ABeam Addresses Digital Transformation in Financial Services Industry (FSI) - Challenges Lie Ahead

Financial institutions are facing more competitive pressure today than ever before.  Fintech, blockchain, startups, non-bank financial institutions and other non-financial institutions are entering different industry verticals at an increasing rate.

A major driver for digital transformation is the need to adapt and evolve as competitors enter the market, or to stay ahead of peers who are also implementing digital strategies.  In more developed markets, new entrants have been at the forefront of the industry and left traditional businesses behind.  They are exerting real change on the industry by virtue of their digital-first approach, offering more sophisticated technology that increases the digital expectations of customers.  Three quarters (75%) of insurers surveyed fear competition from data-driven digital competitors¹.  

Digital banks have emerged that exist only on the internet.  Brokerages are using machine learning to pick stocks and package them into portfolios.  Wealth management companies are using robo-advisors to bring their products to the mass market.  These companies are developing new business models and leveraging technology to introduce products that today’s customers expect.  Altogether, these developments have pushed the financial services industry forward and created an environment of innovation.

Some of the existing players in the financial services industry have shown they are prepared to compete.  Banks, Insurers, Consumer finance companies and brokerages have all acknowledged the need to adapt to a changing landscape.  Siam Commercial Bank embarked on a 40 Billion Baht, 5-year digital transformation project in 2015².  UOB launched a digital bank – TMRW, that has no brick and mortar presence and offers innovative products for millennials such as budgeting services and spending analysis.

There are some myths believed by institutions that either paralyzes them into inaction or sets them on the wrong course of path.  The reality is there are opportunities from digital transformation in every business line and in many elements within each business, not just in customer facing elements or B2C industries.

What is digital transformation?
Digital transformation, through ABeam ecosystem, creates completely fresh user’s experience towards establishing competitive advantage, by transforming business based on social real needs using digital technology. 

Digitization and automation offers companies the ability to compete in new business areas with only virtual assets in a cloud environment. This speed is made possible by the ability to inexpensively test and launch disruptive new technologies in the cloud. It also drives the need for businesses to implement continuous testing and development cycles that can respond to customer feedback and emerging issues in near real time.

As businesses encounter the growth limits of their current markets, they are using digital technology to test new business models, implement them and quickly scale. Current cloud-based applications, Infrastructure as a Service and other components of digital transformation enable them to leverage existing technology and add new applications or services. Institutions with limited expertise in these areas may choose to partner with newcomers, using the size of their client base as a driver to attract the partnerships.

The end goal of a digital transformation can be either an Ultimate Goal, that is, a brand new digital business model or an Incremental Goal, that is, an improvement of current business, either through sales expansion or the digitization and improvement of current processes. ABeam’s framework provides for 3 approaches to either of these goals. The selection of a particular approach is dependent on what the final goal of the transformation project is to be.

The importance of digitization cannot be understated, as it is the foundation for new products and services that can be introduced in an increasingly digital future. The digitization of existing processes is step 1 in turning into a digital company. Due to the complexity and the large scale of systems to be affected, the timeframe for these projects is quite lengthy.

Transitioning from paper to digital can be challenging. This is compounded by challenges with adapting legacy infrastructure to cope with the digital products and customer facing applications that have been deployed. Analog backend systems limit the capabilities of the frontend and are not scalable.

Recognizing the limitations of existing IT infrastructure, many institutions are choosing to deploy modern platforms that can wrap around their legacy systems. Others are choosing to do complete core replacements to help them become more agile. Either solution can be the foundation for a company’s digital transformation strategy as they develop products to become tomorrow’s market leaders.

The vast majority of financial service companies surveyed have acknowledged the need for investing in modernizing their internal systems. More than 90% say they plan to increase spending in digital investments in 2019, and only 3% say they will decrease spending.

Financial service companies who have started implementing digital transformation projects are already seeing improvements in various metrics, including higher profit margins, improved customer advocacy, and faster customer acquisition rates. Lenders such as Capital One have seen an 87% improvement in customer retention and an 83% reduction in the cost per customer acquisition after investing in digital systems³. Insurers who make investments in digital modernization strategies are 63% more profitable on average than their industry peers who do not⁴. Businesses also expect an additional 70% improvement in customer acquisition rate by 2020, underscoring the beneficial outcomes that embracing digital transformation brings to the table⁵.

The time required for such system replacements is a common concern, often resulting in inaction or modifications to existing processes for slight efficiency gains. However, it is necessary as the slow speed of manual processes cannot keep up with the pace and volume of digital transactions. Additionally, there are also financial benefits that follow a digital transformation.

The cost per analog transaction is up to twice as much as a digital transaction⁶, which is too high to effectively compete with digitized and automated rivals. The average cost to income ratio of a traditional bank in Thailand is 44%⁷ and 35% for a digital bank.

Most companies are dealing with at least two large enterprise applications and are struggling with different operating environments and siloed data that is often only available on a monthly basis. Modern systems such as those in the cloud can connect to existing CRM and ERP systems with a range of business systems and third-party applications and APIs. This data is also made available in real-time, giving executives a single view to make decisions quickly.

ABeam can provide various new process design embedded with digital technology. Some examples include Robotic Process Automation (RPA) and implementation of Optical Character Recognition (OCR) systems. RPA can automate repetitive processes that are currently done manually, such as data entry and verification procedures, or periodically create reports for banks or other financial institutions. We can also conduct Business Process Reengineering and redesign process flows with digital technology. Other use cases include e-KYC procedures, data reconciliation or customer onboarding. OCR can be used in conjunction with RPA to quickly and efficiently import data from paper to digital systems. This can vastly speed up the time required for procedures such as customer onboarding.

Throughout this entire process, we must not forget employee engagement levels are just as important as customer engagement levels. A highly engaged employee is better able to utilize the digital tools they are given, and quicker to adapt to industry changes. A truly transformed financial institution should delight customers as well as enhance the employee experience. This can be challenging, particularly for employees who are accustomed to the status quo.

Companies that invest in the employee experience enjoy more than 4 times the average profit and twice the average revenue per customer⁸.

Organizations need to attract tech-savvy new talent, while retraining employees whose roles are changing as the result of automation and digitization. Technology plays a pivotal role, but it only works if it supports the changing needs of a workforce that’s increasingly demanding a more mobile, fluid, “anytime, anywhere” approach to work. At the same time, it must also help fuel a culture of innovation and change.

One of the biggest challenges in a digital transformation initiative is the need to retrain and relocate people as manual processes are eliminated.

Companies can leverage the advances made through digitization to improve the value chain. Digitization does more than turn existing products into digital equivalents, they enable the development of a whole new type of product or service. Existing processes can be redesigned and repackaged in a contemporary manner. Fintech disruptors have introduced policies with zero paperwork and near instant service⁹. In foreign markets we have seen solutions to contemporary problems in the form of on-demand policies for ride and home-sharing coverage. Perhaps the best example of this is adapting financial products to suit the tastes of millennials – a segment of the population raised online and used to the personalization and convenience of online services. Insurance companies and consumer finance companies have been slower than banks or brokerages to realize the digital shift in consumer behavior and how far they are from having meaningful engagement throughout the customer journey. But this appears to be changing as almost all insurers surveyed (92%) say they are increasing their investment in AI and big data to increase their competitiveness. A significant proportion (62%) have already seen measurable benefits from their investments in big data and AI, while 31% say they have a “data-driven organization”¹⁰. Digitally enabled insurers and consumer finance companies of the future will succeed by putting customers at the center of everything they do, vastly different from today when customers rarely interact with their service providers. ABeam facilitated a collaboration between Sumitomo Life Insurance and VYMO to deploy a centralized system to manage clients and sales activities¹¹. This relationship accelerated digital innovation and enhanced the efficiency and productivity of sales activities by a wide margin. Customers were also pleasantly surprised by all sales representatives having visibility on where the customer was in the customer journey.

Not all customers want the same things from their bank. Older customers may seek simplicity – a straightforward experience that provides financial peace of mind, whether their transactions are handled digitally or traditionally. Younger customers want drastically different things – peer to peer payments, robo-advisors, digital wallets, budgeting tools and more. Banks must adapt to this changing landscape and have been doing so by shifting from a product centric approach to a customer centric approach. Catering to the distinct, and different sets of desires for each customer segment requires becoming a truly customer-centric bank, which in turn requires a full embrace of digital transformation, involving updates in business processes, IT architecture, corporate culture and overall operating models. Research shows this kind of personalization can boost product sales by 30-40% in some retail banking areas, cut customer churn by 10-30% and double or triple customer engagement scores¹².

Deeper relationships between financial service firms and customers can be built by offering data and prompts in a frictionless way on a user-friendly interface, like the banking apps that are available today. Linking to third-party services such as loyalty cards or payments providers can provide more insight into customer behavior. Mobile apps can also serve as a window for feedback for the customer.

Retail banking has undergone massive changes in the last few years with mobile banking applications increasingly offering services that were once exclusive to the branch. This trend will continue, with mobile eventually being on par with the branch. ABeam has recognized the importance of customer centricity with mobile banking when deploying a CRM solution for a client in Japan¹³. The trajectory of the industry indicates the convenience and type of products available on a smartphone will undoubtedly exceed anything we previously imagine possible. We are already seeing low cost and quick international remittances using blockchain, offsite account opening using digital KYC systems, and robo-advisors cross selling other products from the bank’s product mix. Global trends point to a future, where mobile banking applications could serve as aggregators for third-party service providers. Regulators in Europe have mandated banks to make their reference data available via APIs to authorized third parties in order to increase competition and service. There is no news of this happening in Asia, though banks should contemplate the possibility of partnering with or acquiring innovative fintechs that offer products customers would find compelling.

The unique position of banks in the minds of the consumer will protect it as an entity that owns the customer relationship. The risk of fintechs gaining market or mind share in deposits or home loans is likely to be quite low, due to the lack of trust they have with newcomers. It is possible that retail banks will eventually morph into a platform for financial services products, either provided by themselves or by third parties.

First movers will have the ability to forge exclusive partnerships with the best service providers. More than ever will product excellence and service be the key differentiators for customer facing institutions. Failure to do so, could turn retail banks into utilities.

Making the shift from digitization to develop new business model requires a deeper understanding of the business value chain and the technological systems within each firm. We can draw on our experience from developing solutions for various financial service firms and leveraging that knowledge to develop new business models with our client partners. Analytics tools that incorporate AI and business intelligence can provide immense insight into a business’ operations. Insurance companies have found this particularly useful for fraud reduction. Interestingly, it has also been used for increasing customer retention rates by observing customer behavior and predicting churn and presenting options to prevent the customer from cancelling their service.

Achieving digitization is quite a straightforward process. Redesigning existing business processes and products requires a deep understanding of the business and the industry in which it operates. We have worked with several of our clients to develop strategy and design products, followed by an implementation process where we maintain flexibility for the client’s needs.

Due to their disruptive nature, breakthrough business models often get a lot of attention. New digital systems and processes enable what was not previously possible. New models emerge by rethinking how to do things with our new digital tools. Examples of the kinds of services made possible include alternative credit scoring and dynamic pricing models for insurance. Both of these services utilize alternative data sources such as those sourced from social media, fitness trackers, satellite data and other online sources to more effectively price risk. As more data is gained on people, customers will no longer be segmented by the same old categories of age, sex and nationality, but rather by behavior. And as more customers are incentivized to bring their devices online and share their data, the vast amount of information collected can provide insurers a new way to benchmark and categorize risky behavior and implement alternative credit scoring effectively.

Imagine a world where insurers and lenders can provide real-time feedback and pricing based on a customer’s activities. Insurance companies could give customers a greater understanding of the costs associated with the choices they make, and provide financial incentives to change their behavior and move into a lower risk category. A driver who is speeding could be informed how much his premium will increase next month if he doesn’t slow down, or an individual exercising for 30 minutes every day could be rewarded with a lower premium if they hit that milestone consistently. Data will generate insights into customer behavior which will affect risk pricing and customer engagement. Insurers can financially incentivize their customers to lower their risk profile, therefore reducing the amount of money they will pay out as claims and improve their bottom line.

Some Lenders are using non-traditional data such as satellite data, weather forecasts and crop price predictions to more accurately forecast the ability for farmers to repay loans. ABeam has partnered with Orbital Insight¹⁴ to utilize their cutting-edge analysis of aerial imagery and other non-traditional data. This could be used to accurately predict and measure flood risk and predict crop harvests, resulting in more accurately priced risk profiles. Other lenders in the financial sector have begun using non-traditional data such as information gathered from social media in their risk management and pricing models.

Big data is essential to manage machine learning and AI, and it is supercharged if it incorporates non-traditional data such as those obtained from wearables, vehicles, online services or other non-traditional sources.

Developing strategic solutions and designing and implementing the systems that are required to run them, puts us in a unique position to understand the possibilities that arise. We have leveraged our knowledge in technology and business strategy development to help insurance companies in Thailand to develop new business models and digital strategy to compete in this digital disruptive era. Our clients have benefitted from tools such as Hypercube, which incorporates analytics and Artificial Intelligence to provide new insights into their business processes. Not only has this allowed our client partner to increase lead conversion, improve customer engagement and increase cross selling of other products, these analytics can also improve profitability by better identifying fraudulent claims.

One of the most significant cases of Approach #3 is MYbank, an Alibaba’s subsidiary¹⁵.

MYbank, Jack Ma’s US$290bln loan machine, changes Chinese banking by using real-time payment data and a risk-management system that analyses more than 30,000 variables. The financial-technology boom that turn China into the world’s biggest market for electronic payments is now changing how banks interact with companies that drive most of the nation’s economic growth.

This 4-year-old bank lends 2 trillion yuan to nearly 16 million small companies and consumers. Borrowers apply using a few taps on a smartphone and receive cash almost instantly if they are approved. The whole process takes 3 minutes and involve zero human banker. The default rate so far is about 1%.

The biggest data sources may come from payment providers in Alibaba Group like Ant Financial, the largest shareholder of MYbank. After obtaining consents from borrowers MYbank analyses real-time transactions to gain insight creditworthiness. For example, a drop in customer payments at a retailer’s flagship store might be an early indicator that the company’s prospects and ability to repay debt are deteriorating.

Another unique source is from government-administered ‘social credit system’, Chinese unique scoring which is being tested in various cities across the country as a way to reward good deeds and punish misbehavior. Hence a small business owner whose social credit score dropped because he failed to return borrowed umbrella would find it harder to get a loan.

The upshot of more information is a loan approval rate at MYbank that is four times higher than at traditional lenders, which typically reject 80% of SMEs’ loan requests and take at least 30 days to process applications.

Another case similar to MYbank is Tencent’s WeBank¹⁶.

WeBank, the 1^st digital bank initiated by Tencent in December 2014, ahead of a pilot program granting online lending licenses to non-bank operator in China in 2015. WeBank has built the first ever distributed banking system based on cloud-computing technologies and the blockchain. It has gained critical mass swiftly. In 2018 it reported revenue of 10 billion yuan and net profit of 2.5 billion yuan.

In late 2018, the bank’s valuation passed 147 billion yuan (US$21 billion), making it one of the world’s largest unicorns; this is not a public valuation but was gleaned from an auction notice for a minor stake in the company, posted on Taobao.com. As of the middle of this year, the NPL ratio is thought to be around the 1%.

In addition to the Alibaba and Tencent-backed internet banks, Baidu is a backer of aiBank, alongside China Citic Bank. But WeBank is, so far, the leader in assets, loans, net profits, return on equity and non-performing loans.

The financial sector is being digitally disrupted, and financial service firms in Thailand need to take decisive actions toward digitally transforming their operations. Failure to do so could see incumbent players lose market share to competitors or new entrants in the Fintech and Insurtech space. The prevalence of high speed mobile connectivity means customers are more accessible to a larger group of service providers than ever before. The threat of foreign companies gaining market share in Thailand is real. Now is the time for financial institutions in Thailand to develop a roadmap and begin their digital transformation.

Digitization might be considered the most basic of the transformation exercises, but it is an essential foundation to build upon. Projects such as core system replacements, RPA implementation, Data Management improvement and infrastructure modernization tend to be large in scale and affecting a large portion of the business. Financial institutions need to carefully plan for these projects and choose the right partner to work with. ABeam can provide PMO (Program/Project Management Office) / CM (Change Management) services, BA (Business Analysis) services, Data Management & Analytics as well as support for RPA projects.

Financial institutions should conduct an end-to-end review of their value chain or business processes, including those of their business partners. A reexamination of current processes through the lens of contemporary technology gives us a unique viewpoint on how new tools can be utilized to improve established methods. Doing this effectively requires a wide range of capabilities, namely; a profound knowledge of business processes in the financial sector, experience and expertise in business process improvement, and the ability to identify and implement relevant cutting-edge technology solutions for businesses.

Financial institutions should also consider developing new business models as part of their business portfolio to prepare against the threat of digital disruption from non-financial firms. Failure to do so could see many companies ceding control of the market to new players. Incumbents should use their advantage of experience and deep understanding of the business to develop a new way of doing business utilizing cutting edge technology.

ABeam has rich experience in the financial services industry. In addition, our consultants are experts in the fields of business process improvement and have supported many companies in their digital transformations. Our deep understanding of Asian and Thai cultures is evident in our tailored solutions for the Thai market – this makes us the best choice to be your real partner.