Across the Asia-Pacific region, governments and regulators are already implementing new strategies to digitise their economies and boost social inclusion. Faster payment networks are spreading, facilitating the adoption of mobile payments and the development of open banking. With mobile payment infrastructure and services already embedded in major economies, Asia-Pacific banks are looking to the next challenge. Digital technology regulations lag other regions but are under review (37% of respondents believe that emerging data regulation will have a major impact on the banking sector) as Asia looks to modernise, diversify and dilute its dependence on international trade.

The race is on

In markets where mobile payments have already taken root, banks and payment processors are battling tech companies on two fronts. They are working to retain their own retail card and current-account customers and attract new users to their apps and e-wallets. They also need to get and keep merchants on their side if they are to reap the economies of scale from a high-volume, low-margin sector.

Competition is intensifying between payment solutions based on application programming interfaces (APIs) and pre-loaded and credit card e-wallets. That may explain why survey respondents see an immediate need to master digital engagement and marketing (37% for 2020) to pull in users and merchants. They also need to be able to respond quickly when Alipay, WeChat Pay, Google and WhatsApp introduce new features (31% for 2020).

In India, app providers are already offering cashbacks, discount vouchers and other features to gain and retain market share. This may leave the smaller players vulnerable, particularly when all that is required to switch services is downloading an app. It is therefore likely that consolidation of this sector will follow. As Vijay Shekhar Sharma, founder and chief executive of Paytm, has pointed out, payments are merely the moat around other, more profitable services. The players with deep pockets will outlive their weaker competitors.

The Monetary Authority of Singapore was met with similar concerns that disruptors would leave the banks unprofitable when it first suggested the introduction of open banking. When the regulator pointed out that tech and fintech firms could already offer faster, simpler and cheaper transaction services, the banks agreed to collaborate on upgrading the banking system, providing all stakeholders operated within the same regulatory environment. 

Singapore is set to follow Hong Kong with virtual bank licences; ride-hailing app giant Grab is likely to be among the first applicants. That may worry established banks, but the question remains whether the big tech providers have the capacity to tie up capital in establishing their own bank operations. It is also not clear if they really want to expose themselves to the reputational risks that service interruptions or bad service present if they are the sole provider of such services. Grab already offers loans through a Japanese bank and recently signed up with Citibank to offer branded credit cards.2 If either of those services fail to deliver to consumers, the banks, not Grab, face the wrath of consumers and regulatory authorities.

Yet all Asian regulators are acutely aware of how Alipay and WeChat Pay were able to create an effective duopoly in an unregulated market. Chinese authorities are now bringing in new laws to level the playing field. Other authorities want to lay down the rules first, before such corrective action needs to be taken. As a result, the Chinese payment giants may find new markets tougher to crack when they must operate under tighter licensing and data protection rules.

As Steve Weston, co-founder of Australia’s Volt Bank, says of the Australian Prudential Regulation Authority: “The regulators are focused on ensuring that all banks, including new entrants, are operating in a prudent manner.”

In Europe, as in the rest of the world, technology is setting the agenda for the banking sector. This year, European respondents to The Economist Intelligence Unit’s global retail banking survey identify new technologies as the primary driver of change for retail banks, both in the coming year and up to 2025, overtaking changing customer behaviour and demands for the first time.

Unlike the rest of the world, however, technology-driven change in the banking sector is following a very particular agenda, in the short-term at least: the EU’s revised Payment Services Directive (PSD2).

For citizens, the open banking mandated by many of PSD2’s provisions promises a new world of intelligent, intuitive and accessible banking services. New features and services will depend heavily on data to manage spending and personal budgets, and encourage long-term savings.

For banks, it offers long-term opportunities but, as the survey reveals, short-term challenges too. Competition from the digital sector is hotting up: a quarter of respondents believe tech giants will be their biggest non-traditional source of competition by 2020; 31% believe that will be the case by 2025.

European banks know they have no time to waste. Making open banking work, both practically and strategically, is the order of the day.

Short-term headaches

Unsurprisingly, given the mandate of PSD2, launching an open banking strategy is a top priority for the coming year for 29% of European respondents, second only in prevalence to talent acquisition and retention (30%). Open banking will still be a priority in 2025 for 26% of respondents, although more expect to be prioritising responding to regulation (35%), migrating clients to digital channels (29%) and mastering digital marketing (29%) by then.

Furthermore, the largest share of European bankers sees embracing openness as the future of the industry: 35% of respondents see acting as a true digital ecosystem—offering both banking and non-banking services that originate either internally or from third parties to customers and other financial services providers—as the primary direction in which their organisation’s business model will evolve.

But the minds of Europe’s bankers are also occupied by the short-term technical challenges that open banking presents, the survey reveals. Banks in the EU are due to deliver fully operational portals for their application programming interfaces (APIs), intrinsic to open banking, by September 2019. However, three in ten respondents from Europe identify a lack of international standards for APIs as their greatest concern regarding regulation and standards.

Indeed, the introduction of APIs in the European banking sector has not been smooth sailing so far. Banks had until June 14th 2019 to prove they had dedicated APIs available for testing by third parties. If they missed the deadline, they may have to offer fallback options and spend more IT money on secure screen scraping.

“Whether the third parties test [our APIs] is out of our control,” says Matt Cox, head of open banking at Nationwide Building Society, one of nine UK banks charged with leading the open banking push, called the CMA9.

“For us, testing is still in early days. We were one of few of the CMA9 to have the full suite ready for the March deadline. We are working with two to four different third parties and are only just at the beginning of testing payment journeys in any meaningful way,’” he says.

Mr Cox feels that the majority of European banks are further behind than the UK. He may be right; a recent survey found 41% of banks1 failed to have API testing sandboxes ready in March to allow third-party providers the chance to test them for six months.

North American bankers sense danger more than most when new entrants join their market, according to a global retail banking survey conducted by the Economist Intelligence Unit. In anticipation of 2020, nearly a third of local respondents (33%) are feeling pressure from the changing competitive environment, compared to 28% globally. An even more pressing issue for North American bankers is keeping on top of changing customer behaviour and demands (cited by 34% for 2020 and 33% for 2025).

As banking clients increasingly seek speed and convenience, and with Google the latest tech giant to announce plans for “smart” checking accounts linked to the Google Pay app, new technologies are understandably seen as high impact trends on the sector for both the short- (40% for 2020) and medium-terms (43% for 2025).

In the long-term, emerging regulation of digital technology is viewed as a prime source of disruption for North American bankers (36% for 2025). Over a quarter (26% for 2025) cite open banking as a key trend.

Lessons learnt

Challenger banks are also making their presence felt in North America, be they domestic startups such as Chime or Simple—now part of Banco Bilbao Vizcaya Argentaria (BBVA)—or overseas brands such as Monzo and Revolut which are now expanding their footprint. But as in Europe, a comparable developed market, banking customers are often hesitant to switch their primary banking relationship, even when a better deal is on offer.

However, the number of banks choosing to develop new greenfield initiatives has increased from 13% in 2018 to 29% in 2019, coming closer to the worldwide average (36%).

There are success stories, but also less fortunate examples when it comes to large banks creating new digital brands. JP Morgan Chase closed its fee-free mobile bank, Finn (which even offered limited access to physical branches), after reportedly attracting fewer than 50,000 customers.

Goldman Sachs has been more successful in attracting customers to its new savings brand, Marcus. The online savings and loan platform has no checking account and no app, and has attracted around 4m accounts and nearly US$50bn in deposits.

Despite advantages in data analytics and the freedom afforded by entering the market with a clean slate, it is worth nothing that big tech’s move into banking may not always be a smooth experience. Apple has faced criticism for alleged gender bias for its new Apple Card, operated by Goldman Sachs.

Customer demands

These events beg the question: what do American customers want? Finn did not offer the high rates that Marcus does, and its app may not have differentiated itself sufficiently from JP Morgan Chase ’s own mobile offering. A 2018 S&P Global survey suggests fees are the key consideration for recent and potential switchers, with incentives and interest rates ranked ahead of the mobile app experience for those likely to move in the next 12 months.

But creating a better experience with lower overheads is hard when mobile platforms are built on old architecture, as Finn’s was. Colin Walsh, founder and CEO of start-up Varo Money, hopes to avoid the same traps.

“A new build is much easier than a renovation,” he says. “In terms of the technology, [corporate] cultures that are not in a growth mindset and a legacy of regulatory issues, it is impossible [for traditional banks] to focus on customers and innovation.”

The innovation angle may explain why payment players are seen as a far greater and more immediate competitive challenge (cited by 41% of respondents for 2020), than the neo-banks (16% for 2020). Banks are also conscious of the upcoming threat posed by big tech firms teaming up with fintechs to create hybrids (cited by 29% for 2025) where the app provider has no need for a banking licence, and is not required to comply with regulatory capital ratios. Survey respondents also note the emergence of robo-advisers as an issue in the medium-term (23% for 2025).

Regulatory developments

Although tech firms may be more than capable of launching new services that fully replicate the banking experience, they appear to be holding back. North American respondents are the least likely to agree that sandbox collaboration between banks and fintechs will be mainstream by 2025 (48% vs 56% globally).

Federal regulation of fintechs, e-money providers and data has lagged behind much of the rest of the world, although Canada is ahead of the US in developing an open banking framework. In fact, Canadian banks have launched initiatives to study opportunities around open banking and are starting to use application programme interfaces (APIs) in partnership with fintech firms to deliver new products.

As things stand in the US, it may simply be too difficult for tech giants to offer a consistent datadriven service with a relatively low regulatory burden across 50 states and 10 provinces until the rules are set. Federal agencies and state supervisors continue to argue, often in the courts, about who should have jurisdiction.

The primary focus for North American banks is to become far more agile (cited by 38% of respondents for 2020) and better-equipped to bring new features and products to market, but that is complicated when the rules of engagement have not been set.

Therefore it comes as no surprise that, when it comes to regulatory matters, North American bankers worry about a lack of international API standards (27%) and inconsistent data protection (27%). There are particular concerns about the regulatory risks of cloud-based services (41%). With a plurality of local respondents planning an open banking strategy (37% for 2025), the need for greater regulatory clarity will only become more pressing.

In the meantime, North American banks are focusing their attentions on becoming digital ecosystems which offer bank-related and non-financial services from third parties (44%). Only a few are attempting to build niche propositions (16%) or opting to become a third-party aggregator (12%).

Enhancing user experience

Digital investment in North America focuses on cyber security (45%), with significantly more respondents citing it than in Asia, Europe, the Middle East and North Africa. In line with the global average, almost seven in every ten (68%) survey respondents expect cyber-security rules to be tightened in the next five years following a systemic bank failure.

North American bankers are also investing in cloud-based technologies (36%) and artificial intelligence (AI) platforms (30%).

More specifically, North American banks are most interested in customer micro-segmentation (15%), hoping that AI will reveal new sell or up-sell opportunities. Deemed equally important, banks are seeking to boost their anti-money laundering and “know your customer” (AML/KYC) capacities when financial products are applied for or used (15%). Many also believe AI technology will help them enhance user experience by developing voice recognition features (14%) and greater customer personalisation (14%).

However, uncertainty about the security of personal financial information is cited by nearly half (45%) of North American bankers as their customers’ top concern when it comes to the use of AI.

The Bank for International Settlements recently highlighted that data-driven big tech firms could be a force for good in terms of financial inclusion. But it also underscores the downsides to a purely data-driven banking model, warning that there are “some signs that big techs’ sophisticated algorithms used to process personal data could develop biases towards minorities”.