This has been a year of mostly gloom and doom for hanks all over the world. Massive layoffs in Malaysia, the United States, Europe, I Hong Kong and China are tell tale signs of shrinking profits. Now, experts warn, banks face their own"Uber moment" digital alternatives to traditional banking. These alternatives from financial tech (fintech) firms and startups are expected to deliver a bruising blow to the already shaky banking sector.
Even Asian banks - profit leaders amidst economic slumps - are feeling the heat of such disruptions.
According to a report by KPMG and several universities, online alternative finance in Asia pacific (excluding China) recorded a transaction volume of US$1.1 bil (RM4.6 bil) last year - a whopping 313% year-on-year growth rate from 2013. On its own, China chalked up US$101.7 bil (RM420.8 bil) wirth of transactions last year.
In Malaysia, fintech has yet to get a big bite of the financial sector pie, but its appetite is growing. Online statistics provider Statista forecasts that fintech transactions will total US$6.3 bil (RM25.9 bil) this year - a small amount compared with transactions in the US totalling US$769.3 bil (RM3.2 trillion).
But Statista also predicts that our fintech dealings will more than double to US$14.4 bil (RM59.2 bil) in the next four years. Among local fintech firms are iMoney. AturDuit and MoneyMatch. Touch'n Go Sdn Bhd (TnG) recently launched its digital wallet and mobile first payment solutions.
How are banks staying on top of these new challenges? They Keep their enemies close.
In important business ares, big banks are already working with fintech far more than they are experiencing competition, according to Stephen Thomas, professor of finance and MBA course director at Cass Business School in the United Kingdom.
Thomas, who was speaking at the recent masterclass on challenges facing the banking sector in 2017 hosted by the Asian Banking School in Kuala Lumpur, cities the findings of McKinsey that show that fewer than 12% of fintech solutions disrupt existing business models among corporate and investment banking. (The masterclass is a lead-up to the Global Banking Leaders Programme.)
"The rest of the solutions are complementary (to banking processes)," he says.
Banks and technology firms are learning to be bedfellows in Malaysia, too. AmBank Group has worked with a fintech company to digitally enhance its retail banking. CIMB bank has launched an incubation programme for creating fintech solutions, and RHB recently hosted its first Financial Technology Hackathon (FinTechathon) with a leading fintech accelerator.
Gearing up for the digital revolution, Bank Negara Malaysia has issued a new regulatory sandbox framework, which allows fintech companies to experiment their solutions in a live enviroment.
Citing research by McKinsey, Thomas points out that operating digital-only banks is "cheaper" - good news for banks currently facing tight profits margins. The upfront capex of setting up IT system costs as low as US$25 mil (RM103 mil), which is a quarter of what traditional banks pay.
Maintenance of the systems for digital-only banks costs US$20 mil (RM82 mil), compared with the US$35 mil to Us$45 mil (RM144 mil to RM185 mil) for traditional banks.
Majority of Asian consumers seem open to virtual banking. In Mckinsey Personal Financial Services Digital Banking Survey 2014, 83% of those surveyed in developed Asia and 56% in emerging Asia said "yes" or "maybe" to opening an account with a pure-play digital bank.
Cost effective and potentially attractive to consumers - operating online may be everthing a bank wants, Unfortunately, it is not what a bank is. Going fully digital - the forte of nimble tech firms - requires agility that the bureaucratic financial sector can hardly muster.
"It takes three to sic years to revamp the IT system in a conventional bank, so new ideas coming in are introduced slowly. It's generally accepted that the fastest takes one to two years. Whereas Google's innovations are [implemented] in a couple of weeks, after a couple of months of development."says Thomas.
The Key to improving the agility of banking is in its people, he points out. Highly-regulated financial behemoths stand a better chance at adapting to change with a well-trained workforce. Equipped with the right skillsets, employees can be intra-preneurs - those who drive innovation and create solutions within a company.
Unfortunately, skills are in short supply in the local banking industry - 94% of banks find that the lack of competent talents is affecting the productivity of their business, according to a survey by the Asian Institute of Finance (AIF) last year.
The survey further highlighted that the skills most sorely needed are strategic thinking, project management, problem solving, analytical capability and management - the skills required to be an intra-preneurial banker.
AIF recorded that a quarter of employees do not think they get enough training for career development. More alarminglt, 61% of employers reported that they upskill workers - but it still leaves over a third of banking personnel not getting trained.
Banks according to Thomas, know that the skills shortage is a threat to growth.
"Banks" ability to tackle [the shortage of talent] is hampered by the uncertainly of directions. I would say that the uncertainly is only going to increase. That is the danger." he says.
Thomas reasons that the nervousness stems from compressed earnings. Low interest rates and low returns on equity (ROE) are squeezing banks' margins. The high debt worldwide, he explains, means that a rise in interest rates is unlikely as it may send economies into a deep global recession. Hence, bank profits will continue to shrink.
The shrinkage is less severe in Asia, but Thomas expects the region to be hit eventually, due to the linkages of markets.
Already the ROE in Asia Pacific are declining, falling from 15% in 2013 to 14% in 2014.
In Malaysia's case, there was a 7.9% drop in ROE margins from 2005 to 2014. To prevent our ROE from dipping further. Mckinsey Panorama reports that banks would need to shave costs by 18% despite earning less.
To attract more customers, banks have to be savvy with their evolving expectations. Citing the Performance against Customer Expectation (PACE) Index, Thomas points out that customers want a user-friendly and simple way to interact with financial profucts and services. They want personalised deals and product recommendations.
Consumers also like to be helped and guided to achieve their financial goals.
"it's time to go back to basics - what talent your business needs, [and] how you handle them." asserts Thomas.
He explains that by 2025, millennials will make up 72% of the workforce, and they will not want outdated concepts. This new generation of workers is tech-savvy and diverse in thoughts, both of which can be encouraged and leveraged to nurture a collaborative talent pool.
With slowing GDP growth and rising loan defaults, Asia Pacific banking is sailing into choppy waters. But Thomas sees plenty of opportunities that will foster growth as well. For example, banks in Asia can focus on the huge untapped crowd of consumers in the region who do not use financial services, and those who under-utilise it.
The expanding middle-class segment and the emerging small-medium enterprise are also areas for profit, if banks play their cards rights.
This article first appeared in Focus Malaysia, on October 22, 2016.
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