Future of Asia: The Future of Financial Services

Consumer spending is increasing everywhere, but nowhere more so than in Asia.

If you ignore Asia, you risk missing out on half of the global picture, a $10 trillion consumer growth potential over the next decade. However, Asia’s consumer markets are growing dynamically, with new development angles providing opportunities for financial services organizations, commodities trading, and shifting or mutating consumption curves. The financial services industry must reconsider its approach to the Asian market.

Three trends to watch

According to a new McKinsey Global Institute (MGI) report, three important trends are taking place across the region. First, as incomes rise across Asia, more consumers will reach the top of the income pyramid, and mobility within the consuming class is more likely to stimulate consumption growth than movement into it. Second, while cities will remain the engines of consumption growth, an increasing number of demographic groupings inside cities show immense potential as new consumers. Take, for example, Seoul’s Insta-grannies, Surabaya’s Generation Z gamers, Manila’s business mums, and Chengdu’s lifestyle-indulging digital natives. Third, when the conventional relationship between income and consumption diminishes, new consumption curves emerge in specific categories.

New financial growth vectors are emerging

Many industries, including financial services, will definitely face disruption in the coming decade as customers and economic forces undergo dramatic transformations. What should financial service providers keep an eye out for? According to MGI’s research, there are eight development vectors that are particularly important to financial services and offer new opportunities to serve customers in the region.

The big convergence

The big convergence has the potential to reshape the role of financial services organizations. Digital ecosystems are widespread throughout Asia. Many clients adopt a “mobile-first” mindset, fostering the development of digital ecosystems such as fully integrated super apps that provide a one-stop shop for a variety of services. Despite the fact that super apps originated in China, Asian countries such as India, Indonesia, Japan, South Korea, and now Vietnam have notable super app operators.

As digital ecosystems and super apps mediate links with an increasing number of clients, financial services firms may wish to learn more about how to develop effective partnerships with people that orchestrate ecosystems. Fast-growing embedded finance is one way that financial services companies may participate in the new digital world. Products such as embedded payments, insurance, and finance, which are provided as part of a larger non-financial product or service might increase by up to 60% each year between 2020 and 2025.

The growth of banking-as-a-service platforms

Banks may seek to examine embedded finance strategies and banking-as-a-service platforms in order to become competitive and unique ecosystem participants. In India, for example, ICICI Bank integrated fundamental banking services within WhatsApp, and the service grew to one million clients in just three months. Any financial institution or insurer with the desire and means can create and operate their own ecosystem. State Bank of India introduced YONO, an app with over 100 partner-provided items and its own financial solutions, which significantly improves client engagement. Another example of an ecosystem-linked possibility is DBS in Singapore. The bank operates travel, mobility, and property markets, as well as an application planning interface (API) developer platform. The message is clear: those who take too long to adapt may be passed over.

Consumers continue to place greater trust in traditional financial service providers than in technology organizations to address their financial needs, but technology firms are swiftly catching up. Asian banks, card providers, and e-wallet providers have the highest levels of trust (70 to 75%), according to McKinsey’s 2021 Personal Finance Survey, compared with technology players (65%) and social media enterprises (55%).

Rise of the sharing economy

In view of shifting customer attitudes regarding ownership, the financial services sector may need to rethink its product offering. Because of economic concerns, evolving consumer attitudes, and technological improvements, many Asian customers are moving away from the traditional ownership paradigm. Sharing, renting, and subscription economies are gaining traction in a variety of industries, including mobility, fashion, technology, and housing. As Asian consumers investigate new forms of ownership, traditional financial goods such as home insurance and car loans may become less essential. In response, participants may need to innovate to produce new revenue streams, such as insurance products geared toward the sharing economy. Opportunities may arise for members in many ecosystems. ShareCover, a subsidiary of IAG, Australia’s largest general insurance company, offers homeowners’ insurance to those who rent out their houses on sites such as Airbnb, as well as auto insurance to people who drive for ridesharing services but don’t own their own car.

Increasing influence of digital natives

Financial institutions’ relationships with digital natives are changing. By 2030, digital natives (those born between 1980 and 2012) are expected to contribute 40 to 50% of Asia’s expenditure. With regional variances, Asia’s digital generation favors non-Asian social media platforms, messaging apps, and digital payment providers, as well as local social media influencers, but utilizes Asian e-commerce platforms. These younger generations are changing their relationships with financial service providers. They are more likely to look into alternative financial services. For example, credit card ownership among Chinese consumers between the ages of 21 and 24 is more than 20 percentage points lower than that of their older generations. Because this generation is more inclined than previous generations to utilize debt to support consumption, there are opportunities to service digital natives, such as point-of-sale financing with flexible maturities. Digital natives, in particular, have demonstrated an openness to integrated financial concepts such as buy-now-pay-later services. According to WorldPay statistics, the percentage of buy-now-pay-later transactions in Asia grew from 2019 to 2020. Buy-now-pay-later services are expected to increase by more than 30% each year in Australia over the next three years. Local companies such as Afterpay and Zip now have the most market share, but worldwide behemoths such as PayPal are also competing for the Australian market.

Time for a rethink

The shifting channel mix will undoubtedly force financial services businesses to rethink how they engage with customers. As customers’ use of digital platforms increases, so does their expectation of a positive customer experience. Digital technologies raise the bar in this regard by providing simple-to-use personalized services. Lockdowns expedited this transition. Although consumer acceptance of digital channels was initially highest for transactional services, by 2020, even traditionally “high-touch” items such as mortgages had begun to shift to online channels. Asia’s percentage of active digital banking users increased to 88% in McKinsey’s 2021 Personal Finance Survey, up from 65% four years earlier. Furthermore, more than 60% of consumers are open to switching to a direct bank. However, while approximately 70% of Asian customers are willing to purchase new items online, only 20 to 30% have done so thus far; investments stand out for adoption. In light of these trends, financial sector players are experimenting with ways to increase online sales. Overseas-Chinese Banking Corporation of Singapore established a 60-minute mortgage approval service for Singaporeans in May 2020 via automation and straight-through processing of online mortgages. By 2020, this platform had been used to apply for and complete 30% of loans.

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