Worldwide, financial services spending on IT is predicted have a compound annual growth rate (CAGR) of just 4.2% from 2014 to 2018. Numbers for Asia Pacific financial services point to a still-robust landscape for IT investments: a CAGR of 6.7% and an annual growth of 6.9% in 2015 over 2014. Annual growth rates (2015 versus 2014) for retail and corporate banking are at 7.8% and 6%, respectively.
It is clear that the banking industry in the Apac region will continue to rely on traditional loans and deposits business. The booming industry over recent years – with the financial sectors in Asia experiencing the highest levels of growth in lending in the past three years and in the process seeing record revenues – validated that regard on the simple, traditional business. IT investments have understandably aligned with the region’s focus. Hence, the industry has been a reliable source of growth for technologies that supported core banking systems, general ledgers and chart of accounts, credit origination systems, and traditional channels.
In 2015, the industry will also focus less on the two behemoths of the Apac region: China and India, which continue to experience diminishing growth. Not unexpectedly, planned IT investments in these two markets are less robust than in previous years.
Further integration of the 10-member Association of Southeast Asian Nations (ASEAN) is expected to gain momentum in 2015. Liberalisation within the 700m-strong market through the ASEAN Economic Community (AEC) will provide a new area of interest for many institutions outside the slowing markets of China and India. Opportunities are easy to appreciate, especially when one considers the huge unbanked segments in Vietnam, Indonesia and the Philippines, as well as in the frontier markets of Cambodia, Laos and Myanmar. Many corporates will seek new partners around the region, and large multi-country banks – the global institutions and their swiftly-emerging Asian super-regional counterparts – will have the advantage of being able to support clients wherever these clients want to go.
The masterplan to become “less local, more regional” continues, with super-regionals targeting to generate at least 50% of their revenues outside of their home markets by next year. However, the golden 50% standard is proving elusive even to the most aggressive institutions. Many are going for bragging rights as the alternative – note for example the marketing by DBS (previously the Development Bank of Singapore), Maybank, Malaysia’s CIMB Group and Bangkok Bank presenting themselves as preeminent Asia/Southeast Asia–based banks. We also see the increasing involvement of megabanks in Japan into the broader Asia/Pacific region.
We have to temper our expectations vis-à-vis the AEC further. Its impact will largely be seen first in the lowering of trade barriers for certain goods and services in Southeast Asia – and even in these areas progress will be slow. Financial services integration will be a long-term trend that does not come into fruition until after 2015. ASEAN payments integration, for example, will take a long time to materialise as it will rely on the establishment of automated clearing houses (ACHs) and real-time gross settlement systems (RTGS) in all member countries, with these systems ideally following global standards. Further liberalisation of the markets to allow foreign players, and the much-talked-about Qualified ASEAN Bank (QAB) framework will also be just as tenuous.
Integration, however, is nevertheless proceeding in ASEAN and also in other markets – as seen in the signing of free trade agreements, most recently by Australia with China, Japan, and South Korea. The Hong Kong-Shanghai Connect also serves to prove that markets will continue to coalesce and that the opportunities to participate in other markets continue to open up.
In general, we see the superregionals and the large Tier 1 domestic banks having higher than usual IT budgets for 2015; not only because they have much more ground to cover, but also because they are more determined to transform and innovate. The industry must thus tread with great caution at this point. More than ever, small-tier banks might be crowded out because of the deeper pockets of their large bank counterparts. The latter will be able to attract the best skills and talent, supporting their effort to bring in new ideas on the new ways of banking and execute such ideas well. Technology vendors will also deploy their A-teams to strategic accounts, leaving mid-tier banks hanging. The result is that large banks, which are already seeing the advantage of regulatory support, public regard and more opportunities amid regional integration, might just have the innovation advantage too.
Where are the opportunities for innovation? We are impressed by a series of initiatives that indicate that the industry is willing to explore beyond the usual – in other words, away from the reliance on simple loans and deposits. More remarkably, many initiatives take institutions to the fringes, taking in many new concepts: multiproduct suites, omni-channel customer engagement, the Internet of Things (IoT), and even new ideas we call ‘lifestyle banking’. Of course, we also mention the relatively well-internalised initiatives around the third platform composed of cloud, mobility, social business, and Big Data.
As we continue to see accelerated innovation in the third platform, we find our industry in a period that will be defined by an explosion of innovation and value creation on top of new technologies and ideas. 2015 might thus yet be the start of new exciting methods of financial services in Asia.
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