Bricks-and-mortar banks, used to mitigating risks for their clients, have traditionally struggled with change. But with technology forcing a shift in thinking, and many banking service now a simple smartphone click away, these groups have begun outsourcing digital transformation.
“We are trying to help traditional banks compete in this new reality,” Backbase regional sales head Riddhi Dutta told FinanceAsia in an interview. He believes that digitalisation is now de rigueur for financial institutions around the world.
Backbase complements the pre-existing business structure of brick-and-mortar banks. “With a comprehensive digital layer, banks do not need to think about changing their legacy systems,” Dutta noted. When the alternative is building a digital presence from the bottom up, Backbase’s approach saves clients time and money.
More than 170 financial groups around the world - including HSBC, Credit Suisse and Westpac - use Backbase’s subscription-based service to access one standardised platform. As Dutta is quick to point out, “it’s a volume game.”
The stakes have risen dramatically over the last few years as digitalisation has gone mainstream. “We have doubled our revenues in the last four years,” said Dutta. Subscriptions over the same period have doubled as well, with around 80% of clients opting to renew their contract.
“Unlike a core banking system, where customer data gets stored, we don't store any sort of customer data,” Dutta explained. “We purely use customer data from the backend systems to orchestrate a seamless customer experience.”
Backbase subscriptions are at least five years in length. “We feel this is the minimum amount of time [needed] to really realise the potential of what clients have invested in,” Dutta pointed out.
Founded in 2003, the Amsterdam-headquartered company has five other office locations in North America, Asia and the Middle East. “We have been expanding and quite aggressively as well,” Dutta said.
As digitalisation becomes the new norm for banks, a race is mounting to onboard some of the world’s largest financial groups. Backbase faces competition from several groups including India’s Edgeverve and Swiss-based Avaloq.
Banking in the time of Covid-19
The current pandemic has been a catalyst for more banks to consider digitalisation. “The COVID-19 situation has definitely proven to be a trigger for a lot of banks,” Dutta noted, particularly for financial institutions in Asia’s developing markets.
“In emerging ASEAN countries you go and talk to one of the four or five largest banks and they really do treat their branch network as a big asset. But today, that asset is of no use to them.”
In mere months, bank’s physical branches have gone from asset to liability, as rents continue to be paid on offices closed due to the pandemic.
“Customer demand for branches is falling as banking behaviour changes and consumers more increasingly to online and mobile channels,” said KPMG global head of banking and capital markets in a research note last month. “The pandemic could potentially be a significant accelerator of trends that were already starting to gather.”
Evolve or die
By the end of 2020, virtual banks will have attracted hundreds of thousands of new clients.
Backbase anticipates more than 60% of customers will make the switch to virtual banks or neobank challengers in the next five years, according to the company’s Fintech and Digital Banking 2025 study.
Digitalisation may be the method by which traditional financial institutions can staunch the persistent leak of clients to neobank competitors. However, to date more than 80% of banks across the Asia region do not yet have the capability to drive digital innovation in-house, consulting firm Deloitte estimates in its 2020 digital transformation report.
“We expect digital transformation to become an increasingly important business imperative to enable banks to improve cost and operational efficiency, capitalise on new opportunities and win new customers,” said KPMG China’s head of banking and capital markets Paul McSheaffrey in the firm’s Hong Kong 2020 outlook report.
But while more people are dipping their toes in the neobank pool, for the most part their money isn’t following them. “We still expect deposits at virtual banks as a percent of total balances to be relatively minor at 2-3 percent [...] by year end,” accounting group KPMG China predicts in the same report.
Regulation has firmly sided with traditional banks. In Hong Kong, only eight virtual banking licenses were up for grabs when the city’s monetary authority launched the initiative between March and May of last year.
Licenses are similarly scarce across Asia. Taiwan awarded three virtual banking licenses in July 2019 and Singapore’s monetary authority is currently reviewing 21 applications for five virtual banking licenses; contenders range from gaming hardware supplier Razer to transportation superapp Grab.