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The Rise of Digital Banking in Southeast Asia

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The key takeaways from the report are that digital banking adoption is growing across Southeast Asia due to evolving customer expectations and increased digital penetration. The COVID-19 pandemic has further accelerated this trend by forcing digital transitions.

The main drivers of digital banking adoption in Southeast Asia mentioned in the report are evolving customer expectations, enhanced digital penetration in the region, and the COVID-19 pandemic accelerating digital transitions.

Some of the challenges faced by traditional banks in adapting to digital banking mentioned in the report include clash of new ideas against legacy expectations and having to change their operating model and culture to become more agile like startups.

The Rise of Digital

Banking in Southeast
Asia
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THE RISE OF DIGITAL
BANKING IN SOUTHEAST
ASIA

JUNGKIU CHOI

PRASANNA SANTHANAM

PAULINE WRAY

SHOBHIT SHUBHANKAR

JEROEN VANDENSTEEN

Comissioned by:

DECEMBER 2020 | Boston Consulting Group


CONTENTS

3 EXECUTIVE SUMMARY

5 THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA

7 CHARTING THE BANKING EVOLUTION

1 1 UNDERSTANDING EMERGING CHALLENGER BANKS

1 7 TRADITIONAL INCUMBENTS REACT AND RESPOND

2 1 SOUTHEAST ASIA’S DIGITAL BANKING OPPORTUNITY

2 3 SHIFTING ATTITUDES TO E-ADOPTION

2 5 FIVE ENABLERS OF DIGITAL BANKING ADOPTION

2 8 IMPERATIVES FOR BUILDING A SUCCESSFUL DIGITAL BANK

3 7 SUMMARY: NOW IS THE TIME TO ACT

2 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA


EXECUTIVE SUMMARY

D igital banking adoption is growing across Southeast Asia,


driven by evolving customer expectations and enhanced digital
penetration. The COVID-19 pandemic has accelerated this trend, as
enforced digital transitions have embedded a more immediate
impetus for change.

These drivers will see Southeast Asia’s digital banking opportunity


expanding significantly in coming years, reflecting a trend which has
seen over 200 new digital banks established globally over the last
decade. Since 2015, the number of digital banks has grown by 190%,
supported by significant investment and positively evolving
regulation.

Understanding Emerging Challengers


Institutional banks are now facing a new era of digital-first
competition. Customers looking for more personalized and targeted
offerings are turning away from incumbent operators towards a new
breed of digital-first challengers, launched by financial technology
(fintech) operators and non-financial institution (NFI) players. These
operators are unified by a focus on superior customer experience,
branchless design, and use of technology.

Emerging Digital Challenger Banks can be broadly slotted into two


main categories — those with, and those without, a full banking
license. Those institutions without full banking licenses are
categorized as Neobanks. Those with a full banking license are
identified as Challenger Banks. In this changing environment,
traditional operators face a growing pressure to transform. These
legacy incumbents must adapt if they are to defend, grow, and win in
this evolving landscape.

Imperatives For Digital Banking Success


Despite this remarkable landscape of opportunity, profitability
remains a major challenge for digital banks. Of the top 10 digital
banks by users globally, just five have achieved profitability.

Boston Consulting Group has identified six key ingredients for success
in building a profitable digital bank. It must be customer-centric and
respond to evolving customer needs. It must have an operating model
that leverages an effective digital ecosystem approach. It must be
built on the right tech principles and strategic choices to innovate fast

Boston Consulting Group | 3


and scale quickly. It should leverage big data and analytics to ensure
an informed pathway to personalization. It should operate on a digital
start-up culture and talent base rather than legacy banking culture. It
should communicate with regulators to create competition and meet
the needs of underbanked segments. These six key imperatives offer
the most effective pathway to unlock the full value of this emerging
opportunity.

4 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA


CHAPTER 1
THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA

D IGITAL BANKING IS ENJOYING a period


of remarkable growth in Southeast Asia.
Evolving customer expectations combined
trillion today. Mirroring this impressive
economic expansion has been growth within
the region’s digitally-connected population.
with growing digital penetration are driving There are now over 400 million internet users
the accelerating adoption of these innovative across the region, with a digital penetration
new banking models. of 63% set to rise rapidly in coming years.
Smartphone penetration has also been
Southeast Asia presents fertile ground for this central to this digital growth, with the region
banking revolution. The diverse but digitally- largely a mobile-first digital economy. More
connected population of over 650 million than 90% of the region’s 400+ million internet
citizens is ripe for disruption, as agile users connect via mobile phones. Expanding
emerging banking players compete against 4G penetration, alongside emerging 5G
incumbent operators striving to adapt to the opportunities, unlocks further potential for
rapidly evolving landscape. connected digital banking customers.

The region’s continued growth frames a The COVID-19 pandemic undoubtedly


lucrative environment of opportunity. presents challenges to Southeast Asia’s
Southeast Asia’s population is projected to decades of unbroken economic growth. Yet it
reach 542 million by 2030, positioning it has also delivered a remarkable catalyst for
behind only China, India, and the EU as most digital adoption both regionally, and globally.
populous regional markets. Economic growth While a firm projection remains difficult to
continues to outpace global averages in this ascertain, we at Boston Consulting Group
dynamic emerging region. The combined (BCG) estimate that the impact of the
gross domestic product (GDP) of major pandemic has accelerated digital adoption by
economies in the ASEAN 5 — Malaysia, several years globally.
Indonesia, Philippines, Singapore, Thailand
— could reach an estimated USD4.3 trillion This accelerator has been a clear driver of
by 2030, positioning it as the sixth-largest deepening digital banking adoption. In BCG’s
global economic bloc. June 2020 REBEX Pulse survey of 17,600
respondents across 30 countries, 16% of those
By any measure, Southeast Asia is a growth surveyed enrolled into online or mobile
success story. Regional GDP has expanded banking for the first time as a result of the
from USD2.02 trillion in 2010 to USD3.11 COVID-19 pandemic. This period of

Boston Consulting Group | 5


transformation has driven even reluctant branches less frequently, or stop visiting all
digital adopters to embrace digital banking together once the crisis is resolved. More than
for the first time. half of customers also noted a willingness to
open an account digitally if branches were
Use of digital channels increased significantly unavailable rather than delaying a purchase
during COVID-19 restrictions, with one in or opting for another provider.
three customers having used mobile banking
more than they did prior to the crisis. This Increasing connectivity, accelerating digital
rises to one in two for the 18-34 age group. adoption, and expanding economic wealth
Digital channels were also seen to have offer the foundations for extraordinary
delivered the highest satisfaction levels market potential. While innovative disruptors
during the crisis, smoothing the pathway to are likely to trigger rapid market change, this
sustained migration from physical to digital fast-evolving landscape presents a picture of
channels in the wake of COVID-19. One in opportunity for incumbent and emerging
four customers is expecting to use physical players alike.

6 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA


CHAPTER 2
CHARTING THE BANKING EVOLUTION

M ORE THAN 200 NEW digital banks


have been established globally since
2010, with uptake largely driven by growing
These characteristics enable digital banks to
reach untapped market segments at scale, a
major factor in the growing penetration of
customer expectations, digital familiarity, these challengers. Since 2015, the number of
and evolving regional regulations. Southeast digital banks has grown by 190%, in part
Asia is already deeply engaged in the early thanks to encouraging intervention by
stages of a digital banking evolution. regulators. Equity funding to start-ups in the
space has reached USD7.7 billion. This has
Legacy operators have initially been slow to led to Digital Challenger Banks rapidly
react to this changing landscape, with increasing customer bases, competing on
traditional financial offerings evolving far too lower cost to serve, speed of innovation, and
slowly in this environment of rampant differentiated propositions designed to meet
consumer expectation. Lack of personalized the identified needs of the modern banking
advice, high fees, and unattractive brand customer.
images have driven customer leakage away
from incumbent operators towards emerging
digital challengers. Evolving Customer Expectations
Evolving customer expectations have been a
This structural shift has given rise to a new core driver of digital banking adoption.
breed of digital-first challengers, launched by Customers are no longer content with simple
financial technology (fintech) operators and financial products, and are increasingly
non-financial institution (NFI) players. looking to engage with banks that offer
Emerging consortiums have also entered the relationships and experiences as part of their
market, adding greater competition for banking journey.
incumbent players looking to progress their
own digital banking initiatives. The modern digital world breeds expectation
of rapid resolution that digital banks have
While the propensity towards a particular leveraged through smart product offerings.
digital banking model varies by market, these That landscape of consumer empowerment
digital banks are broadly united by key can be summarized in six key expectations:
unifying traits — branchless design, superior
customer experience, and use of technology. • Targeted and personalized experiences

Boston Consulting Group | 7


• Frictionless omnichannel interaction a baby, which trigger customers’ engagement
with product offerings and services.
• End-to-end two-way communication Technology companies on the other hand
have taken a more demand-oriented
• Consistent response, anytime, anywhere approach, where customer-centricity
accelerates revenue growth above that of
• Authentic value-additive offering legacy institutions.

• Transparency, anticipation, and protection This changing customer landscape has


against risks generated significant demand for new
banking experiences that are highly
The expectation of a customer-first approach accessible and easy to use, particularly
has become deeply embedded in society, among millennials (Exhibit 1). Digital
largely resulting from growing exposure to banking services represent the most
responsive technology companies. These tech important drivers for the millennial market,
players have raised the bar on customer with customer-centricity and ease of account
service across multiple industries, including opening offering equally crucial
financial services. Amazon and Taobao have considerations.
transformed the retail commerce experience,
with the likes of Netflix and Facebook doing Across all respondents of BCG’s REBEX Pulse
the same in the media landscape. Uber, Grab, Survey, social responsibility, mobile and
Airbnb, Agoda, all represent tech-first internet banking offerings, and monetary
innovators that have transformed an existing considerations around cost and return on
industry vertical to a more customer-centric savings represent the top three drivers of
approach. digital banking adoption. The most notable
change from legacy expectations is perhaps
In the banking space, incumbent players have that three-quarters of respondents believe a
largely operated on principles of a business bank actively contributing to society and
or product-centric strategy oriented around exhibiting high moral standards is a major
supply. These revolve around key life events motivation for engagement.
such as job promotions, marriage, or birth of

Exhibit 1 | Changing User Expectations Demands for a New Banking Experience

Source: BCG REBEX Customer survey

8 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA


Exhibit 2 | Lack of Personalized Advice, High Fees, and Unattractive Image Are Top Reasons for Shifting
from Traditional Banks in SEA

Source: BCG Center for Customer Insight 2019 payments and digital banking survey of 3,250 consumers and 1,350 merchants in Indonesia,
Malaysia, Singapore, Thailand and Vietnam

Turning Away From Traditional At the same time as incumbent operators


Operators are wrestling with these challenges,
The transformation of consumer expectations emerging structural changes are generating
is creating significant challenges for even greater complexity. Technology
incumbent operators who have been slow to evolution continues at a pace that rivals
meet evolving consumer needs (Exhibit 2). changing consumer expectations. Cloud
infrastructure allows IT systems to be
Banks face a number of hurdles in fulfilling simple and scalable, which challenges
changing customer demands. Traditional legacy in-house systems that traditional
mindsets have hampered evolution, as operators once relied on. User-interfaces
evolving operational understanding is (UI) are becoming ubiquitous — you can
outpaced by the rapid transformation in now interact through large screens, small
customer expectations. Changing mindsets is screens, voice, and even gestures. The
only part of this challenge, with rigid and ability to process big data brings new
complex operating models presenting an insights, making it possible to introduce
equally intractable force. Changing the course heavily personalized product offerings.
of incumbent banks is somewhat akin to
turning an oil tanker, with the inexorable Regulation is also changing, with
pace of forward motion presenting a mechanisms such as open banking now
significant challenge in charting a new threatening to replace traditional models.
course. A highly regulated market and New types of licensed players are emerging.
analogue governance structure create Regulation for competition continues to
additional barriers for agility in evolve to fit the changing landscape.
transformation, embedding rigid approval
pathways that limit speed of change. The final piece in this puzzle comes from
our modern digital world itself. Digital
Lack of digital talent has furthered hampered life is now mainstream, and with it the
this transition, as incumbent operators expectations of instant gratification
struggle to manage transformation projects inherent in our digital world. Society is
with existing talent, and are faced with used to queries being answered at the
complex hiring needs in a notably end of a Google search. A taxi is just a
competitive talent landscape. button tap away through Grab, Gojek, Uber,

Boston Consulting Group | 9


or any one of these major on-demand
economy players. Directions are available
at the swipe of a screen through Google “Banks, governments,
Maps. The emergence of fresh technology
offerings provides a background excitement and tech players need to
to all that is ‘new’, creating an inherent
marketing burden for ‘old’ institutions
work together to digitize
appealing to a modern audience enthralled economies and increase
by exciting new trends.
financial inclusion.”
While this modern environment — Caesar Sengupta, General
undoubtedly offers challenges, it also
presents an unprecedented opportunity to Manager & VP, Payments and
expand banking access and provide vital
financial services to wider populations
Next Billion Users, Google.
across Southeast Asia. That is an
opportunity which can be best unwrapped
in partnership.

10 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA


CHAPTER 3
UNDERSTANDING EMERGING CHALLENGER BANKS

N EW DIGITAL BANKS ARE emerging to


aggressively challenge for market share
in this disrupted landscape. Since 2010, more
• Challenger Banks. Fintech Start-ups.
These are fintech start-ups that have
navigated their way towards attaining a
than 200 Digital Challenger Banks have full banking license. Some of these
been established globally, with 46 of them operators will have started out as a
founded in the Asia Pacific region. In its Neobank
report Southeast Asia: Coming of the Digital
Challenger Banks, BCG Expand Fintech • Challenger Banks. Non-FIs Backed, and
Control Tower, a subsidiary of the Boston Consortiums. These challenger banks
Consulting Group, identified four main types emerge from non-financial institution
of Digital Challenger Banks (Exhibit 3). players, and predominantly originate from
big tech companies, telecom companies,
Emerging Digital Challenger Banks can be and consortium-led players. They operate
broadly slotted into two main categories — with a full banking license
those with, and those without, a full banking
license. Those institutions without full While the possession of a full banking license
banking licenses are categorized as and route towards market might vary, these
Neobanks. Those with a full banking license Digital Challenger Banks share some unifying
are identified as Challenger Banks. traits that reflect their particular market
proposition:
• Neobank. Partnership. These are fintech
start-ups that partner with incumbent • Branchless. Customers can complete all
banks. They provide financial services via of their everyday banking needs online,
a sponsored banking license via web or mobile, with 100% digital
delivery covering all products and
• Neobank. Independent. These are services. This includes electronic know
fintech start-ups that operate without a your customer (KYC) capabilities which
legacy banking sponsor. These allow customers to sign up without
independent operators rely on their visiting a physical branch
product license and/or marketplace
strategy to provide ‘bank-like’ services to • Customer-focused. Superior customer
their customers experience is at the heart of their offering.

Boston Consulting Group | 11


Exhibit 3 | Four Types of Digital Challenger Banks

Source: BCG x Expand FinTech Control Tower

State-of-the-art user experience (UX) • Innovative value-added products.


design, instant and hassle-free service, and Neobanks are offering a number of
responsive customer service are core to innovative value-added products directly
delivery within their application such as insurance,
cryptocurrency purchases, and investment
• Tech-driven. New players utilize modular products
technology design, advanced analytics,
and agile governance, providing a service • Niche and underserved markets. Digital
which can rapidly respond and scale as banks are offering banking services to
demands change. Cloud-native focus, open SMEs, freelancers, and sole traders. These
architecture, and data-driven processes all areas are underserved by incumbents,
complement this approach enabling challengers to generate revenue
through fees charged on these accounts.
These core principles enable digital banks to Players are targeting specific niches such
reach a wide range of customer segments as migrants, young people, and the
rapidly and at scale. Revolut and KakaoBank underbanked
provide examples of digital banks serving
millennial segments, with strong personal • B2B banking-as-a-service (BaaS). Players
financial management (PFM) tools focused who have built their own infrastructure
on budgeting and saving. Monese and are now offering their platforms to be
WeBank offer solutions such as cash deposits used by other challenger banks,
at convenience stores to reach underbanked incumbents looking to expand to new
customers. Novo and Penta offer integrated markets, and financial institutions who
accounting tools and tax tracking for small need banking services for their customers
and medium enterprises (SMEs).
• Marketplace integration. Some
These digital banks are offering a range of challengers are offering marketplaces for
differentiated services, utilizing a set of financial or lifestyle products. These allow
strategic approaches that engage with core customers to compare and purchase
customer segments: products easily and securely from within
their banking application as part of a
lucrative ecosystem approach

12 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA


The Changing Face Of Counting The Benefits Of Digital
Competition Banking
Digital Challenger Banks are fundamentally Alongside meeting changing customer
changing the face of banking competition. expectations, digital banking is providing
The success of this evolution has other key benefits that are driving customer
demonstrated impressive results to date. adoption. All four of these key drivers are
There has been a 190% increase in the enabled by wider trends in expanding digital
number of Digital Challenger Banks since adoption and digital technology capabilities.
2015, initially spurred by pioneering changes
in regulation in the UK and Japan. Other Accessibility continues to be a critical factor
countries have followed suit, with 45% of in the rise of digital banking. Digital banks
digital banks now based in the Europe and are able to provide affordable and accessible
Middle East (EMEA) region, 35% in the services to traditionally underbanked
Americas, and 20% in the APAC region. population segments — for example 75% of
WeBank’s customers are blue-collar workers
Investment trends paint a revealing picture that have traditionally been unbanked or
of growth. More than 70% of equity funding underbanked in the Chinese market.
rounds have been funneled to early stage
firms, with Digital Challenger Banks This ability to tap underserved segments is a
dominating equity funding in EMEA and major benefit in Southeast Asia, where
APAC in the two decades between 2000 and financial access varies significantly across the
2020. This reflects an encouraging investment region. In its 2019 report on digital payments
landscape for digital banking players. — Southeast Asian Consumers Are Driving A
Digital Payment Revolution — BCG revealed
Charting the growth of Digital Challenger that while 90% of Malaysian consumers and
Banks reveals impressive early growth after 98% of Singaporeans own bank accounts, only
launch, typically acquiring customers rapidly 61% of Indonesians and 40% of Vietnamese
and leading to an exponential growth in their actively utilize these services. Equally
customer base. Korea’s KakaoBank on- revealing is that while 85% of Singaporeans
boarded 300,000 customers on its first day of have credit cards, the figure drops to 30% in
launch, and 1.5 million in its first week of Thailand, 11% in Vietnam, and a mere 6% in
operations. Revolut’s users nearly tripled Indonesia. While 42% of respondents in
between 2018 and 2019, up from 3.5 million Malaysia take out loans from banks, only 27%
to 10 million, with daily active customers do so in Singapore, and just 14% in Thailand.
growing by 231%. These two players reflect a This reveals the stark differences in financial
trend seen throughout the digital banking engagement across the region.
space.
Digital banks not only potentially offer better
There is a clear propensity towards certain access to bank accounts, but also digital
digital banking models in different payment channels which can unlock greater
jurisdictions, reflective of, and encouraged by, accessibility where credit card uptake is low.
the particular local market and regulatory Credit card penetration across Southeast Asia
factors. American markets are dominated by is estimated at ~4%. The COVID-19 pandemic
Neobanks leveraging partnerships with has also revealed how tech resilience can
legacy banking institutions. The EMEA is further enable accessibility in scenarios or
driven by fintech start-up challenger banks. geographies where physical branch access is
challenging. The more digital the landscape
In the APAC region, initial signs are that NFI is, the more accessible banking products are
players are leading the digital banking for a greater share of the population.
charge. More than half of established players
in Southeast Asia fit into this category, and Value realization is another key benefit of
almost two-thirds across the wider Asia digital banks, which typically generate better
region. unit economics than more traditional

Boston Consulting Group | 13


operators. Through better product pricing, as adaptive credit limits on cards, and instant
digital banks are often able to pass that value feedback through chatbot features.
on to customers. Examples include Digital
Challenger Banks leveraging new data
sources to define better credit scores, Risks And Challenges Of Digital
reducing risks when handling out loans. Banking
Digital banking is an exciting and valuable
Product features also present an important emerging opportunity, but it is not without its
draw for customers. Digital banks offer risks. Consumer protection is perhaps the
heightened personalization, largely enabled most prominent of these challenges,
by the technology focus of these operations. particularly in light of the rapid evolution of
This wider variety of product features is the landscape.
likely to be further enhanced as the market
expands, with a growing number of players Financial regulations on fintech players tend
strengthening the proposition for users. to be less restrictive than on the heavily-
These include smart saving solutions that regulated established institutions. Many
allow personalized and responsive features. founders come from non-banking
backgrounds, and may not fully understand
Customer experience is also a key benefit, the market risks. Fintech customers also
and particularly when considering the disproportionately belong to previously-
expanding expectations of customers unbanked segments, where financial literacy
highlighted as a catalyst for the changing tends to be lower. This can mean they are less
landscape. Digital banks are heavily focused informed on how to independently negotiate
on customer experience, leading to enhanced risks.
ease-of-use and convenience, making offers
increasingly accessible to users regardless of Cybersecurity breaches present an inflated
their digital confidence. This is evidenced risk to these tech-heavy offerings, with
through frictionless onboarding processes significant potential disruption from
without any need for hard copy successful attacks. Data protection is also a
documentation, as well as mechanisms such major concern, with multiple consumer data

Exhibit 4 | Few Digital Challenger Banks Globally Are Profitable Today

1. Top 10 Digital Challenger Banks in terms of users (Consumers)


Note: Indicative timelines and not to scale
Source: BCG FinTech Control Tower

14 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA


points and large volumes of data used for emerging digital players. Of the 10 top Digital
service personalization. This raises questions Challenger Banks globally by user base, just
of appropriate and secure data storage and five have achieved profitability (Exhibit 4).
usage.
We estimate that since 2000, there have been
The potential for long-term value erosion in a approximately 150 new digital banks
competitive market presents a further risk. established in developed markets. Of those
Many digital banking players are competing 150 banks, we identify seven which have
on price, potentially triggering a race to the started to generate profit. If we expand our
bottom style approach which leads to large- analysis beyond developed markets, we
scale value erosion in banking markets. assess that there have been 212 new digital
banks established globally since 2015. These
This value erosion feeds into a larger point include both licensed and unlicensed
around business sustainability. Digital banks operators. While major APAC players such as
focus on building scale through customer WeBank, Mybank, Kakao, and PayTM offer
acquisition. Profitability is typically achieved inspiration for success, there is still a long
only after 5-7 years of operations. Business way to go for most digital banks on the road
sustainability is not guaranteed, and there are to profitability.
as of yet limited successful examples in the
Asia region. Many players are oriented to The key drivers to profitability are a
success metrics based on achieving higher combination of fee-based and interest-based
valuations or greater volume of app revenue streams, together with a lower cost
downloads, which may not necessarily structure due to their app-centric approach.
transition into financial sustainability. This ensures lower operational costs due to
elimination of manual processing steps, and
The Digital Challenger Banks Reference reduced customer communication
Guide analysis undertaken by Singapore commitments. The absence of costly legacy
FinTech Association and BCG Expand IT infrastructure and branchless setup are
FinTech Control Tower shows that also important differentiators.
profitability remains a real hurdle for these

CASE STUDY
KAKAOBANK, SOUTH KOREA
South Korean digital banking player KakaoBank achieved 25% market
KakaoBank has been a notable winner penetration within just two years of launch,
amongst digital banks, meeting customer reaching 10 million users by June 2019. On
needs, creating financial viability, and the first day of launch, more than 300,000
maintaining a competitive edge that accounts were created, USD5 million
positions it as an exemplar in the space. deposited, and over 652,000 app downloads
undertaken. The bank now has an asset
South Korea is a highly mature banking base of over USD12 billion. What sets
market, with an average of two bank KakaoBank apart is a model which quickly
accounts per person. Credit cards are achieved break-even, with projections
widely used, with an average 3.6 per person suggesting the bank achieved a profit of
in circulation in the country. Just 20% of over USD20 million in 2019.
payment value is transacted in cash.
Crucially, it also boasts 95% smartphone Crucial to KakaoBank’s strategy has been
penetration, making it ripe for digital leveraging an ecosystem approach to digital
disruption. banking (Exhibit 5). The bank targeted the

Boston Consulting Group | 15


50 million users of partner platform typically delivered better returns than
KakaoTalk, and 22 million of payment existing major banks. Easy loan
solution KakaoPay, addressing a significant applications were offered with lower
pool of users with limited marketing interest rates, such as emergency loans
investment requirements. Familiar UI/UX allowing users to borrow emergency cash
from existing platforms also provided in as little as one minute.
simple engagement for transitioning
customers, with the design of the KakaoBank succeeded by combining this
KakaoBank app incorporated as part of the robust ecosystem approach with directly
existing ecosystem app interfaces. controlled governance, creating an agile
institution that could rapidly on-board new
KakaoBank also took a unique approach to customers. It incorporated clear
branding, extending brand engagement communication, an existing ecosystem user
into the banking market with Kakao base, and simple and effective product
Friends. This popular group of cartoon offerings to generate rapid growth. This led
characters helped engage audiences in an to per user acquisition costs of less than
industry that’s not traditionally known for USD25, reaching over 20% market
accessible branding, particularly appealing penetration and break-even by the third
to millennial groups. year of operations.

An aggressive pricing strategy rounded off


this successful launch. Savings accounts

Exhibit 5 | Kakao Has a Huge Ecosystem That KakaoBank Could Leverage

Source: BCG x Expand FinTech Control Tower, company press releases and publications

16 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA


CHAPTER 4
TRADITIONAL INCUMBENTS REACT AND RESPOND

W HILE INITIALLY SLOW TO react,


traditional incumbents across
Southeast Asia are gaining momentum as
each imperative framing a particular banking
model:

they seek to penetrate the growing digital • Defend. Defend market position in an
banking market, protecting market share increasingly competitive landscape that
against incursions by emerging challengers. comprises traditional banks, established
digital banks, Neobanks, and possible
Incumbents are transforming to meet platform players. This applies
changing customer expectations in the predominantly to digital banks and direct
rapidly evolving landscape, catering for a banks seeking growth
marketplace where digital is increasingly
mainstream. These operators are aiming to • Grow. Tap into new demand spaces
create their own low-cost operating models arising from changing customer
that can win in a low-growth future expectations that are not currently being
environment. met by offerings from traditional banks.
Digital-only subsidiaries are the segment
The number of digital banks launched by primarily driven by this imperative
incumbents globally has doubled over the
last decade, with offerings largely driven by • Win. Create a low-cost model that can win
mobile-first digital banks. One example is in a low-growth environment with more
Union Overseas Bank’s (UOB) TMRW, which stringent compliance requirements. This
operates a mobile-first approach with a full reflects the partnership relationship
suite of banking solutions, looking to engage between existing incumbent banks and
the essential millennial market segment. emerging fintech operators
Players such as mBank, ING, and Openbank
all represent existing players transforming to Incumbent players are typically taking one of
a new digital-first model. three different paths towards a digital
banking model. Digital bank or direct bank
Digital banking is self-evidently not a passing models have been adopted by players such as
phase, and incumbents are facing increasing HSBC and ING. Digital-only subsidiaries have
pressure to build their own home market been established by others, with examples
digital challenger. These pressures can be such as UOB’s TMRW, and Bank Leumi’s
summarized with three key imperatives, with Pepper. Partnerships between incumbent

Boston Consulting Group | 17


banks and fintech operators are the third comprising 90% of all digital banks
strand, demonstrated by the likes of Chime launched by incumbent operators. Over the
and Up. last decade that story has changed, with
domestic banks driving growth. Of the 38
This is not the first period of digital digital banks launched by legacy operators
disruption experienced by incumbent banks. over this decade, 14 have been launched
The first such wave emerged with the advent from domestic banks, and 16 from regional
of widespread internet use in the late ‘90s banking operators.
and early ‘00s, offering an important learning
template for incumbents as this new wave of Regional banks are commonly launched
digital transformation hits (Exhibit 6). by players who are already leaders in
their home market such as DBS and UOB.
The first wave of digital disruption Their core market tends to be targeted
triggered a scramble for new market share. at disrupting themselves to address an
Many incumbent operators transitioned emerging pool of digital native customers.
towards internet-based offerings. Some A second approach can be seen in
of these offerings were successful, while those regional banks challenging local
others faded away over time. incumbents despite having a more limited
physical presence in identified target
The new wave of digital banks are markets.
increasingly mobile-first, driven by rapid
global mobile adoption. While the first Domestic banks however tend to launch
wave of digital disruption emerged in a smaller domestic players, typically in less
broadly level playing field, the new wave developed markets. Digital banks such as
of digital banking sees technology and EON Bank, ME, and Timo are examples of
technical capabilities being an increasingly this strategy. These incumbent domestic
important differentiator of success. players digitize in order to compete with
local leaders by targeting the growing
Global and regional banks led early digital and youth customer segments.
adoption in the period 1990-2008,

Exhibit 6 | Early Innovators Launched Online Banks in Response to the Internet While Recent Players
Immediately Adopted a Mobile-first Strategy

Source: BCG x Expand FinTech Control Tower

18 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA


Three Approaches For Success operator UOB embraced an in-house build
Broadly speaking, incumbent operators are to successfully launch its TMRW digital
taking one of three distinct approaches to bank in Thailand in 2019. It plans to
successful launch of digital banking roll-out across other markets in Southeast
operations: Asia in coming years, thanks to the
underlying architecture and
• Acquisitions. Acquiring and investing in personalization capabilities powered by
existing tech assets to build up digital tech providers Personetics and Meniga
reach and digital capabilities. BBVA
utilized this strategy by acquiring Simple • Partner. Providing banking licenses to
in 2014 for USD117 million, going on to create a joint digital bank with technology
invest in a 39% stake in UK-based Atom partner(s). European VPBank partnered
Bank in 2015. In 2016 they acquired with Timo to offer banking license and
Finnish bank Holvi, and invested in core banking systems, as well as KYC
German SolarisBank in 2018 functionality as part of a revenue sharing
agreement. In turn, Timo enabled VPBank
• In-house builds. Leveraging tech to experiment with building a new
providers to power digital capabilities for technology stack, as well as adopting new
a new digital bank. Singaporean legacy on-boarding methodologies

CASE STUDY
UOB TMRW, THAILAND
Singaporean UOB bank is an incumbent notifications. Smart saving functionality
operator with over 90 years of banking offers personalized saving advice, and
legacy behind it. In 2019 it launched digital gamifies savings through a virtual city
banking subsidiary TMRW, a mobile-only game which grows as savings increase.
bank designed to tap into the lucrative Customer service is complemented through
millennial segment of emerging banking a 24-hour chatbot. This smart functionality
markets through a core focus on customer- is enabled through partnership with AI
centricity. experts Personetics and Avatec.ai, as well
as tech company Meniga.
UOB’s TMRW offers a full suite of banking
solutions through a smart mobile-only app, TMRW leverages Personetics as a
leveraging the parent company’s extensive technology solution which supports digital
industry experience through a digital-only banks through an assist, act, engage
model. approach. The advanced AI provides an
assistance chatbot that can interact in
The TMRW offering is based around a natural language, with deep financial
user-friendly app that directly appeals to domain proficiency, incorporating customer
the millennial market segment. It boasts a data to provide both a reactive and
focus on a good on-boarding experience, proactive solution. It can engage customers
with users able to open a TMRW account through analysis that flags unusual
in just seven minutes. The TMRW app transactions, offering smart saving alerts
includes features that analyze and predict and financial guidance. It acts through
cash flow in accounts and patterns of defined decision pathways to automatically
upcoming payments. Spend tracking allows move funds or pay credit card balances
simple budgeting and payment and spend based on cash flow needs and predicted

Boston Consulting Group | 19


human behavior, offering unique benefits to February 2020. TMRW’s future plans are
to customer-centricity at the heart of the to achieve a 35% cost-to-income ratio
TMRW offer. within five years, with a customer base of
up to five million across that same
This advanced technology approach has timeframe.
contributed to TMRW delivering impressive
early results, tripling its customer base in
Thailand in six months from August 2019

CASE STUDY
BANK BRI, INDONESIA
With more than 10,000 offices across approach enables the bank to on-board
Indonesia, Bank BRI has the largest new partners in less than an hour,
physical network of banks of any bank in compared to up to six months for previous
the Southeast Asia region. Now Bank BRI legacy technology systems. Partners can
is transforming its legacy operations with a use the Bank BRI Apigee developer portal
digital banking solution designed to to register, browse APIs, conduct testing
increase financial inclusion in Indonesia within a sandbox, and produce new
through smart use of a cloud-based API products.
approach.
This cloud-based API approach provides
Bank BRI launched a digital banking automation and agility which allowed Bank
operation as part of a target to achieve 84% BRI’s offering to integrate with platforms
banking system participation by 2022. Its such as the Indonesian Government’s ID
innovative digital strategy has seen it database, providing automatic verification
leapfrog fintech competition, with and rapid on-boarding while tackling
indications that it has achieved 70% important fraud or identity concerns,
financial inclusion across the country by enabling quicker, more confident lending
the end of 2019. decisions. An open API marketplace makes
it easy to serve fintech operators, with
Bank BRI utilized a web-native approach more than 50 monetized open APIs and 70
using open application programming ecosystem partners benefiting from the
interfaces (APIs) to create and monetize bank’s wealth of big data insight and
products. Adopting this cloud-based API financial experience.

20 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA


CHAPTER 5
SOUTHEAST ASIA’S DIGITAL BANKING OPPORTUNITY

I NCUMBENT BANKS AND DIGITAL


Challenger Banks are both seeking to
access a remarkable opportunity in
the total Digital Challenger Banks in the
region.

Southeast Asia’s growing market. In Korea, KakaoBank represents a successful


NFI approach with over 10 million users.
Southeast Asia’s population is expected to China’s WeBank is an NFI/consortium player
grow from 487 million today to reach 542 which generated USD570 million profit and
million by 2030, positioning it behind only served 300 million customers in 2019.
the EU, India, and China as most populous MyBank is another Chinese challenger
regional markets. Indonesia alone — the following a similar path, serving 12 million
largest regional market — is the fourth users in 2018.
largest country globally by population, with a
population of nearly 300 million. The volume of investment in fintech
operators reveals a real appetite for funding
The gross domestic product (GDP) of major innovative financial models. Analysis by BCG
economies the ASEAN 5 — Malaysia, indicates there are currently 1,587 fintechs
Indonesia, Philippines, Singapore, Thailand operating in Southeast Asia, which have
— is expected to grow to reach USD4.3 attracted a cumulative total of USD4.8 billion
trillion by 2030, up from around USD3 trillion of equity funding. By far the greatest share of
today. That positions the ASEAN 5 as the those start-ups emerged in Singapore.
sixth-largest economic bloc globally, a figure
which grows further when the economies of A breakdown of investment figures reveals
Brunei, Cambodia, Laos, Myanmar, and that fintech funding is largely driven by retail
Vietnam are added to the total. banking. Retail banking fintechs represent
35% of total businesses, and 60% of equity
funding.
The Evolving Financial Landscape
Southeast Asia and the wider APAC region Innovation-enabling regulation has been
are in the midst of a banking evolution. There fundamental for this expanding tech-driven
are now more than 40 Digital Challenger financial landscape, with important
Banks across APAC, largely driven by backing implications for fintechs such as Digital
from tech giants, NFIs, and consortium Challenger Banks. Singapore and Malaysia
operators. These style of NFI and consortium- introduced privacy regulations in 2012 and
backed operating models account for half of 2010 respectively, laying the groundwork for

Boston Consulting Group | 21


a digital finance landscape. Both e-money coming years, as first-mover Singapore is set
regulation and open banking reform were to grant five digital banking licenses for
introduced in following years. Thailand operation in its banking markets by the end
meanwhile introduced E-KYC regulations in of 2020. Bank Negara Malaysia recently
2016. These three countries have been released its own draft framework for licensing
regional pioneers in adopting activity-based digital bank operators. Thailand, Indonesia,
and digital-enabling regulations over the last and Vietnam have all indicated that further
decade. Recent regulations introduced in enabling digital banking regulations will
Philippines, Vietnam, and Indonesia offer an likely be introduced in the next 12-24 months.
encouraging outlook in other key regional These enabling regulations will be important
markets. in ensuring the region can leverage the
greatest possible value from emerging digital
Southeast Asia approaches a seminal banking opportunities.
moment in its digital banking journey in

22 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA


CHAPTER 6
SHIFTING ATTITUDES TO E-ADOPTION

S OUTHEAST ASIA’S DIGITAL BANKING


opportunity is energized by a wider
trend of digital adoption witnessed in recent
Singapore to 14% in Vietnam. Expansion of
this coverage will accelerate digital adoption
further.
years. This is now a dynamic and digitally-
connected region, with digital channels Growing smartphone penetration has led to
forming a central part of everyday life. significant growth in e-payment solutions,
revealing a strong regional appetite for digital
A consumer might wake up in Kuala Lumpur, financial products. This is a global trend with
call a taxi with the tap of a button through significant regional ramifications. BCG
Grab, and during transit log in to their online estimates that up to USD23 trillion of global
check-in booked through Traveloka for a payments are set to shift online within the
flight to Indonesia. While awaiting their next 10 years. Between 2017 and 2019 the
plane they order some gifts for a family number of e-wallet users globally exploded
member through Lazada, or browse Facebook from 500 million to 2.1 billion. Crucially for
or Instagram to check in with friends. On the digital banking, e-payments provide a
flight they use Google to search the location gateway opportunity to digital financial
of their hotel, identify nearby attractions, and products which can have a lasting impact on
assess local weather conditions. Upon arrival digital banking adoption.
they use the Gojek app to hail a ride, digitally
check-in at the hotel, and book dinner E-wallets such as Boost in Malaysia and Ovo
through restaurant booking app Qraved. in Indonesia are now household names. The
gross transaction value (GTV) of electronic
This digital mindset is an essential part of the and mobile payments is expected to reach
fertile landscape for digital banking players. USD130 billion by 2023. At least 10% of the
Central to this growth has been the adult populations of Malaysia, Vietnam,
accelerating penetration of smartphones and Thailand, Indonesia, and Singapore already
4G data services. Southeast Asia is a mobile- use e-wallets, and penetration rates are well
first digital ecosystem, with 90% of the ahead of those in advanced economies. Just
region’s 400+ million internet users under half (49%) of urban consumers in the
connecting via mobile phones. The region who are commercial bank customers
prevalence of 4G-connected smartphones use e-wallets, with that figure expected to rise
ranges from 116% of the total population in to 84% by 2025.

Boston Consulting Group | 23


COVID-19 has accelerated this transition Asia. The value of the region’s internet
globally, with digital payment usage economy is expected to triple in coming
expanding by more than 20%, and cards by years, from USD100 billion in 2019 to
more than 10% during this period according USD300 billion in 2025. E-commerce is a
to analysis from BCG’s REBEX Pulse survey. major driver of that growth, with active
The role of regulation in enabling this e-commerce users growing from 49 million in
opportunity is an important lesson for the 2015 to 150 million in 2019. The substantial
digital banking space. Several governments in growth value of the market for ride hailing,
Southeast Asia have released policy online media, online travel, and e-commerce
documents or frameworks to increase non- all reveal deep and significant trends towards
cash usage in the economy. For example, growing digital usage in everyday lives.
Malaysia introduced its Financial Sector
Blueprint 2011-20. The Philippines crafted a Southeast Asia is ripe for digital disruption,
national strategy for financial inclusion in with rising digital preparedness and low
2015, and Thailand introduced its National penetration of traditional financial products.
e-Payment Master Plan in December 2015. This positive customer sentiment towards
digital journeys is compelling, and one which
E-wallets aren’t the only area of digital life has major implications for the digital banking
which shows impressive growth in Southeast industry.

24 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA


CHAPTER 7
FIVE ENABLERS OF DIGITAL BANKING ADOPTION

D IGITAL BANKING ADOPTION IS


poised to benefit from growing digital
acceptance across Southeast Asia. While this
• Technology adoption, and talent. Cloud
adoption and the presence of technology
talent are key enablers of growth for
journey is encouraging for operators, there digital banks
remain several key pre-requisites which
ecosystem stakeholders should both • National digital ID system. Presence of a
recognize and nurture in order to further national digital ID system can be a strong
enable this opportunity: enabler through easing verification and
KYC processes, further boosting
• Unmet customer need. The rise of digital transparency
banking is enabled when traditional
incumbents are unable to consistently
meet consumer needs The Critical Role Of Digital Id
Digital ID is a particularly crucial enabler of
• Smartphone and internet penetration. digital banking opportunity. This mechanism
High smartphone and digital penetration provides a foundation to trusted identity
generate wider accessibility, and a greater services which allow operators to quickly
addressable market. The presence of identify and assess customers. The role of
digital payment systems offers a platform digital ID offers a boost to four core areas of
on which wider digital banking service:
engagement can be built
• Enrolment and verification. Providing
• Cloud availability and acceptance. identity while on-boarding to a new
Supporting regulation that allows product or service, enabling rapid ID for
operators to host banking systems on the later interactions
cloud is essential. This opportunity is
contingent on cloud providers having • Authentication. Providing identity in
sufficient presence in a country or region order to simply and securely access an
to comply with relevant data sovereignty existing product or service through a
regulations variety of channels

Boston Consulting Group | 25


• Delegation. Providing authority for a and boosting the all-important regulatory
third-party to act on another’s behalf compliance for operators. Consumers benefit
through more traceable digital cash
• Notification. Proving identity in order to transactions that reduce their exposure to
update identity information such as data losses, as well as a more transparent tax
sharing or service provision system. There do however remain privacy
concerns which should be tackled in
The existence of a digital ID framework can implementing such measures.
greatly enhance digital banking adoption,
providing a crucial accelerator for a cashless Simplifying authentication and financial on-
society that feeds into a wider digital boarding also makes transactions a more
financial system. Security and trust obviously accessible and seamless experience. This can
offer an important part of this. Digital ID have important implications around financial
reduces the burden on financial institutions accessibility for underbanked populations.
for KYC processes, allowing trusted real-time
authentication through a highly secure There are a range of national ID frameworks
network. Secure digital ID also reinforces in operation or testing across Southeast Asia.
consumer confidence in digital transactions, Thailand is exploring a blockchain-based
increasing use of products such as e-payment database that offers real-time identification
and digital banking while at the same time verification alongside facial recognition
tackling key fraud concerns. technology. Meanwhile Singapore’s digital ID
program looks to build on existing
Digital ID offers an important contribution to frameworks such as SingPass and MyInfo
critical anti-money laundering (AML) efforts, with introduction of its National Digital
increasing transparency in financial systems Identity (NDI) program.

CASE STUDY
SOUTH KOREA
South Korea offers a valuable case study of portability that incorporated aggregated
success in enabling the rise of digital banks GIRO payment information across
in its market. Financial system reform and multiple accounts offered by 18 banks
supportive infrastructure were introduced and 54 fintech operators. Any citizen
that provided a strong enabling with a mobile phone was instantly able
atmosphere for digital banking adoption to access open banking services. This
and growth: tackled issues around funds left in
dormant bank accounts, providing full
• National ID system. Korea rolled out consolidation and control by enabling a
a national digital ID system that began centralized infrastructure for open
with a photo-based ID in 2015. This banking. This open banking spurred
enabled digital enrolment, innovation, creating a seamless bank
authentication, and led to a rise in account transfer process that deepened
online transactions. It reduced the risk competition. Open banking provides a
of ID fraud and thus increased convenient and consolidated view of
confidence in digital banking solutions accounts that further empowers
personal finance management that
• Open banking. Korea implemented an benefits customers, at the same time
open banking approach to accelerate enabling digital banks to more rapidly
innovation and boost banking services. innovate PFM solutions. Emerging
This included elements such as account challengers are also now better able to

26 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA


integrate new offers and services thanks program in 2017, with the aim to
to an open API, at the same time become coinless by 2020. This program
reducing costs and eliminating market generated increased awareness of
access barriers digital payments and banking solutions,
and helped further promote adoption
• Coinless Korea program. Bank of
Korea launched a coinless society pilot

Boston Consulting Group | 27


CHAPTER 8
IMPERATIVES FOR BUILDING A SUCCESSFUL DIGITAL BANK

U NLOCKING SUCCESS FOR DIGITAL


banks remains challenging in a complex
operating environment. While there is no
Digital banks can look to these leaders in the
technology field in order to understand and
adapt their own customer experience focus.
defined recipe for success, BCG’s analysis An organization like Google provides an
reveals that are a number of key ingredients aspirational template, with a wide range of
which are essential in ensuring a digital products offered across a user base of more
bank can prosper. These six imperatives than 1 billion global customers.
represent a valuable framework for a
successful digital bank (Exhibit 7). Building solutions that are customer-focused
is a core component in the rise of digital
banking. Offerings should be designed to
Customer-Centricity address unmet customer needs, remove
Digital ID is a particularly crucial enabler of friction in processes, promote interaction, and
digital banking opportunity. This mechanism offer a unique or differentiated product.
provides a foundation to trusted identity These benefits represent some of the key
services which allow operators to quickly ways in which leading digital banks are
identify and assess customers. The role of differentiating from incumbents, building
digital ID offers a boost to four core areas of significant traction through key
service. functionalities:

Customer-centricity is at the heart of our • Low friction app downloads and rapid
modern digital world. Digital technology on-boarding. Customers can sign up for a
leaders have nurtured an environment of bank account from anywhere in a matter
rapid convenience, where products and of minutes. On average it takes just five
services are designed to deliver frictionless minutes to open a typical digital banking
customer experience across a broad range of account
day-to-day activities. Global tech giants such
as Apple, Alibaba, Tencent, and Google are • Engaging user experience. Well-
exemplars in this digital journey, with designed apps allow customers to
integrated offerings spanning from effortlessly carry out their banking needs
communication and entertainment to and gain insight into their spending
mapping, augmented reality information behavior. All leading digital players offer
services, and e-payments. PFM tools with their current account
products

28 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA


Exhibit 7 | Imperatives for Building a Successful Digital Bank

• Key ‘anchor products’. Products such as and shared social payment account allows
commission-free FX provide customers members to easily share and track funds,
with more competitive services than while also offering quirky reminder messages
traditional banks for outstanding transfers. TMRW utilizes PFM
tools and smart savings, alongside a 24-hour
• Value-added services. A data-rich chatbot, to ensure frictionless and customer-
relationship and added services such as focused functionality.
PFM tools and integrated marketplaces
create platforms that provide an enhanced Excellent user experience (UX) and user
but personalized banking experience. interfaces (UI) are critical prerequisites of a
Value-added services can be easily digital bank offering, not a differentiating
purchased, saving users time and effort factor. Simple, user-friendly design is
searching alternative providers. fundamental in effective delivery.
Marketplace platforms also offer instant
choice and financial lifestyle products Customer obsession is realized by leveraging
directly within the app human-centered design, developed through a
lean start-up approach that embraces agile
Digital bank Revolut offers an example of an sprints and a DevOps mentality, enabling
emerging digital bank driving growth through digital banks to build and maintain solutions
this proposition. Commission-free FX helped that customers want across all stages of the
simplify travel and address an unmet need. product lifecycle. Explore what customers
Simple and fast on-boarding and free want, experiment and understand, build the
accounts were designed for frictionless user right thing, and ensure continuous support
experience. Unique card branding and for the end product.
innovative cryptocurrency exchange offers a
unique attraction for customers. An online
community and daily banking needs added Operating Model And Ecosystem
that element of interaction. Digital banks need to leverage digital ways of
working and build a proprietary ecosystem in
KakaoBank and TMRW showcase two other which they guard their freedom to operate.
digital banks employing customer experience Banks without these propriety ecosystems or
as an important differentiator. Both banks assets are at risk of being replicable, and
seek to leverage the idea of customer eventually supplanted by emerging new
obsession and engagement as a model to challengers.
drive adoption. KakaoBank’s Eat Lover Club

Boston Consulting Group | 29


Operating models should be based on an Operators should look to ways to benefit
end-to-end digital process that ensures a from an ecosystem approach, leveraging the
fully-digitized pathway for both internal and data from a wide range of functionalities to
external user experience (Exhibit 8). feed into an increasingly personalized
product and service offering. For example,
A best-practice approach means internal leveraging a telco ecosystem offering will
users would be enabled to perform credit risk provide a rich vein of data around payment
assessment and application processing modes, mobile behavior, address verification,
through automated and AI-enabled processes. and KYC insight. An e-commerce ecosystem
Transaction reconciliation will provide solution will deliver insight on spend and
instant access across accounts. Product transaction history, demographics, and rating
manufacturing and integration is fully and review preferences.
digitized, with integrated APIs providing an
open access pathway across the product There are numerous examples of successful
range. External users are enabled through technology ecosystem players across global
digital self-service on-boarding. Customer markets. In Southeast Asia, ride hailing
data delivers personalization, as well as unicorns Grab and Gojek represent platform
providing adaptive and optimized pricing players which have rapidly scaled to become
models and tailored product offerings. household names, moving from early
Products will be accessed through an operations in ride hailing to a range of
omnichannel product suite. adjacent and non-adjacent areas. These two
operators reflect a trend by ecosystem players
Polish digital bank mBank was launched as a in entering the e-wallet space as a gateway to
branchless online-only offering in 2000, with financial services, with Gojek’s Gopay and
an end-to-end digital journey as a core Grab’s Grabpay offering a valuable entrance
element of its operating model. In 2013, point for early customer insight. These
mBank relaunched online and with mobile operators then go on to expand into further
offerings through e-commerce and digital financial product offerings in areas such as
advertising channels. Continuous investment lending, insurance, wealth management, and
in a lean, flexible, agile business model and retail banking.
technology has seen it positioned as the third
biggest bank in Poland today, and is one of Chinese giant Alipay is an impressive
the most profitable and successful digital example of ecosystem success, leveraging the
banks globally. value of its extensive ecosystem to penetrate

Exhibit 8 | Operating Model Must Be Based on E2E Digital Processes

30 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA


into a wide range of consumer activities. It others such as fintech partners.
boasts product and service offerings in a
diverse range of areas, from traditional Digital Challenger Banks are leveraging
mobile wallet and marketplace applications, partnerships to reduce time-to-market and
transportation and ride hailing, dining and quickly launch new products and features.
delivery, discount vouchers, entertainment (Exhibit 8.) Examples include instant P2P
and movie tickets, to bricks and mortar loan approval in partnership between
retailers. Through leveraging mobile apps, Revolut and Lending Works, international
Alipay has created a payment platform transfers with transparent fees in partnership
present across many verticals, with high between N26 and TransferWise, and fraud
customer adoption. 40% of customers use and AML monitoring features through
Alipay in four or more active scenarios, and partnership between Featurespace and Contis
78% in two or more active scenarios. (Exhibit 9).

Successful Neobank players are establishing


marketplaces for third-party products to Tech Principles And Strategic
quickly expand offerings. This is a fast and Choices
affordable way to add product offerings, Traditional incumbent banks often struggle
retain customers, and diversify revenue to rapidly adapt to change, in contrast to
streams. It enables operators to easily digital banks where agile delivery remains a
translate their user base into profit. Players fundamental part of their DNA. Establishing
such as Revolut, N26, Monese, and Atom a successful digital bank requires a
Bank have all adopted this approach to boost commitment to this agile approach,
revenue opportunities. supported by smart strategic choices in
building the right technology foundations to
Revolut partners with pension disruptor flourish.
PensionBee, insurance provider Lending
Works, and many others to diversify its IT stacks need to be effectively organized in
product offerings. N26 takes a similar order to support rapid change, providing a
approach through partnership with payment responsive and scalable solution. This
companies Barzahlen and TransferWise, requires a comprehensive approach to
insurance company Clark, and others. This technology capability throughout a business,
approach also highly values monetizing data incorporating applications and platforms with
through charging for its use, or selling it on to clear ownership and control.

Exhibit 9 | Digital Challenger Banks Leverage Partnerships to Reduce Time-to-market and Quickly Launch
New Product and Features

Source: BCG x Expand FinTech Control Tower

Boston Consulting Group | 31


Cloud is a valuable enabler which all digital Technology stacks are often standardized to
banks use to some degree. It provides a current technology offerings. These features
flexible opportunity to trial new outline a checklist of key lessons which
functionalities with limited investment, operators should recognize:
offering both scalability and reliability. The
level of innovation by public cloud providers • Architecture is owned by the bank, and
is remarkable, with new modules such as represents an important competitive edge
artificial intelligence or machine learning
capabilities allowing banks to innovate faster. • Open source is safe to be used in a bank
Banks benefit from the latest technologies at when properly governed and supported. It
their fingertips, with limited effort. should be used to safeguard costs and to
Developers are currently concentrated access a larger developer pool. Support
around public cloud technologies, with and expertise can be outsourced
professional training programs offered by
providers to keep them up to date. These • Infrastructure is virtualized and
tend to be offered through a self-service automated, so that developers can
model, allowing small multi-disciplinary self-provision infrastructure for their
teams to deliver real value. needs

Assessing the role of technology in successful • Build vs. buy is considered as a strategic
digital banks reveals some core decision. Building or using open source
commonalities. They tend to use open source products is often preferred over buy
software, libraries, and frameworks. This
open architecture enables easy integration • All processes are automated and paperless
and avoids potential bottlenecks in
integrating bespoke design. They often utilize • Technology is always current. Legacy
microservices, and containerize to make technology is discouraged or not allowed
components portable, reliable, scalable, and
easy to maintain. Cloud is often a core part of • The software development lifecycle
deployment, on either public or private cloud (SDLC) is agile and automated
infrastructure. Simple, high performant,
standard integrations are the norm. Agile • Integration is based on industry standards
development and deployment is critical.

CASE STUDY
REVOLUT
Revolut is a digital bank which has enjoyed ease of use, automated deployment, and
significant success through placing control over security. The company also
technology at the heart of its growth. Since adopted comprehensive use of cloud APIs
its launch in 2015, Revolut has grown to with third-party automation to achieve a
handle over 230 million transactions, and fully automated infrastructure-as-code
on-boarded more than three million provisioning and platform management
customers. It has gradually incorporated solution. This has enabled Revolut’s
more features into its offering, leveraging developers to accelerate deployment of
scalable architecture to include integration features and functionality, while enabling
of more than 50 applications through its easy rollback of features if necessary.
platform.
Through integrating use of cloud identity
Revolut built its core infrastructure through and access management tools, Revolut was
compute engine virtual machines, giving its able to easily set up highly secure,
engineers the perfect balance between compartmentalized infrastructure that

32 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA


enables it to assign resources simply and Revolut’s use of this cloud-based approach
quickly. That’s particularly important for has allowed them to build infrastructure
digital banks, with the security of Revolut’s that can scale at speed without sacrificing
large dataset a key part of its technology stability, automate deployment without
decisions. The cloud-based solution compromising control, and help maintain
allowed Revolut to ensure backup of data the security standards that are required of
in a secure but less resource-intensive a financial services company.
fashion.

Big Data And Analytics enabled through a platform which engages


Big data and analytics provide the strategic with use of chatbots or virtual assistants,
backbone to decision making for successful automated notifications, and dashboards.
digital banks. This incorporates elements
from product design right through to The potential of modern data analytics
customer service and satisfaction. however goes beyond this more traditional
Understanding and incorporating this data is approach, and unlocks potential around
critical to personalized, customer-centric usage behavior, time-sensitive decision
approaches that are crucial to digital banks. making, and even interests, motivation, and
There are three key components of a psychology of customer journeys. This can
personalization strategy — platform, features, inform even greater use of features provided
and data (Exhibit 10). by digital banks, with aspects like smart
credit decision making, time-sensitive offers,
Data is the foundation for personalized third-party promotions, and a range of other
intelligence, with advanced analytics on product and lifestyle features. This also forms
transaction, customer, and other data types part of an optimized platform design that has
allowing digital banks to build understanding UX personalization as a core functionality.
of customer desires and expectations.
Features can be adapted to deliver Data and analytics capabilities may be built
personalized services based on this data, in-house, or acquired through partnerships
ensuring that customers are served with with third-party providers. There are
hyper-relevant content, products, and offers. numerous examples available on the market
A data-driven platform then offers a today, for example The Waay, Persado, and
personalized user experience, with intuitive Flybits all represent third-party operators
interface that provide both positive which have engaged in successful partnership
engagement and simple ease of use, with digital banks.
alongside an adaptive approach that builds
insight from data. The Waay is a third-party partner which
boasts an ability to help banks understand
Financial technology companies typically individual customers, analyzing and
target different behavioral segments to offer presenting insight into their particular traits
behavior-based personalization. As a result, and values. That enables digital banks to
they often differ in data required, features target particular features or products, as well
enabled, and the platform enhancements as align promotions with content that
possible through analysis of that data. engages what’s important to customers. AI-
powered technology partners Persado applies
Utilizing more traditional behavioral data its understanding of language to create
such as purchasing insights is enabled compelling messages for digital banks,
through transaction data, which feeds into providing personalized messaging on landing
standard personalization tools such as pages, apps, notifications, and customer
personal financial management, balance communications that constantly evolves to
warnings, and automated savings. This can be enhance engagement. That personalized

Boston Consulting Group | 33


Exhibit 10 | There Are Three Key Components to a Personalization Strategy

Source: BCG x Expand FinTech Control Tower

approach builds emotional engagement Such a start-up approach can present a real
through language that boosts success for clash of ideals for incumbent operators
digital banks. Flybits is another technology transitioning to digital banking. The
partner that engages through data, using its management team is critical in steering the
advanced analytics capabilities to provide a right trajectory, with a real need to recruit
comprehensive insight into consumer appropriate management talent early on to
demands and desires. That enables banks to steer the journey. Gather an appropriate pool
incorporate contextualized offers and of leadership team candidates before
promotions that speak to immediate needs of finalizing the consortium or organizational
customers. approach where possible. Leaders must be
comfortable with, and indeed enthusiastic
about, this customer-centric approach. That
Digital Start-Up Culture And means avoiding becoming tangled in a
Talent culture of meetings in favour of an
Embedding an appropriate start-up culture is operational focus on customers. Bureaucracy,
essential to create a successful digital bank, a once an unflinching reality of banking, is
particular challenge for incumbent players toxic to a truly effective start-up culture.
transitioning into the space. This strategy
should embrace a customer-obsessed A horizontal organization structure is critical
approach, and seek to avoid traditional to agility. This should incorporate a strong IT
elements of a legacy banking culture. team as key, and should not be siloed away
from operational teams. Avoid fleshing out
This approach is about remaining agile and organizations with team members from
responsive, and being able to quickly add, existing consortiums or operational areas
change, and improve products and services. where possible. Digital banks will thrive by
The ability to react rapidly with speed and taking a new approach to banking, not by
flexibility, enabled by a horizontal swamping positions with traditional
organizational structure, is essential. mindsets. It is also crucial to have a good
Innovation culture has been critical to success balance of technology experts and financial
at tech giants like Google. Even during its experts. The more bankers you bring into
rapid growth, this global giant has scaled your fresh, exciting digital bank, the more it
innovation culture with focus on eight key will look like the legacy operation which
pillars (Exhibit 11). businesses are attempting to transition away
from.

34 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA


Exhibit 11 | The Eight Pillars of Innovation

Source: Susan Wojcicki, CEO of YouTube

Obtaining talent in a competitive Communication With Regulators


marketplace may not be easy. Digital skills The value of agility can only truly be enabled
are in high demand, with digital disruption within an appropriate regulatory framework.
now pervasive across all industries and Digital banks must work with regulators to
geographies. Digital banks may have to look unlock the full potential of this remarkable
to recruit outside traditional backgrounds or opportunity, ensuring that guide rails can
markets. In BCG’s 2019 study Decoding steer transformation without limiting
Digital Talent, Singapore was the only city innovation.
within the Southeast Asia region to achieve a Regulators are seeking to assist digital
top-20 spot in most attractive global banking growth, driven by two key
destinations. Crucially however, a good work- imperatives. The first is to create competition
life balance, learning and training for traditional incumbents, amplifying the
opportunities, and career development need for better and more effective products
possibilities reflected the most important and services. The second is the fundamental
work preferences identified in the study. desire to drive better service delivery to
Those are all features which an emerging underbanked segments. The latter is a
digital bank could potentially leverage to particular focus in Southeast Asia. Regulators
attract digital talent. are likely to examine five key factors in
assessing the suitability of candidate digital
How a digital bank staffs and governs is banks:
critical. As they scale up, it’s important to
think of traditional functions such as risk and • Path to profitability. Regulators will wish
compliance differently. These digital banks to see a convincing path towards
will need to combine technology and people, profitability for candidate digital banks.
to provide the right balance of automated Many operators have shown impressive
risk and compliance against the need to user growth, without truly achieving a
constantly evolve and transform. The human breakeven which will be fundamental to
factor will still be critical, with banks, the sustainable success of digital banking.
operators, and regulators equally unprepared Many players have unproven business
for a truly fully-automated compliance models, showing that innovation still
vertical. requires recognition of financial demands

Boston Consulting Group | 35


• Key differentiation. With the priority • Ability to serve underserved. Regulators
around reaching underbanked segments are likely to want to understand
foremost in mind, regulators are likely to underbanked and underserved customer
want to understand what differentiates a segments will be served by proposed
digital bank’s proposition, and how digital banks
unique it is in the marketplace. It is
crucial for digital bank candidates to Technology platforms can be important
communicate how they are different from partners in ensuring regulatory compliance.
incumbents, and how they might employ These platforms have extensive experience
transparent, robust technology building solutions that meet regulatory
approaches and design to cater to the standards. In Singapore for example, Google
demands of a customer-centric landscape supported cloud adoption solutions for
partners that were uniquely designed to meet
• Adherence to regulation. While enabling the requirements of the Monetary Authority
digital banking opportunity requires of Singapore (MAS) guidelines on
freedom to innovative to scale, it must outsourcing, creating a detailed mapping
also cater to the underlying need to meet between MAS guidelines and Google Cloud
existing banking regulation. That includes operations. These partnership approaches
those which apply to existing incumbent leverage industry expertise from both sides of
operators, as well as any evolving the technology and banking equation to
regulation which may apply to digital design a solution that meets critical national
banks and regional standards.

• Consumer protection. Regulators will


wish to see how consumer protection will
be ensured, cybersecurity risks mitigated,
and data protection robustly implemented

36 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA


SUMMARY
NOW IS THE TIME TO ACT

D IGITAL BANKING OFFERS HUGE


POTENTIAL to the Southeast Asia
region. Digital adoption has grown rapidly in
as Google, Apple, AliBaba, and Tencent —
organizations which have shown how
substantial success can be leveraged from the
recent years, with the region now home to a ability to adapt and rapidly scale to meet the
digitally-connected population of over 400 needs of a diverse customer base.
million citizens. This figure is likely to grow
substantially in coming years, as mobile Customer-centricity is at the heart of a
penetration and 4G coverage expands in a successful evolution. That will require
region with a population expected to reach incumbent and challenger banks alike to
542 million by 2030. ensure user experience is central to both
their business, and their unique technology
This growing digital penetration, combined offering. Embracing the right operating
with wider economic growth, reveals a model and ecosystem is critical to steering
pressing need for innovation in banking this course, ensuring that the tools and
services. Digital banking provides an functionality are enabled by the underlying
opportunity to meet the demands of modern architecture and platforms. Selecting the right
customers who are increasingly turning away technology is also fundamental to enabling
from traditional banking products and this ethos of continual change. Equally
services. This era of banking innovation also important however is embracing the right
provides an important avenue to on-board data analytics and understanding to ensure
unbanked or underbanked populations, in a that such evolution is built on sound strategic
region where bank account adoption varies reasoning. This data-driven approach is also
significantly across geographies. essential to unlocking the hyper-personalized
products and features that can rapidly adapt
While Digital Challenger Banks are emerging and appeal to a modern digital banking
to disrupt the status quo, there is increasing audience.
evidence of incumbent operators effectively
entering the expanding digital banking Culture will be a major determiner of success.
market. In doing so they face pressures to Digital transformation cannot succeed
transform, moving away from legacy without embedding an appropriate start-up
structures to a more agile form of operations. culture. Digital banks must think agile, and
These transitions should be inspired by the act agile. That creates a particular challenge
success of major technology companies such for incumbent banks, which will have to

Boston Consulting Group | 37


navigate the clash of new ideas against legacy With markets across the region exploring
expectations. In all of this, digital banks pioneering digital banking licenses in coming
should be careful to manage, monitor, and years, there has never been a more important
respond to the regulatory environment in time to act for challengers and incumbent
which they operate. Working in collaboration operators alike. The region is banking on
with technology partners can provide a innovation to unlock greater access to a
valuable opportunity to inform those choices future of customer-focused, personalized
in a smart and effective manner. banking experiences.

38 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA


FOR FURTHER READING

Southeast Asian Consumers


Are Driving A Digital Payment
Revolution
A report by Boston Consulting Group,
May 2020
Read the report

Decoding Digital Talent


A report by Boston Consulting Group,
May 2019
Read the report

Boston Consulting Group | 39


NOTE TO THE READER

Acknowledgments About the Authors For Further Contact


The authors thank Selin Suntay and JungKiu Choi is a Managing Prasanna Santhanam
Ian Loh from BCG Expand FinTech Director and Partner in the Managing Director and Partner
Control Tower for their valuable Singapore office of Boston BCG Singapore
contributions to the development of Consulting Group and a leader of Santhanam.Prasanna@bcg.com
this report. the Financial Institutions practice
JungKiu Choi
The authors would also like to Prasanna Santhanam is a Managing Director and Partner
thank Josh Turner, Belinda Hu and Managing Director and Partner in BCG Singapore
Deepesh TK for their editorial, the Singapore office of Boston Choi.JungKiu@bcg.com
design, and production support. Consulting Group and a leader of
the Telecom, Media and Technology Pauline Wray
(TMT) practice Managing Director and Global Lead
BCG Expand FinTech Control Tower
Pauline Wray is a Managing Singapore
Director and Global Lead of the Pauline.wray@expandresearch.com
BCG Expand FinTech Control Tower

Shobhit Shubhankar is a
Consultant in the Kuala Lumpur
office of Boston Consulting Group

Jeroen Vandensteen is a Senior IT


Architect in the Singapore office of
BCG Platinion

40 | THE RISE OF DIGITAL BANKING IN SOUTHEAST ASIA


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