Digitize to Survive

Retail banks take digital plunge in face of emerging competition from fintech firms



Financial technology, or fintech, is touted as an unprecedented disruptive force in world finance. Facing competition from non-bank tech giants and start-ups, the banking industry is imposing on itself a series of systemic changes, with retail banks at the center.

The urgency for such changes is captured by a recent report – In Tech We Trust – by the Economist Intelligence Unit. It surveyed 203 senior retail banking executives around the globe.

One standout finding is that retail bankers are far more concerned about the threat of digital disruption posed by non- traditional competitors than the tighter regulations brought along after the global financial crisis in the last decade. They believe the traditional branch- based banking model is dying, and retail banking will become fully automated.

In Hong Kong, traditional banks are hastening the digitization of its outlets, changing their role from a cash- handling point into one that provides digitized financial services. Banks with a digital branch are Standard Chartered and the Bank of East Asia.

The latter has a target to convert all 89 Hong Kong branches into digital outlets by 2018. The digitization effort provides a fully paperless, straight- through banking experience. It is said to be “a new way to bank,” according to the SAR-based lender.

“Consumers still highly value a physical branch when picking their primary bank, but the role of a branch has changed,” said Kenneth Tsin Wai-lun, BEA’s personal banking division’s head of channel management and operations department.

“Nowadays, 90 percent of our customers’ transactions are done through internet or mobile. That explains the switch to an omnichannel strategy, which we target to offer a consistent service in all channels, including mobile, internet, branch, call center, and social media.”

BEA’s digital branch is equipped with a suite of banking devices and interactive software, developed entirely by the bank’s in-house IT team. Traditional branch services, from account opening to the selling of structured products, can now be done with a tap of the finger.

A tool called i-Kit, an iPad-like device, can close a credit card application in five minutes. One only needs to take snapshots of the required supporting documents with the device, leaving the optical character recognition technology to auto-complete an application form.

Then there is i-Teller, which does what a bank teller does, but via a live video chat and touchscreen interface. Bank staff at a remote location handle inquiries and requests about money transfer or basic investment products, such as time deposits and the Mandatory Provident Fund.

Another device worth noting is i-Window. Bank staff use the interactive aid to sell complicated financial planning products, such as insurance and mortgages. The device is so innovative that no one else is providing similar solutions, according to BEA.

“The device guides our staff and customers through a transaction process, in which their conversations and all images shown on screen are recorded. The staff still handle the due diligence work, but pre-recorded tapes now do part of the explanations,” Tsin said.

“Skipping any one step to go to the next is not allowed, and customers can see what an employee is doing on a second screen. This is a big assurance, as it ensures our staff are following all regulatory requirements and protecting customers’ interests.”

Consumers and the banking industry welcomed BEA’s automation effort. Business-wise, the digital branches have yielded a 35 percent increase in deposit balance per customer, and a 65 percent rise in average mortgage drawdown compared with its traditional branches.

The bank has also won various accolades, including Best FinTech Grand Award at the Hong Kong ICT Awards, and the Most Innovative Bank of the Year Award at the BAI-Infosys Finacle Global Banking Innovation Awards in Las Vegas.

For traditional banks saddled with rising regulatory costs, digitization is a survival strategy that yields a cheap and fast growth model. But they’re up against tough competition from fintech companies.

These tech companies aren’t banks, despite making money off digital platforms for financial services – from fund management to credit card processing, peer-to-peer lending, and crowdfunding.

In essence, they offer the same financial services as a traditional bank, with the same degree of efficiency and ease of use. But with the promise of lower fees, they’re starting to divert the flow of money to the traditional bank networks.

To Hong Kong-based retail banks, two most fearful challengers are the Alibaba-backed MyBank, and Tencent- backed WeBank, which have already built a large local customer base.

According to Ernst & Young’s Fintech adoption index, one in four people in the SAR used at least two fintech products by non-bank, non- insurance, online companies over a five- week period last year. The index drew upon a survey of 10,131 digitally active consumers in Australia, Canada, Hong Kong, Singapore, Britain and the United States.

Hong Kong has the highest non- bank fintech adoption rate of all markets surveyed – more than 10 percentage points higher than America and Britain, which are both pioneer fintech hubs.

What products are most popular in Hong Kong? Online services for payment, foreign exchange and overseas remittances come first. Savings and investment products are second. They include online stock broking and spread betting, online budgeting and planning, equity and rewards crowdfunding, and peer-to-peer or marketplace lending.

“We are going to see Ant Financial [Alibaba’s affiliate that launched MyBank] and other large China fintech players in the next 12 or 18 months to go international very aggressively. Southeast Asia and India are obvious candidates,” said James Lloyd, Ernst & Young’s Asia-Pacific fintech leader.

“Over time, the question will be how do some of the incumbent banks respond. We are likely to see more partnerships with some of the retail banks with smaller fintech. It’s going to be very interesting.”

The article first appeared in the Standard on July 25, 2016.