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.

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 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%⁷and 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.

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 Insight¹⁴to 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 1st 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.