How APAC financial services leaders can accelerate tech transformation

The EY Tech Horizon analysis reveals that:

• A high proportion (39%) of APAC FIs are still in the incremental stage of tech transformation.
• APAC FIs are less advanced in their transformation journey compared to FIs globally.
• Transformation is less likely to have exceeded expectations than FIs’ transformations globally.
• Meeting changing customer demands is the primary objective of transformation within the region.

The pace of digital transformation in the sector is being held back by a mixture of corporate culture, the global skills shortage, and the fact that companies are struggling to keep pace with customer expectations.

For example, APAC FIs are having significant difficulty adapting to hybrid working models and the needs of a distributed workforce. More than half of respondents (51%) named “corporate culture differences across geographies or ineffective virtual collaboration” as the foremost cultural challenge delaying transformation.

While hybrid working, when successful, can extend the available pool of talent and increase employee attractiveness, there appear to be deep-seated reservations. “Perhaps more than other regions, financial services companies in Asia-Pacific expect to interact with employees on a face-to-face level,” explains Brett Verschoor, Partner, Technology Consulting, Ernst & Young LLP.  “For example, culturally in Asia if an employer can’t see their employee at their desk, they assume they’re not working. So there’s this ingrained mistrust in distributed workforce models and a mindset change that has to occur,” he adds.

A growing FS tech talent gap is also holding back growth and innovation in the region, with nearly half of all respondents saying that “struggling with retaining existing skilled employees” and “ineffective upskilling programs” were the biggest internal barriers to retaining the talent they need to transform.  

Meanwhile, the sheer speed at which customer expectations are evolving is another huge challenge, according to Tech Horizon respondents. “Customers’ expectations are changing faster than enterprises can track them and nowhere is that more prevalent than the financial services sector in APAC,” says Verschoor. “That’s why such a high number of FinTechs are starting up – to satisfy customer demand.”

This is borne out in the survey. While 44% of respondents cited “meeting customer needs” as their number one transformation objective, more than half (53%) named “difficulty in tracking customer needs” as the primary barrier to improving customer experience.

The result is that, rather than being well advanced in their change journey, more than three quarters (78%) of APAC Tech Horizon respondents said that their organization was “still trying to develop and implement a transformation culture.”

There is some positive news for incumbents, however. Verschoor explains that increasing numbers of traditional firms are circumventing these challenges by creating digital-first FS subsidiaries. “They are built around being cloud first, being data focused, mining data, developing new products in a nimble or agile way and getting to market as quickly as possible in a way that it is consumer and employee friendly across the board,” he says. 

Five technologies – blockchain, data analytics, cloud, artificial intelligence (AI) and machine learning (ML), and Internet of Things (IoT) – continue to be viewed as the digital foundation for successful transformation. They are expected to account for the largest share of investment and to deliver the most value over the next two years within the APAC FS sector.

Blockchain receives the biggest share of investment – 62% of respondents say it will be their top investment in the next two years, compared to only 17% of organizations in all sectors globally. Data and analytics will also receive a larger share of technology investment compared to globally, while process automation will not be as heavily invested in.

In just a few years’ time, data centricity will drive and predict the most important decisions, processes and interactions of market-leading FIs across APAC and globally.

To become data-centric, APAC FIs need to view the value of data as equal to raw materials or sales. This will require significant investment for the majority of organizations, but it will enable them to outperform competitors who have not transformed their business models.

The EY Tech Horizon analysis reveals that:

• Data and analytics is the second-highest area of tech investment within the APAC FS sector (behind blockchain) – and investment has been growing since 2020.
• This shift to data centricity is aimed at addressing data gaps, which are the number one challenge to meeting financial sector customer needs.
• Only 8% of FIs in APAC describe themselves as data-centric today, despite the clear advantages of a data-first approach.
• APAC FIs are also more concerned about cybersecurity and data privacy than their contemporaries elsewhere.

The ascendency of data and analytics is not surprising considering its critical role in digital transformation. Ashish Verma, Partner, Technology Consulting, Ernst & Young LLP, describes data and analytics as the common thread running through all such programs, without which they would likely fall apart.

“Data is critical whether an FI is attempting systems migration, core systems replacement, operational efficiency, mergers and acquisitions, or it is looking at efficiency improvement through analytics and predictive capabilities,” he says. “Unless the organization is managing data from end-to-end, it will be incredibly difficult to achieve its transformation goals,” he adds.

According to Verma, record growth in mergers and acquisitions (M&A) activity globally and in APAC during the past two years has triggered an increase in corporate data centralization and rationalization. When two organizations merge, they invariably combine and rationalize their data systems and processes. FIs have also identified this is a prime opportunity to digitally transform.

“There are different aspects to data management from a seller’s perspective compared to a buyer’s perspective. Sellers need to identify, extract, cleanse, redact and centralize all the data belonging to the sole entity, package it up and deliver it to the buyer with minimal negative impact for either party, while considering the relevant data regulations and privacy principles," explains Verma.

“From the buyer’s perspective, they are faced with a huge volume of new data. They need to ensure their existing systems are fit for purpose, but there’s also an opportunity to deliver new transformation programs to manage, analyze and operationalize this data in order to gain a competitive advantage.”

The Tech Horizon survey reveals further factors driving data centricity. They include the advent of open banking, the growing need for customer insights, the importance of trend prediction, and mitigating risk by identifying issues around anti-money laundering (AML) and know your customer (KYC).

Regulators across jurisdictions now expect FIs to share increasingly granular data, faster and at a greater frequency. FIs are also faced with privacy regulations such as the General Data Protection Regulation (GDPR), which require them to identify, extract and sometimes even erase all customer data flowing through their systems. None of this is possible, according to Verma, without a streamlined and tech-enabled digital core, with data at the center. 

There are a number of key factors driving high levels of blockchain investment in APAC’s FS sector. The first, and possibly the most important factor, according to Waller, is that incumbent FIs in the region had initially adopted a defensive position on blockchain, but they are now planning to invest heavily to catch up with early adopters in the US and Europe.

“Initially blockchain was possibly seen as a fad by the local market, something to wait and see how it pans out, but now it’s clearly here to stay,” says Waller. “There’s an acceptance that every financial services business needs to have a strong blockchain and digital assets strategy.”

Another factor driving the investment in blockchain and digital assets by incumbent FIs is the proactive regulatory regime in the region. Markets such as Singapore have led the development of crypto regulation, which has created the certainty companies need to invest with confidence. This confidence is clearly illustrated by the growth of some of the world’s biggest crypto-native companies – notably the APAC-based exchanges Crypto.com and BitFlyer, and blockchain-based gaming companies: Immutable, Sky Mavis and Animoca.

How blockchain technology is shaking up the market

As with other markets, disintermediation is a key goal for FIs moving into this space. Thanks to blockchain and digital assets, FIs can streamline transactions and remove intermediaries to reduce cost and accelerate transaction time.

The technology is also being used to grow collaboration across the market, expediting interbank lending and settlement processes. Blockchain is also increasingly being used by APAC FIs to streamline reconciliation and reporting and also to bring new products to the market.

“One use-case we’re seeing in APAC involves FIs using blockchain to capture, consolidate and process data relating to the carbon emissions of asset portfolios,” says Waller. “Blockchain is particularly well-suited to this because it ensures high levels of data trust and integrity.”

While the evolution of blockchain in the fintech sector began with organizations building the blockchains, protocols, privacy technology and scaling solutions needed for sector growth, more recently it has extended to decentralized use cases within APAC’s capital markets. For example, traditional FIs are now offering hedge funds and deposit accounts on blockchain with no intermediaries.

The APAC market is also seeing blockchain use-cases around securities assurance, marketplaces and exchanges clearing and settlement. ANZ, a traditional FI in Australasia, for example, has created a payment solution using stablecoin.

According to Damien Jones, Partner, Capital Markets Consulting, Ernst & Young LLP, the short-term battleground for banks is in establishing their digital custody arrangements, currently dominated by native crypto businesses. “The use cases we are seeing that are focused on crypto assets are being used by the banks as a ‘test and learn’ experience with an eye on the future”, says Jones.

“They are a way of establishing a MVP, so that when banks inevitably move into other digital solutions that use blockchain technology, they have a strong foundation to expand their digital custody ecosystem. Those who get early runs on the board will be in the best position to drive blockchain solutions forward which target real-business problems across major business lines, such as housing smart securities contracts, or tokenized assets, or supporting asset settlement processes.”

The learning curve may be steep, but incumbent FIs must now invest in blockchain and digital assets or risk losing significant market share.

Conclusion

The findings from EY Tech Horizon 2022 show that APAC’s incumbent FIs can maximize the long-term value from their transformation and technology adoption programs through the following actions:

• Unlock data to power new products, services and business models.
• Combine the five foundational technologies – blockchain, data analytics, cloud, AI and ML, and IoT – with appropriate use-cases.
• Meet and evolve customer demand by focusing on new products and end-to-end experiences.
• Focus on nurturing talent and culture, introducing new mindsets and ways of working.
• Pursue win-win business ecosystem partnerships that accelerate transformation and value creation.