finews.asia talks to strategy consultants Simon-Kucher and finds out why traditional banks won’t be marginalized by digital disruptors anytime soon.
When it comes to processes and structures, banks don't necessarily have much of a choice in doing things the way they do. That might be clear to any back-office project manager waiting eight months to get a minor banking system update approved by a local regulator - but it is much less apparent to the wider world.
A substantial proportion of a bank's integral processes are built and subsequently modified based on in-country regulation, which can differ substantially. This is particularly true for the more hands-on regulatory regimes, such as the US, UK, Hong Kong, Singapore, and, increasingly, the EU.
In past decades, this all frequently came as a surprise to Swiss banks, many accustomed to the largely laissez-faire approach of Finma, the Swiss regulator. They often found they had to throw out processes and systems they built, almost naively, on things such as perceived market demand, client needs, global consistency, and supposed cost synergies.
The Digital Surprise
The neobanks are no different, and many of them are facing the same unpleasant awakening. They will also have to rejig everything based on whatever jurisdiction they are active in. Much of banking is not only hard to digitalize but doing so without the full understanding and approval of a local regulator only leads to dreaded on-site inspections or mandated third-party audits, both of which are akin to some kind of massive uncontrolled data dumping frenzy that end ups feeling like an internal bureaucratic root canal. In the worst cases, it can lead to censure, fines, and a request to stop all business activity.
The big difference here is that banks can simply revert to their old way of doing things, with a few band-aids here and there. In other words, they can easily make last-minute impromptu process modifications and system changes based on the regulator's findings. But neobanks can't do that. They need to build everything from scratch.
Some neobanks are beginning to confront all this, and a recent study (contact details required on sign-up) by the Simon-Kucher consultancy provides a far more differentiated picture of the challenges facing them.
Challenges Aplenty
finews.asia took the opportunity to talk to Simon-Kucher's banking lead in APAC, Silvio Struebi, about the study and challenges currently facing neobanks. He fully agreed that they need to comply with regulations in much the same way that the traditional banks do, with German mobile bank N26 and its issues with its home banking supervisor, Bafin, being a clear example of that.
N26 has faced three supervisory orders in recent years. The first, in 2019, involved a request to re-identify customers and establish better processes. In early 2021, Bafin appointed a special commissioner to rectify deficiencies in IT monitoring and client due diligence under that country's AML regime. Later that year, it appointed another special commissioner to remediate risk management deficiencies and limit the intake of new customers to 50,000 a month while capping its mortgage exposure to 500 million euros.
For many, that may have been a key watershed moment that prompted a widespread reappraisal of the generally held belief that new neobanks were simply waiting on the sidelines, just waiting for a chance to overtake their staid, lumbering competitors.
Choosing Niches Carefully
Despite that, Struebi indicates that there are certain niches where neobanks have an advantage and they will have to take advantage of these in order to get out of the current income and size trap that they are in.
«A lot of the current neobanks remain unprofitable and become unsustainable in the long run. However, in certain areas such as credit lending, neobanks can build engines that are powerful and incorporate more data points that include bank internal and external data. The Super-apps which most firms aspire to develop for example already have a good view of customer’s spending behavior across different product categories in the ecosystem,» Struebi explained.
He said that will give them the ability to choose niches carefully, such as specific types of small and medium enterprise lending that are too marginal for the traditional banks to cover in places like Singapore, or in private debt, a new asset class for many players.
Bigger Means More Costly
Digital banks can combine data from risk profiling against ticket size and focus on clients who are willing to pay higher interest rates. Many of them will be highly appreciative of being able to get a loan in the first place as it is a first step to making them more creditworthy.
Efforts like these also jibe with the Hong Kong and Singapore regulators, given they have purposely limited competition to ensure there is a path to profitability for the banks. But there doesn't seem to be much of a case for getting into markets much larger than that, where the traditional banks hold sway.
«For digital banks, the moment they get larger everything gets really costly,» Struebi said.
A Distinct Improvement
But if the neobanks aren't going to be great industry disrupters, as had been expected by many just a few years ago, they have accomplished a great deal. They have already made traditional banks better, as many have been forced to launch so-called innovation speedboats - or independent digital spinoffs to remain competitive.
«It has just provided more options for consumers and prompted vast improvements in traditional banks,» Struebi said.
In addition, they have the added advantage that they appeal to millennials, who apparently «don’t want to speak with a banker or anyone», as Struebi says.
Distinctly Unscary
We may have already reached peak disruption. The ongoing digitalization in banking has been in place in most places in Asia for the better part of a decade, including in places like China, which has essentially been a digitalized, cashless society for any number of years now.
The time seems to have passed when everyone working at an old school financial institution feared the neobank, from the board down to operations staff who thought they were going to lose their jobs. Everything seems to have become a bit humdrum in the meantime. And that probably suits the traditional players just fine.
