Dynamics of banking amidst fintech evolution explained

An expert from Arthur D. Little delves on how fintech revolutionises retail banking whilst corporate banking takes centre stage.

As financial technology disrupts the landscape of retail banking, corporate banking emerges as a dominant profit source.

In a candid interview with Asian Banking and Finance, Justin Tan, partner and regional head of Financial Services Practice at Arthur D. Little, provided a deep dive into the changing tides of Southeast Asia’s banking sector and delved into the dichotomy between incumbent banks and neo-banks.

“Neo banks have been around for quite some time. In recent years, Southeast Asia has witnessed the rise of neo-banks,” Tan said, acknowledging the transformative trends that have reshaped the banking realm.

Incumbent banks boast an extensive history and a diverse customer base, spanning corporate giants to small businesses. On the other hand, neo-banks, with their shorter history, tend to specialise in distinct segments such as digitally-savvy millennials or underserved populations.

Technological advancements and shifting consumer preferences, though, has impacted the financial services industry, something which an expert international management consulting firm like Arthur D. Little has been closely studying.

Tan stressed the importance of paying attention to the distinctions between incumbent banks and neo-banks, their approaches to cybersecurity and data privacy, collaboration, and how his company navigates these evolving dynamics.

Speaking about the critical issues of cybersecurity and data privacy, Tan highlighted the regulatory uniformity that binds both incumbent and neo-banks. “From a regulatory point of view, the challenges and requirements are similar,” he said.

However, the execution differs. Incumbent banks capitalise on their established brand identity and physical presence to foster trust among customers. Neo-banks, operating primarily in the digital realm, use technology to build that trust.

“They would have to convince potential customers about their technology infrastructure, processes, and controls,” Tan explained, shedding light on the uphill battle neo-banks face in establishing credibility.

He also described the intriguing dance of competition and cooperation that characterises the relationship between incumbent and neo-banks.

“They might not be a big overlap between the customer base,” he said, suggesting that neo-banks often target underserved niches, thereby complementing the broader services provided by incumbents.

Tan's analysis extends to partnerships as he points to Trust Bank Singapore, a digital bank backed by Standard Chartered and FairPrice Group, as a prime example of a collaboration that benefits both parties.

Still on the relationship between incumbent banks and Neo banks, Tan coined the term “coopetition” to describe the interplay of collaboration and competition, underpins the sector’s evolution.

“We see collaboration or competition across different aspects, from the customer base to technology to the business model,” Tan said of his term that encapsulates the complexity of the symbiotic competition between incumbent and neo-banks.

This dynamic of coopetition also extends to technology, where Neo banks’ innovative solutions catalyse technology adoption across the industry.

“What Arthur D. Little has tried to do is to present different ways in which they could sharpen their strategy, leverage commonalities, and move the industry forward,” Tan said.

By offering strategic guidance, the firm aids both incumbent and neo-banks in navigating the evolving landscape, facilitating healthy competition and innovation.

In the final analysis, Tan concluded: “Incumbents have established trust over time and possess a broad customer base spanning corporate and retail sectors. In contrast, neo banks tend to target specialised segments such as the digitally-savvy youth, SMEs, or underbanked segments.”

As they scale, neo banks might ultimately expand their target segments, according to Tan.