This article first appeared in The Edge Malaysia Weekly on September 27, 2021 - October 3, 2021

THE level of digital banking adoption in Asia-Pacific emerging markets (EMs), including Malaysia, has risen dramatically over the last few years and is now on par with that in developed markets, a key survey has found, in a boost to the digital banks that are soon to come in the region.

According to McKinsey & Co’s Personal Financial Services survey, the share of consumers actively using digital banking in EMs rose sharply to 88% this year from 54% in 2017, while that in developed markets remained stable over the same period, at about 90%.

This means nearly nine in 10 consumers across the emerging and developed markets of the Asia-Pacific region use digital banking actively. “Actively” means accessing internet or mobile banking at least once a month. The survey also found that most of these consumers are open to purchasing more banking services through digital channels.

These developments should spell good news for the upcoming slew of digital-only banks in the region. Malaysia is set to issue up to five digital banking licences early next year after recently receiving 29 applications, while Singapore issued four licences last year, and Hong Kong, eight, in 2019.

Meanwhile, Indonesia reportedly has seven digital banks, with seven more awaiting licences.

“There is an opportunity for digital-only banks in the region to increase their customer base as more than 60% of Asia consumers are open to switching to a direct bank (that is, a digital bank with limited or no branches),” Sonia Barquin, a Jakarta-based partner at McKinsey, tells The Edge.

Moreover, based on the survey, affluent consumers expect to move 36% of their portfolio to digital banks in the next three years, she points out.

“To address this opportunity, direct banks will need to move beyond convenience, speed, ease of use and security to introduce innovative features and a compelling value proposition that distinguish their offerings from the competition,” she says.

“Beyond direct banks, there are new digital banking players that are embedding themselves as part of broader ecosystems, designing specific features to address customer pain points and tapping into existing customer bases to achieve scale quickly in a cost-effective way,” she notes.

The survey, which McKinsey carries out independently every three to four years, covered about 20,000 urban-banked respondents in 15 countries within Asia-Pacific, which included eight EMs (China, India, Indonesia, Malaysia, the Philippines, Sri Lanka, Thailand and Vietnam).

Consumers have taken more quickly to digital banking in recent years as the Covid-19 pandemic and subsequent lockdowns forced them to adapt to digital channels.

According to McKinsey, more than 500,000 customers had signed on to Hong Kong’s eight virtual banks by the second quarter of this year.

Interestingly, McKinsey’s survey results suggest that the high levels of digital adoption are likely to stick even after the pandemic subsides.

“Roughly 80% of consumers say they expect to maintain or increase their use of mobile and online channels post-Covid-19, and 42% indicate that they expect to visit their branch either less often or not at all when the pandemic ends,” it says in a report released last Friday.

In order for incumbent banks to ensure they don’t lose out amid the current consumer trends, they need to reinvent their businesses to capture growth opportunities, says Barquin, who is one of the authors of the report.

McKinsey’s research shows that banks, many of which already have digital propositions, are not doing enough to convert customer interest in digital products into digital sales.

“While most survey respondents express an openness to using digital channels for services beyond transactions, less than a third report having purchased a product or service through a digital channel. This discrepancy between interest and actual behaviour is likely the result of many banks having a limited digital offering and not engaging effectively with digital users to deepen relationships,” it notes. Barquin points out, however, that with the right strategy and capabilities, the digital channel can contribute significantly to new sales. “For example, between 2015 and 2019, top banking performers globally doubled their rates of cross-selling via mobile apps and online banking (digital sales per digital user) to 4.2 times those of slow adopters.”

In Malaysia, the McKinsey survey yielded some interesting insights, among which was that 90% of consumers have used digital banking at least once a month this year compared with 62% in 2017.

Barquin says Malaysian consumers are open to switching banks, with 36% of respondents having switched from their primary bank over the last year, and 66% planning to switch in the future. “Digital functionality along with poor network coverage are the main reasons for a customer to shift [from] their primary bank,” she explains.

The survey also revealed that while around 70% of consumers are willing to buy banking products digitally, only around 20% actually do so. “This is likely not reflecting the readiness of the market, but the lack of digital offerings and journeys,” she says.

Kenanga Research, in a recent special report on digital banking, says it remains to be seen whether the five upcoming digital banks in Malaysia will prosper within the next few years. Digital banks in Asia-Pacific took an average of two years to achieve profitability, it notes.

“Other profitable players took close to five years in operation to achieve sustainability, but it is likely [the Malaysian players] will be benchmarked against our regional peers. We believe that having just one locally bred name to arrive at profit would instil great confidence in the Malaysian financial market in the global arena, which could spill over exponentially into other economic sectors,” its banking analyst Clement Chua says.

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