Traditional banks are simply not digitalizing deep enough, paving the way for neobanks to thrive within the next few years.

Digital banking in the Asia Pacific (APAC) region is set to be widely adopted with over three in five customers (63%) willing to make the switch to neobanks and challenger banks in the next five years, according to a report by digital banking platform Backbase and IDC.

By 2025 the region is expected to see 100 new financial institutions, ushered in by the liberalization of several markets and the issuance of new banking licenses.

Right now, the unprecedented pandemic has also brought into question the banking industry’s readiness towards digital banking, as a significant majority (70%) of APAC banking customers continue to view banking processes as tedious. This is a result of incumbent banks’ extreme focus on legacy systems and disregard for digital-first integration: the report states that only 30% of the banking customer base in APAC are active on digital banking channels.

According to the report, incumbent banks across APAC are faced with the pressing need to up the ante on digital-first banking due to intensified customers’ need for availability, access, and control of digital channel interactions.

The race to be Digital-First

The report surmises that incumbent banks have not been able to take advantage of potential ecosystem partners as they still hold traditional views of the value chain. It cited 80% of the top 250 banks in APAC prefering to own the entire value chain of banking, with third party-contributed business at a mere 2%.

Meanwhile, the average age of legacy core banking systems in the top 100 banks in APAC remains at 17.5 years, far behind the rapidly developing digital economy of today.

On the other hand, more than 35 neobanks or new digital challengers across APAC are built on agile innovative best practices—way ahead of incumbents in terms of flexibility, self-service capabilities, customer needs, and personalization. Consequently, with the emergence of new players and further digital disruption in the industry, 38% of traditional banks’ revenues are at risk by 2025, according to the report.

Investments and growth priorities for 2025

As the banking industry accelerates its pursuit to be digital-first, the report found that APAC banks must unleash the potential of personalization at scale and become more customer-driven and platform-oriented.

The key focus will be on digitalization and implementation of AI. Digitalization provides a multitude of benefits to core banking systems. For instance, in retail and consumer banking, instantaneous delivery of products, services and information is certain to meet the growing demands of consumers. Furthermore, automated processes and lower cost of operations can enable banks to better serve their corporate clients. Lastly, AI and ML also bring intelligence to wealth management decisions, boosting productivity.

By 2025, 44% of the top 250 banks across APAC will have completed their “connected core” transformation—working on platform-based and componentized modernization, and API-enablement. About 48% of banks in APAC are also expected to leverage AI or machine learning technologies for data-driven decisions.

Said Jouk Pleiter, CEO and founder of Backbase:“The pandemic has triggered the accelerated digitization of financial services across the region. Consumers and small business owners alike expect their banks to truly step up their digital game and provide 100% seamless digital capabilities, any time, any place. Looking beyond, banks and neobanks have to elevate their digital-first capabilities to effectively enable hyper-personalization for customers.”

Michael Araneta, Associate Vice-President of IDC Financial Insights, Asia Pacific added: “Being digital-first calls for the integration of digital technologies with the comprehensive transformation of business processes, engagement strategies, channels, and business models of banking. With the insights from the report, banks and neobanks can be well-positioned for the future.”