM (Photo credit should read NOAH SEELAM/AFP/Getty Images)

John Mitchell is co-founder and chief executive of payments technology company Episode Six.

Singapore’s opening of its market to digital-only banks has seen companies, including ride-hailing service Grab, mobile network operator Singtel and Chinese online finance provider Ant Group plunge in as investors in new platforms that have launched in recent months.

The arrival of technology-focused groups has raised fears that traditional banks in Singapore and other Southeast Asian markets like Malaysia, Indonesia and Vietnam could be doomed to lose business and market share to savvy upstarts.

For now, there is no need for big bank chief executives to lose sleep over this potential competition. Incumbency creates powerful advantages, and there is a big difference between profile and profitability.

Most of Southeast Asia’s existing banks have trusted brands, large customer bases and a broad set of products and services that drive profitable business models. Digital and virtual banks have not had the time to match these formidable strengths yet.

The threat is real, though, if not immediate. Over time, the advantages of digital-first banks will start to count, especially among young and tech-savvy Southeast Asian consumers. Modern cloud-based infrastructure, outstanding user experience and a willingness to embed their financial services in other platforms could begin to give the upstarts an edge over their entrenched competitors.

This is because many people already expect financial services, especially payments, to be available in the places where they spend their digital lives, which are generally not on banking platforms. Research by International Data Corp. that Episode Six commissioned earlier this year forecasts that nonfinancial institutions will handle 74% of global consumer payments by 2030.

By then, IDC expects 80% of consumer payments handled by nonbanks to go through mobile or other connected devices, while 95% of physical noncash payments will be contactless, whether by card, phone or something virtual in the cloud. Anyone in Southeast Asia can already see this happening with the region’s ubiquitous superapps, including Grab, GoTo and local players like MoMo in Vietnam.

If established players commit to investing more in their own digital transformation over the coming five to 10 years, they will be able to reinforce their advantages and maintain their edge over this new generation of rivals. If they are not willing or able to do that, then legacy business models will one day be at risk from the new entrants.

The reality is that the existing technology of most banks in Southeast Asia is not fit for purpose when it comes to digital.

IDC’s research found that 86% of Asia-Pacific financial institutions still have payment technology infrastructures that are not well equipped for the ongoing shifts in consumer preferences. That puts $201 billion of payments revenue at risk in the region by 2030.

Remember that digital banks do not even need to take customers from existing banks to be successful. In many parts of Southeast Asia, more people have mobile phones than bank accounts, providing a ready unbanked market for newcomers. How profitable this kind of business can be is another question, of course.

So established banks in the region should not sit still, and some are not. The launch of GXS Bank in Singapore by Grab and Singtel was followed quickly by that of Trust Bank, a joint venture between Standard Chartered and local supermarket cooperative FairPrice Group.

In Indonesia, major banks like Bank Central Asia have been acquiring small rivals to convert them into digital platforms.

There will be more such deals. They offer incumbents a way to turbocharge their digitalization and give financial technology providers access to the incumbents’ trusted brands and customer bases. They are predicated on the same idea as the new entrants’ business models: that financial services need to be accessed through the platforms where people are increasingly spending their time.

This concept of embedded finance makes as much sense for established banks as it does for new ones.

In truth, all banks are digital now, or should be. In the past, people used to shop, be entertained and hail a ride in person. These activities took place in a town or city, so it made sense for banks to have a physical presence in those places, too. Now all those services and many more are delivered by mobile, so that is where all banks must be as well.

Changes in retail banking can move very slowly at first, and then all at once. We saw this before with the early days of internet banking.

But while it will take time for the new wave of digital banks to gain market share, how they serve customers today will set expectations for the broader industry, and they will become increasingly formidable competitors as time goes by. Southeast Asia’s traditional banks cannot afford to delay their investment in digital transformation.

These transformations will be expensive for established banks and could disrupt time-honored operational models. But the arrival of digital-first banks and the digital push by established players will be good news for societies as a whole across the region because this will increase access to financial services. In Indonesia, for example, between 65% and 75% of the population uses smartphones, but barely half of its citizens have a bank account.

Greater financial inclusion can be a powerful catalyst for prosperity among families and small businesses, and boost economies throughout the region. Banks that have been around for decades or more will recognize ultimately that what is good for their countries is good for them, too.