Why you should pay attention to challenger banks in Asia
Challenger banks and startups have been the protagonists of the fintech landscape, they have been unbundling financial services and delivering better customer services at a fraction of the cost. But there's a different narrative in Asia.
Monzo toppled FirstDirect from its 10-year reign as Britain’s best bank according to a Which? 2018 survey. We have also seen this narrative play out in other verticals such as loans and wealth management.
In Asia, instead of startups and digital challengers, it is non-FS digital players that have been the market movers. These are the technology companies with a large customer base that are digitally and geographically native - think Alibaba, WeChat, Ping An Technologies, Kakao, Line, Grab and GoJek.
How fast are they moving the market?
No region has put pressure on incumbent financial institutions to adapt like Asia. Technology companies reshaped the way billions of people manage their financial lives in less than a decade and abruptly shifted the competitive dynamics.
- Alibaba’s money market fund Yu’e Bao debuted in 2013 and now has 325 million investors, US$233 billion assets under management (AUM) and represents a quarter of the entire money management fund value in China. To put this in perspective, it took JP Morgan 26 years to build up the US Government Money Market Fund to US$144 billion AUM.
- Kakao, a Korean communications company launched KaKao Bank, Korea’s internet-only bank in 2017. It amassed 300,000 customers in 24 hours, US$930 million in deposit in one week, and has more than 6.5 million accounts in 1 year. The number of new accounts opened with Kakao in 24 hours exceeded what some incumbent and challenger banks have managed in a year.
- Grab, Southeast Asia’s dominant ride-hailing company claims 135 million downloads across 196 cities and 8 countries in 7 years. Starting as a ride-hailing app, it is now evolving as the region’s super-app with financial services at the centre. Grab now offers loans to underbanked consumers and SMEs, car insurance for their driver-partners, mobile wallet for payments and runs Southeast Asia’s largest loyalty program with over 440 merchants across the region.
This will not be an anomaly in Asia. We have already seen technology companies in the West like Amazon move gently into primary payments positions; In March 2019, Amazon struck a deal with Worldpay to include Amazon Pay as a checkout option and Apple launched a credit card with Goldman Sachs. We shouldn’t be surprised to see a similar shift in competitive dynamics in the West within three to five years.
An exponential curve always looks linear up close
Two things allow these technology companies to advance in finance at breakneck speed.
1. They don’t start with financial products in mind
They understand that customers fundamentally don’t want a bank - financial product is just an enabler to making progress in other areas of their lives. Banks exist because they happen to be a part of customers’ critical path towards progress: customers don’t want travel insurance, they want to be able to go on a holiday with their family without feeling anxious. This is the Jobs to be Done (JTBD) approach to product design.
Big technology companies have been experts at applying this theory. Alibaba understood that the progress customers want is to buy goods cheaply online. To help customers make this progress, Alibaba first had to solve two key customer jobs when they shop online through Taobao (the Amazon of China owned by Alibaba): “Make me feel secured throughout the purchasing journey” and “Make sure I am treated fairly.”
In a traditionally low trust society like China, where transactions were primary made in-person with cash, buyers worried Taobao sellers would take their money without delivering the product. So Alibaba introduced an escrow service. Sellers informed Alibaba when an order is raised, and Alibaba funnelled money from buyers to an escrow.
Once buyers received the order in good condition, they informed Alibaba and their money in the escrow is released to the sellers. This addressed those two customer jobs and enabled Taobao to gain trust with early adopters and grow users exponentially. In 2018, Taobao had 636 million active consumers - 10 times the population of the United Kingdom.
2. They partner to expand at speed
In order to grow revenues, expand customer base and increase customer loyalty, technology companies need to help customers make progress across their lives - one service alone is not enough.
Grab decided to look at payments; a daily necessity for customers and a common denominator across customers’ lives.
This is not an easy space to enter. There are two problems to solve. On one side is customer adoption. Most countries in Southeast Asia are cash-based, and there is an embedded credit card rewards culture for countries with more advanced infrastructure. How do you switch customers from their existing solutions - the inertia of the old - to the new - GrabPay?
The other side is merchant adoption. How would Grab minimise the effort, complexity and investment required for merchants to accept payments from GrabPay?
A more risk aversed culture in Asia also furthers inertia and anxiety and localising a go-to-market approach was key.
One solution was to partner with banks across the region: UOB in Singapore, Maybank in Malaysia, BDO in the Philippines and KBank in Thailand. These partnerships helped Grab access the banks’ key merchants through a recognised brand, widened the channels which customers can top-up their mobile wallet from, and increased the value of reward schemes for both customers and merchants. These partnerships lowered the barrier of product adoption and improved the customer’s end-to-end journey.
What does this mean for the incumbent financial institutions?
The three fundamental competitive moats for banks have been a) brand; b) sticky customer base; and c) the know-how and regulatory permission to manufacture products. What’s happening now is big technology companies are disintermediating bank’s relationship with customers and eroding competitive moats a and b. They’ve been doing this very quickly in Asia.
If this trend continues, the logical conclusion will be for banks to excel in product manufacturing.
As technology companies own the customer relationship, banks will compete on manufacture and distribution cost. This becomes a survival strategy. It is already unfurling at scale in the East. LINE, Japan’s messaging platform with 78 million monthly active users (61% of Japan’s population) already offers investment products from FOLIO (asset management startup) and non-life insurance policies from Sompo Japan Nipponkoa Insurance.
Incumbent financial institutions understand how this story could end and are working to craft an alternate ending. As they provide technology companies with product manufacturing capabilities and digitising existing processes to reduce cost, they are also building standalone challenger brands to reclaim relationships with customers. Mizuho Finance is building a new challenger bank with LINE in Japan, UOB is launching TMRW in Thailand, JP Morgan launched FINN in the US
Hong Kong is at the cusp of this new challenger bank wave. The Hong Kong Monetary Authority recently issued the first three virtual banking licenses to Standard Chartered Bank, Bank of China Hong Kong, and ZhongAn Technologies International Group. Unlike the UK where the majority of new banking license applicants were startups like Monzo and Starling, this first wave of license holders are incumbent financial institutions and a Chinese technology giant.
11:FS has had the opportunity to design two virtual bank propositions in Hong Kong. From our experience, we see this as a rare opportunity for the Chinese technology giants to reach Hong Kong customers at scale, a chance for start-up applicants to introduce truly digital-first financial services, and a strategic venture for incumbent financial institutions to meaningfully build customer relationships and move beyond digitisation.
It’s a bird, it’s a plane, it’s a challenger bank
Free from legacy culture, incumbents can use a customer-centric product development approach like JTBD and implement a modern architecture that supports real-time, intelligent, contextual, human, extendable and intelligent services. Greenfield propositions protect incumbent banks from becoming the manufacturer of commodity products and equip them to compete with big technology companies.
To transit successfully from a largely cash-based economy to a fully digital one, financial institutions in Asia must avoid the same service gap mistake that Western financial institutions made. We have seen how digitising an analogue product distances customers and complicates their financial lives. It is important to remember that customers don’t want a financial product, they want a service that helps them make progress life.
While the East and the West differ drastically in language, culture and infrastructure, the human need for services is universal. Grab, Alibaba, LINE and other technology firms in Asia have been designing and launching wildly successful propositions with this principle.
Their success in financial services will undoubtedly inspire technology companies in the West to attempt to follow suit. As an increasing number of incumbent financial institutions realise the importance of this approach, we should expect to see more challenger banks to launch in both the East and the West, from a variety of incumbents and technology players.