Banks in Asia face competition the likes of which they have never seen before.
Well-known challengers to traditional financial institutions include Alipay in China, an affiliate of online retailer Alibaba Group Holding, and Paytm in India. The new arrrivals are taking a chunk of banks' payments businesses. Alibaba and Tencent Holdings, another Internet giant, are also moving into online banking and investment -- Tencent through its affiliate WeBank, and Alibaba through MyBank and the online fund management platform Yu'e Bao.
Startups are also trying to get in on the action. In Japan, Exchange Corp., a new cardless e-commerce payment service for merchants, announced that it had raised $8 million to expand its business this year. Exchange allows consumers to purchase products online using only their mobile phone numbers and email addresses. In India, One MobiKwik Systems, a mobile wallet company, Ezetap, a mobile payments company, and Mswipe Technologies, a payments company, all raised funds this year.
Mobile commerce is an area where banks are particularly keen to retain market share. Mobile commerce sales are growing at a compound annual rate of 25%. As mobile payments increase, revenue opportunities for banks are decreasing as consumers use services like Alipay in place of credit cards. Interchange fees, which banks pay each other to process credit card transactions, are under threat. As much as 30% of those fees could be at risk.
To counter the challenge, banks need to make holistic changes, not just tweaks. Major overhauls are required because the changes that need to be made at banks are not just across their platforms. What is needed is to connect banks with partners outside their traditional businesses -- from retailers for payments to the cloud and other outside providers for faster and better data management.
After all, most of the current processes are designed for a protected world, not for a seamlessly connected one. The existing technology will not be up to speed, either.
Top executives and boards need to wrap their brains around the magnitude of the change. They will need to make choices about what they can do on their own and what they need to look for externally. Consider the amount of money that banks are spending on updating their information technology to comply with new regulations -- a recent Accenture survey of 131 global financial services companies found that more than half expect to invest at least $200 million to overhaul how they do business and address global structural reform regulations this year. Nearly one-third are expecting to spend at least $500 million. Given that level of costs, it would be very difficult for them to seek sizable further investment in information technology, especially given the uncertain prospects of success.
ROAD MAP Banks will need to re-examine who they employ because the required skill sets are evolving. Furthermore, most banks rely on aging staff who need to be replaced with younger people. Banks need to figure out how to attract and reward new talent, and how to retain the necessary brain pool, which is already leaving the sector and will be doing so increasingly quickly as time passes.
Following in the footsteps of companies in other industries, investment banks are relying increasingly on an extended workforce to close that gap while keeping costs under control. The Accenture research showed that 82% of all organizations use part-time workers, freelancers, contract employees and consultants. Defining the characteristics of the new talent required will require external help, too.
On the capital front, banks should junk traditional ownership structures and move to service models. The merits of the everything-as-a-service-model, using always-on cloud connections, have been well-documented.
On the technology front, embracing emerging solutions is critical. Banks should be considering new cloud technologies, and a more mature cloud computing sector that makes it possible to virtualize legacy applications on an industrial scale using low-cost, agile infrastructure. They should also be considering the possibilities of blockchain-enabled networks that have the potential to increase trading efficiency, improve regulatory control and eliminate unnecessary intermediaries.
Banks risk extinction if they do not respond with genuine, daring moves. But agile digital banks will be able to thrive in the new world order.
Piyush Singh leads Accenture's financial services business in India and is head of sales for the Asia-Pacific region.