ASB student Saloni Saraogi (MBA Class of 2019) interviewed Dato’ Ariff about his thoughts on the growing trends of digital banking and fintech. Read on to discover insights about where this industry might be headed in the near future.

Why is digital banking a big business opportunity that attracts even non-financial players such as Grab and AirAsia?

The concept of digital banking is not new and has been in existence for many years. For instance, in Europe we have N26, Revolut, and Atom Bank. However, the term has become popular only in the past 5-8 years. Initially, the struggle was regulatory in the sense of acquiring a banking license.  Europe has been at the forefront [of this movement] and is moving to Open Banking. This has led to a lot of activity in the virtual banking space in that region.

Asia is catching up. Grab, AirAsia, Paytm and many other non-financial players want to enter into this market. However, most of the success stories have been on the payments side, and this is primarily because cross-border payment costs are lower in digital banks when compared to traditional banks. Digital banking has been a big business opportunity and there has been chatter everywhere that the next banking generation is virtual banking and [brick-and-mortar] banks will be wiped off.

However, in my view, retail banking is the sector that is currently being disrupted the most and no bank will be wiped off. Banks provide services in many other areas such as corporate, trade, and securities, and the disruption in these areas will take time. Customer behaviors and mindsets are changing with respect to digital banking and there is a race to be the first to grab this opportunity.

What are the implications of a digital bank for non-financial players and financial players?

Clearly customer preferences are changing. When we look at the basic rationale as to why customers keep their money in a bank, the underlying and most important reason is trust. People feel that their money will be safe in a bank and can be withdrawn at any time. With trust in mind, more and more people are now using services by non-financial players. Alipay and WeChat offer wallet services which allow customers to keep their money safe.

It is not surprising to see that their penetration rate has been extremely high. Grab has announced its entrance into financial services and I believe that Grab Pay will fly. People want to pay online, and these are small amounts so there is no big risk. If traditional banks have millions of customers, bigger tech giants such as Google and Facebook have billions of customers.

These tech giants are currently in the initial learning phase, but once they enter into the digital banking and payment space, they can give serious challenges to existing traditional banking systems and the competition will then reach a global scale.

What do you think is the biggest challenge traditional banks face in their move to become a digital bank and how can they overcome this?

Standard Chartered recently received a virtual banking license from HKMA in Hong Kong. It is a completely standalone virtual bank with respect to management. Various banks like Standard Chartered are testing the waters now. They want to have a first-mover advantage and be the first ones to overcome challenges and solve problems. Each bank has a different challenge and different experience. For instance, in the US, Mobile Bank is a university bank.

All of its customers are university students. It offers them small loans, deposits and ATM services. It got acquired by a traditional bank, Commerce Bank, for around USD $180 million. Some banks are setting up digital banks as a standalone bank, some are partnering with fintech companies and some are acquiring digital banks. There is no right or wrong or good or bad model out there. It is important to be experimental in nature and to be a quick learner.

For instance, N26 is already present in 19 countries with a very high penetration rate and has been able to expand quickly due to its presence on the cloud. Banks are now watching and learning from these use cases. I believe that the challenges are much more regulatory in nature and less digital. Customers would like to use digital services because of the convenience they offer.

In Hong Kong, it takes about one year to get a banking license.  Regulators too are new in the space and are working to ensure that customers’ money is safe.There is a time lag and regulations will evolve. Be it a digital bank or a traditional bank, all banks need to comply with regulations. However, for a digital bank, regulators are trying to make [the process] suitable for both the banks and themselves.

Standard Chartered just received a virtual banking license in Hong Kong. What are the implications for existing bank branches? Does it mean that branches will become obsolete?

In spite of the existence of virtual banks, many banks are opening branches in the US. Bank of America said that it will open 900 more branches. Why are they doing this, especially when there is a popular belief that branch banking will become obsolete? It is important to understand the difference in demographics of a country. Each country is different. India, Pakistan, Bangladesh and African countries have small banked populations.

Singapore and Malaysia, on the other hand, have large banked populations of 95% and 92%, respectively. For countries where the banked population is very high, opening a new branch may add less value in the sense that there will be a smaller number of additional customers that will join. But in countries where financial inclusion has not reached its optimum level, banks will continue to have branches.

One may argue e-money and digital money [will instead dominate], but I believe that they have a long way to go. DBS in India launched Digi money and their services do not use e-KYC. The customer is required to go to a local coffee shop and verify himself/herself to open an account. This may be possible in cities, but in small villages there are no coffee shops. Hence, the process is not 100% digital and there are challenges.

What is the implication of a virtual banking license for the digital banking services of a bank?

A virtual banking license is required in many countries to operate a bank digitally. These license regulations require a sort of discipline in terms of capital requirements. When a small bank or fintech firm wants to offer virtual banking services, they have different capital requirements and restrictions.

Regulators, after years of research and firsthand experience, are now determining what the optimum capital requirements are for a digital bank. They are concerned about people’s money and place more emphasis on deposits than on lending. Banks need to comply with regulators in the sense of how much money can be deposited and how much money can be lent. These requirements are different for traditional and virtual banks.

As an industry expert, what do you think will be the next biggest change we are going to see in banking services in the next 5 years?

Certain banks will be wiped off in the next 10 years. There are banks that are doing a lot such as Standard Chartered, DBS and Yes Bank, and then there are banks that believe that they will be fine and are not doing anything substantial.

It is very clear that banks that are not evolving and are not doing enough in the digital space will be wiped off. When I say wiped off, I mean that the cost of doing business will be high, customer bases will start shrinking and the profit pie will become smaller.

Banks have depended on loyalty to gain generation after generation of customers, but this does not hold true anymore and is being replaced with a focus on service. The loyalty of a customer in today’s world is based on good service.

Banking will evolve. The threat of new entrants to a bank is extremely high. Google and Facebook are developing their own solutions. Countries too are now issuing e-money. In China, e-money and wallets have become so popular that is hard for traditional banks to do what they want. Incumbent banks will have to evolve, and new journeys will be undertaken.