4 trends that will shape financial services in a post-COVID world
The groundswell of digitalization that forced entire industries and services to go online in 2020 at the onset of the COVID-19 pandemic, only continued to grow in 2021 despite the return to office work and deployment of vaccines around the world.
Enterprises, SMBs and end users, having tasted the widespread benefits of e-commerce, digital payments and other seismic changes, were simply not looking back.
The migration of businesses online has led to the proliferation of nascent fintechs to offer specific verticals that customers have been clamoring for in the new normal, such as wealth management (robo-advisors), SME lending and business offerings. buy it now and pay later (BNPL).
Some traditional banks and financial institutions have quickly repurposed their businesses, enabling application programming interfaces (APIs) that connect their KYC and other key services with third-party apps and developers, creating open banking ecosystems. According to a May 2022 report, Asia-Pacific banks are expected to earn up to 18% of revenue through their BaaS partners.
As Asia-Pacific fintechs and banking players enter the second half of 2022 and plan for 2023, here are four key trends that will shape a post-Covid world of finance: BNPL, Central Bank Digital Currencies (CBDCs) , environment, social and governance (ESG standards) and the rise of neobanks.
POS and BNPL financing
Point-of-sale (PoS) financing includes both BNPL and other financing options such as interest-bearing point-of-sale loans. In Finastra Outlook 2022 BaaS White Paperour survey of business and finance executives led us to predict an acceleration in point-of-sale funding of 104% by 2024.
According to the BNPL Q4 2021 Survey, the BNPL payments industry in Asia-Pacific is expected to grow by 61.5% on an annual basis to reach US$133.7 billion in 2022. BNPL’s strong growth in the region has been largely supported by increased e-commerce penetration as well as the general economic downturn which makes POS financing a key value proposition for e-merchants.
The region is home to one of BNPL’s largest global players in Australia Afterpay (acquired by Square for $29 billion), as well as The Pine Labs of India (valuation of 7 billion US dollars), payy from japan (acquired by Paypal for $2.7 billion), Singapore Atom (valuation of US$2 billion) and Akulaku from Indonesia ($1 billion).
However, the shine has faded somewhat in recent years, as recent estimates expect BNPL to represent only 2% of e-commerce payments in Asia Pacific by 2025 (2021: 1%).
At the same time, BNPL companies are loss-making, with Afterpay and Paidy showing average margins of -15% and smaller players suffering much more. An April 2022 report predicts that BNPL players in the region will face a combined loss of US$5.2 billion by 2025.
Central Bank Digital Currencies (CBDC)
With the accelerated digitalization caused by the COVID-19 lockdowns, central banks in Asia-Pacific have considered issuing digital tokens that are pegged to their own fiat currency. These are called CBDCdigital dollars that have the same value as cash or paper dollars.
There are two types of CBDC: wholesale and retail. As defined by the Bank for International Settlements (BIS), wholesale CBDCs are intended for the settlement of interbank wire transfers and associated wholesale transactions. They serve the same purpose as reserves held at the central bank but with additional functionality.
Meanwhile, retail CBDCs are making central bank digital currency available to the general public, just as cash is made available to the general public as a direct claim on the central bank.
As of June 2022, 109 countries or currency unions had some form of CBDC initiative, according to the Atlantic Council Center for Geoeconomics CBDC tracker. Emerging markets are leading the charge on CBDCsin search of digital tokens to solve various local problems.
China became the world’s first major economy to pilot a digital currency (e-yuan or e-CNY) amid the pandemic in April 2020, in a bid to push more Chinese people away from cash while building greater resilience in the local payments ecosystem currently dominated by TenPay and AliPay, backed by tech giants.
Meanwhile, India plans to deploy its digital rupee gradually this year to support its massive import-export activities, in order to streamline cross-border transactions reducing costs and bypassing multiple layers of banks for international settlements.
Solving the complex ecosystem of cross-border payments is a common problem for Asia-Pacific countries exploring CBDCs. In March 2022, the BIS Innovation Hub, in collaboration with the central banks of Australia, Malaysia, Singapore and South Africa, developed an experimental multi-CBDC platform for international settlements.
The initiative, called Dunbar Projectresulted in two shared platform prototypes that could enable international settlements using digital currencies issued by multiple central banks.
Increased pressure from stakeholders has led to accelerated progress by companies towards ESG-related objectives. In October 2021, Bloomberg reported that ESG-related funding in Asia-Pacific reached $229.2 billion year-to-date, more than five times its 2016 level.
ESG financing presents a huge opportunity for banks to respond with relevant financial instruments that can help fund âgreenâ and âsocialâ projects and promote improvement in a borrower’s ESG-related metrics.
In 2017, China Development Bank (CDB) offered financing for the construction of Karot Hydroelectric Power Station in Pakistan, which is also the first large-scale hydropower project supported by the Belt and Road Initiative. In June 2022, the plant started operating, generating 3.2 billion kWh of electricity and the reduction of 3.5 million tons of carbon emissions per year.
Banks can play a key role by setting up a panel of industry experts including ESG experts and auditors, who can guide borrowers to adopt the right KPIs and Sustainable Performance Goals (SPTs).
On this basis, banks can act as custodians of green loan data. This will foster greater confidence through green and ESG results with verified impact â especially with the recent emergence of green laundering issues from Asia Peaceful regulators.
A January 2022 report revealed that Asia-Pacific had 68 neobanks â that number has definitely increased now. Between 2012 and 2021, the market grew at a CAGR of 37%. India leads the region with 14 neobanks, Hong Kong has 12. Conversely, China, which claims 220 million neobank customers, is home to only four neobanks.
Fintech start-ups are no longer upstarts as more Asia-Pacific super apps increasingly flounder in the neo-banking and digital banking space.
In April 2022, Malaysia announced the five successful applicants for its first digital banking licenses, adding to the scheme above. Two of the five were linked to Singaporean superapps Sea and seize (through GXS Bank).
Great apps take different paths to becoming neobanks. Grab and local telecommunications giant Singtel have formed a joint venture called GXS Bankwhich has obtained digital banking licenses in Singapore (2020) and Malaysia (2022).
Meanwhile, the Indonesian super app Gojek bought a stake in the listed bank Jago in December 2020. As of July 2021, Bank Jago’s cashless payment services had been integrated into the Gojek app.
As these four trends converge to create a maelstrom of both confusion and opportunity, banking and fintech players must choose wisely which forces to satisfy and become aware of the benefits and potential pitfalls of adopting the open banking and BaaS.
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