What will the new banking normal look like?
By Tan Bin Ru
The banking sector has traditionally been conservative in adopting emerging technologies, but things are changing rapidly with the entry of digital banks across Asia.
The COVID-19 outbreak has accelerated tech adoption and provided a fillip to digitalisation efforts across all sectors including financial services. While there has been a surge in demand for contactless and digital banking services, the pandemic has brought tremendous financial pressures on several financial institutions (FIs) as well.
Given economic uncertainty and concerns around future credit losses and liquidity, banks are planning to cut back on IT innovation spend and operating costs. There are however banks that acknowledge this is the opportune time to accelerate digital initiatives.
Shifts amid the pandemic
The pandemic has brought to light questions around the sustainability of digital banks’ rapid growth. Europe’s leading digital banks such as Monzo and Revolut are facing difficulties. Monzo’s valuation slid from $2.6 billion in 2019 to $1.6 billion this year despite having grown to four million accounts. Revolut at its recent town hall meeting accepted it has lost its operating leverage by getting “fat and weak”. It saw a near trebling of costs in a year due to rapid increase in employee numbers. Both banks are now aggressively cutting cost to sustain their burn rate.
Traditional banks are not far behind in the technological race because they have sufficient capital to tide through this crisis. Moreover, they have a loyal customer base that the new digital banks do not.
Frictionless banking is one of the end goals in digitalisation, but implementing technology around core processes is complex, time-consuming and costly. The challenge is deploying new technology without changing existing products, governance and business KPIs. The test is to convince FIs that a truly frictionless banking experience requires the user journey to be an absolute breeze.
Consider loan origination systems that can be completely digitalised. Starting from when an application is made, to underwriting the loan, the journey has to be frictionless, end-to-end and yet robust at the core.
Continuous R&D for AI to mature
There have also been rapid advancements in chatbots and voicebots. Until recently, these bots have not been smart enough to tackle dynamic questions due to a lack of training with enough scenarios and historical data. Nevertheless, they can be trained to be significantly smarter and more intelligent through machine learning over time.
A critical pre-requisite in artificial intelligence (AI) adoption and maturity is patience. There must be a long-term focus on research and development, and any expectations of immediate results or gains cast aside.
New tech developments in banking
Anti-fraud and risk modules have become important for banks in this macroeconomic environment. With risk and anti-fraud functions fully modularised on cloud, an act of applying a loan holiday function in a recession will be a simple one, which otherwise takes a long time on a traditional loan system.
Demand for credit-risk aversion technologies is expected to increase. Through the use of micro-expression polygraphs and anti-fraud technology, remote loan interviews can be conducted to reduce credit losses. This can also result in an overall reduction in the average loan approval turnaround time from five days to just two hours. This is already being achieved with the help of micro-expression technology.
A key obstacle in adoption and implementation of these technologies is banks’ expectation of a quick ROI. They expect a quick ROI and the yardstick is almost invariably share price. Return expectations can be set when investing in tested and proven technologies, but the same is not possible when investing in new and emerging technologies with no precedent. This is a big hurdle for banking boards to cross.
The availability of big data is still a challenge. Most banks do not keep historical data – the ability to collect and build a history of the right data has been limited. The effort to sieve out usable data is a massive undertaking. The technology is available to develop insightful outcomes, but the lack of usable data and regulations around data collection in some countries are impeding tech adoption.
Banking of the future
The pandemic has pushed the envelope in many ways. A singular focus on digitalisation is not enough, an equal commitment to profitability and sustainable growth are also required.
How the banking landscape looks in the future will depend on how well digital banks manage the sustainability of their operations, and in what way traditional banks make use of the capital they have. Many have been critical of digital banks, but the reality is they’ve barely been around for a decade, compared to banks that are 200 years old. It’s not going to be an easy start for digital banks, but this is just the beginning.
Tan Bin Ru is CEO of Southeast Asia at OneConnect, a Ping An Group technology-as-a-service subsidiary