• Saurat Fred

Coronavirus to Accelerate ASEAN Banks’ Digital Transformation

Updated: Jun 10

Fitch believes that banks will be even more active in pursuing growth through digital channels, with existing branches likely to be further optimized towards higher value-add, cross-selling services. With the exception of many Philippine banks, banks in the region had not generally been relying on the expansion of physical distribution channels to drive revenue before the pandemic: we estimate that the banks in major ASEAN markets have on average been expanding revenue at a 8% CAGR over 2014-2019 while their branch networks have been shrinking by 1% CAGR. 


We expect established, digitally advanced incumbent banks to gain from the trend as customers flock to convenience and perceived safety in times of crisis, while also reaping the benefits from potentially improved productivity as well as cost savings from closed branches in the medium term. 


Many major banks across the region have reported a surge in online banking activities since the onset of the pandemic. For example, Bank Rakyat Indonesia (Persero) Tbk (BBB-/Stable) reported around 88% year to year growth in internet banking activity in 1Q20, and a similar trend occurred in many major banks in the Philippines and Malaysia. The three large Singapore banks, in addition to higher digital transactions, have also reported a significant rise in digital account opening or usage of ‘robo-advisory’ financial planning services platforms in the same period. We expect this trend to persist even after the outbreak subsides, as customers who were used to cash-based and over-the-counter transactions maintain their newly adopted habits. This, coupled with the greater adoption of open banking architectures in some jurisdictions, would force banks to innovate more quickly or risk falling behind. We see the smaller banks, especially those with below-par digital capabilities, to be more at risk of the change in competitive dynamics. 


Fitch believes that banks will be even more active in pursuing growth through digital channels, with existing branches likely to be further optimised towards higher value-add, cross-selling services. With the exception of many Philippine banks, banks in the region had not generally been relying on the expansion of physical distribution channels to drive revenue before the pandemic: we estimate that the banks in major ASEAN markets have on average been expanding revenue at a 8% CAGR over 2014-2019 while their branch networks have been shrinking by 1% CAGR. 


The shift towards a digital-channel strategy is likely to be significantly amplified now that customer preferences are abruptly adjusted. DBS Bank Ltd. (AA-/Rating Watch Negative) has in the past reported that the cost-to-income ratio of its digital customers is roughly 20pp lower than its non-digital banking clients, implying considerable potential productivity to be gained in the longer term should the trend persists. That said, actual investments in IT are likely to be tempered in the near term as banks look to cut overall costs in the face of significant business uncertainty.


This article was posted first in Fintech Ranking, MAY 22, 2020

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