Digital banking offers traditional lenders an obstacle and opportunity: McKinsey

China Tencent’s “e-hongbao” service is the latest example of consumers seeking alternative financing channels. Traditional bank lenders should adopt these services or lose out to new rivals.

  • By Paolo Danese
  • 09 Feb 2014
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Asian banks that implement digital banking strategies could enjoy a potential 45% upside in profits and open new markets for retail and corporate banking, according to a new study from McKinsey published on January 23. However those that don’t risk losing customers to a rising number of rivals offering online banking services with far lower fixed costs.  

Asia is at the centre of what the study calls “a perfect storm” brought about by technology and consumer adoption of the latest innovations. Kenny Lam, a partner at McKinsey in Hong Kong, says banks need to up their game to avoid losing ground in this rapidly changing environment.

“The pace of change is quite rapid, [banks’] branch usage is dropping and there is a rising share of mobile usage. Even in second and third tier cities in China, banking is being done through mobile,” he said.  

Data in the McKinsey report states that branch usage in developed Asia dropped by 29% between 2007 and 2012 and fell an equivalent 26% in emerging Asia over the same time period, as customers leave branches for internet and mobile banking.

The survey’s findings between 2007 and 2012 mark the first time it has reported a drop in the usage of branches since it began in 1998. It also notes that Asia consumers are using new channels more than traditional channels for the first time.

The Chinese New Year holidays have shown just how real the threat of digital banking to traditional banking is. WeChat, an instant messaging provider owned by Chinese internet giant Tencent,  launched an “e-hongbao” service which allowed users to transfer funds from a debit card and then make gifts for a randomised amount to friends through a mobile phone.

The online service was a huge success, with Xinhua news agency reporting that, “in the 40 hours before 4pm on January 31 — Chinese New Year’s Day — more than five million WeChat users received money from more than 20 million virtual red envelopes.”

All this took place with little involvement from traditional banks.

Banks that are early adopters of digital banking appear to have some first mover advantage. Hana Bank in South Korea is one. The bank, according to Celent analyst KyongSun Kong, “has gained attention by launching the first smartphone banking service in South Korea”.

“All domestic banks in South Korea now provide smartphone banking services. The number of smartphone banking users has been increasing steadily and smartphone banking transactions accounts for some 40% of digital banking transactions in 2013 according to the announcement from Bank of Korea. There are some innovative approaches such as P2P (peer-to-peer) payment and loan applying by smartphone banking,” Kong said.

He added that all domestic banks in South Korea [now] provide smart phone banking services and that the number of smart phone banking transactions accounted for nearly 40% of digital banking transactions in 2013, according to an announcement from the Bank of Korea.

There are some innovative approaches such as P2P payment and loan applying by smart phone banking, Kong added. “Consumers are paying attention to banking services through not only their traditional banking transaction but also their extended services. It may lead to increase in profits in the future.”

Successful strategies for digital innovation in retail banking are also being applied to corporate banking. “Digital banking is leveraging new approaches. Relationship managers can have a better understanding of their accounts, supported by new technology,” Lam said.

Banks seeking to compete with new entrants into digital finance will need to carefully price the products they offer, but observers say this is possible due to the customer data they already possess.

“The reason for Alibaba’s pricing aggressiveness is that they understand cash flows through merchants that are active on Alibaba. Banks can create similar things through better customer relationship management and better use of data on corporates. That would allow them to better price products and services and provide more competitive prices,” Lam said.

Technology also offers banks the potential to offer their services to new clients.

“Large corporates are already covered well, but SMEs (small and medium enterprises) are still a huge afterthought. Banks could leverage online and mobile to cover smaller companies. Digital will help banks collect new data in a much more real-time and dynamic way and, in turn, help banks provide much more tailored products and pricing for clients, especially SMEs, which is a relative white space now,” Lam said.

The bottom line is quite clear. Banks need to leverage their existing territorial presence and enhance the banking experience with help from new technologies, or lose out to a new and more efficient breed of financial services providers. 

  • By Paolo Danese
  • 09 Feb 2014

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