The caveat is that leadership mindsets, capital investments, governance and regulatory frameworks must work in tandem to reap digitalization benefits.

Today, it is common to see new fintech businesses in Asia rise up and challenge incumbent industry players in the market. VC funding deals for fintech companies in the region witnessed a big jump of 38% in 2018  compared to the previous year, accounting for a record US$22.65 billion.  

Consistently innovating through the use of emerging technologies, these non-traditional financial companies are hungrier than ever, identifying many opportunities to fill the gaps in catering to the customers and clients of today.

The rise of fintech presents vast opportunities for sectors such as digital banking, where companies are presented with a fresh slice of the pie, thanks to the unbanked. According to KPMG, 73% of the region’s population does not have a bank account.  

On the other end of the spectrum, there is increasing opportunity to reach out to a wide pool of mobile-savvy consumers—a McKinsey study revealed that in developed markets, smartphone banking has trebled since 2011.  This has led to the rise of digital banks as they continue to search for more ways to innovate and thrive in today’s economy.

As companies continue striving towards modernizing their apps, data and infrastructure to innovate faster, there is a great deal of aspiration and inspiration in the financial services market. However, can they realize these goals, and what does it take to win in the banking game? DigiconAsia sought the views of Matthew Heap, Regional Manager, Solutions Architecture at Rackspace.

How has the rise of fintech affected investment in technology, globally and especially in Asia Pacific?

Heap: Fintech remains an extremely hot topic in the Asia Pacific region. It was very recently reported that fintech investments in Singapore had surged 69% in the first three quarters of 2019, compared to the same period last year, and we are seeing significant and continued growth in other countries around the region, such as China and India. 

Fintech thrives on technological innovation, yet this innovation requires extremely strong technological fundamentals and investment. Given the significant economic repercussions that a single mistake by a fintech entity could have, the industry is naturally governed by strict regulations, ensuring that any possibility for error is minimized.  Yet the industry is susceptible to runaway IT costs, largely due to misunderstanding of workload usage, poor cloud architecture or poorly performing applications. This means that fintechs are investing significant—and appropriate—amounts of money into technology. 

Yet with the dizzying variety of solutions on the market, many organizations are beginning to be overwhelmed by complexity, leading to an inefficient usage of this investment. These include the legacy usage of complex applications and infrastructure that are difficult to integrate with the latest technologies; ineffective business processes do not leverage the modern way of work; nor ensure security and compliance in an increasingly complex digital landscape. Another trend is the lack of experience and resources within internal IT teams. 

What are the opportunities and risks (especially cyber) associated with digital banking? 

Heap: Digital banking has doubtlessly proved itself as one of the biggest advances in technology in years. The use of best-in-class technologies in order to optimize operations has become a necessary step in driving greater value to end users. However, as with any other digitally transformed service, it carries with it its own set of opportunities and risks. 

The rise of digital banking contributes to an overall increase in digital services—this can be seen as larger legacy banks with established customer and client bases continue opening up existing application programming interfaces (APIs) for fintech and third-party app development, as banking-as-a-service continues to gain widespread traction. At the same time, other incumbents within the financial services industry will have to adopt more digital services, especially as they move towards open banking models.  

To stay ahead within the constantly changing financial services industry, there is a need for organizations to have the right governance and regulatory frameworks in place. With the right strategy and understanding of where businesses are on their digital transformation journey, they can drive efficiency through operations automation, grow revenue through innovation, modernize applications and realize cost savings by shifting towards agile, use-based, pay-as-you-go pricing models for technology adoption.

At the same time, fintech and traditional banks recognize the challenges involved. These include: migrating to and leveraging cloud-based infrastructures, managing existing IT assets, evolving their microservices architectures, improving their DevOps agility and monetizing APIs— and they need to deliver all of this while reducing IT expense. 

Additionally, banks need to be weary of the risks associated with digital banking—especially, cyber-related risks. One of the biggest trends we are seeing is that fintech investors are beginning to set their sights on beefing up cybersecurity and risk monitoring capabilities, amidst an abundance of cyber threats and strict regulatory practices within the space. This has seen resources being pushed into the different facets of technology ranging from machine learning to artificial intelligence (AI). All to stay ahead of imminent cybersecurity risks that arise from outside their networks and environments. As the world becomes more interconnected, this continued emphasis and investment into cybersecurity capabilities can be expected to rise.

As financial services continue to invest in resources that enable them to protect their networks from cyber-attacks, malicious external threats have continued to get more sophisticated by developing new methods and points of entry to exploit.  

It is not uncommon for these vulnerabilities to be present in third-party networks and shared banking systems. It is thus important for these vendors to be closely monitored, and for companies to be certain about the security solutions in place to avoid catastrophic damage from cyberthreats.

How does wise investment in infrastructure help organizations to thrive with these opportunities, as well as mitigate the risks? 

Heap: Wise investments in infrastructure can see fintech companies scale and innovate at a much quicker pace. By embracing crucial functions necessary for success—such as open banking —organizations are empowered to push their businesses forward by not only adopting current and important technologies, but to also strive towards bigger advancements. 

We can see how this enables organizations to thrive in the way Chinese fintech players have scaled and innovated quicker than their Western competition. At the very core, they differ structurally: Successful Western fintechs focus on one vertical before further developing their core offering, while the most successful Chinese fintechs build financial ecosystems on the back of high-engagement consumer platforms (Ant Financial, for instance). 

At the same time, investments in infrastructure to help mitigate cyber risks—as earlier mentioned—would tend to focus on three key areas; Application Security, Cloud Security, and Automated Threat Intelligence. Beefing these areas up enables organizations to build a holistic and integrated defense system against potential cyber risks. For example, many organizations place a great emphasis on scalable cloud services, which boast performance and low costs. However, fintech firms need to understand that these cloud systems should be secured differently than traditional networks. These organizations need to thus understand not just how to prevent attacks, but what to do if they are attacked; the processes that follow and what risks are incurred on the business. 

There are many ways in which organizations can set up a suitable strategy, but a lack of understanding in what works best for their business is commonplace. It would be wise to employ an appropriate managed services provider who can help plug the gaps. For instance, the right technology partners can harden infrastructure for its customers to a high standard and even to help secure and maintain APIs. Such partners work very closely with their customers to ensure they receive the industry’s best and most unbiased expertise and solutions, priming them for success.

What, in your opinion, does the future landscape look like for fintech and digital banking, from an infrastructure and technology perspective? 

In the near future, a number of emerging technologies will amalgamate to continually update and redefine our understanding of digital banking and its offerings. 

For instance, it is likely that we will see the continued rise of AI, which may bleed into aspects of digital banking such as the customer experience. Through the use of new and innovative data models and algorithms, digital banking will begin to develop greater customer personalization and enable customers with low financial literacy to overcome barriers. 

As data, machine learning and AI continue to advance, they may help drive organizations to take engagement to the core of their businesses—becoming what essentially is engagement-as-a-service. Being able to anticipate and stay ahead of users’ needs and requirements would allow them to drive greater value, evolving the way they serve their customers. 

Organizations will also recognize the need for unbiased third-party expertise to provide proper guidance in how to best optimize IT spend to navigate the continuously-evolving fintech industry and stay competitive. Strategic partners provide the methodologies, professional services, skills, integrated products, managed services and ecosystem to the right business processes, implement and integrate the leading applications, deploy them on the optimal cloud platform(s) and ensure security and compliance.  

Technology will continue to accelerate and evolve the way financial services are delivered, and as it continues to pivot its focus on exactly how it drives real business value, one thing is for certain—change is the only constant!