In the early 2000s, the evolution of digital technology alongside the development of computers and the internet have put forward challenges for traditional credit institutions.
COVID-19 pandemic has forced a rapid shift of customer transactions and interactions to digital. In 2021 H1, 134.8 million banking customers in APAC were willing to switch to neo-banks or new digital challengers, jumping by 113.2 per cent from the previous year.
APAC banks rushed to meet an average of at least 50 per cent growth in digital transactions. Specifically, 44 per cent of the top 250 banks across APAC will complete their “connected core” transformation— working on platform-based and componentised modernisation, and API enablement.
58 per cent banking executives predict the disappearance of the traditional banking models in five to 10 years according to a report by FT Focus of more than 500 global banking executives
The report also indicates the Asia Pacific region had the slowest pace of digital transformation compared to other parts of the world. Notwithstanding, banks in this region are gradually catching up with the world, with an increasing number of investment projects in big data, machine learning, and blockchain.
Personal Financial Services Survey in 2021 revealed that while the adoption of digital banking in developed markets such as Australia, Hong Kong, and Singapore has stabilised at around 90 per cent since 2017, emerging markets, namely mainland China, Indonesia, Malaysia, the Philippines, and Vietnam, have seen a rising penetration over the past few years, with an increase from just 55 per cent in 2017 to 88 per cent in 2021.
Also, in the Asia Pacific PFS Survey from McKinsey, more than 80 per cent of the respondents claimed that they would continue to use or will use more online banking services.
In the emerging region including the Vietnam market, only 17 per cent of participants will switch to using services from digital banks to traditional banks.
Of 249 digital banks worldwide, APAC is home to about 50 digital banks (approximately 20 per cent of the total digital banks in the world), of which more than 70 per cent were established during the years from 2016 to 2020.
ASEAN: The potential market
Southeast Asia and India are now emerging as these leaders’ next expansion markets in APAC. Southeast Asia, Malaysia, the Philippines, Indonesia, Vietnam, and Thailand are showing encouraging signs for digital banks, including positive market liberalisation and attractive market demographics.
However, most digital banks in Southeast Asia have only recently started or are about to commence operations (Fitch Ratings, 2021). The reason is that Southeast Asian users are still mostly concerned about trust and privacy issues when adopting digital services, hindering the digital transformation process in Southeast Asia banks.
However, the adoption rate of digital services has recently increased remarkably. As 40 million new internet users came online in 2021, ASEAN now has a total of 440 million users, increasing by 10 per cent in 2020, bringing the internet penetration rate in ASEAN to 75 per cent.
Smartphone penetration has also been central to digital growth, with more than 90 per cent of the region’s 400+ million internet users connecting via mobile phones.
Besides, expanding 4G penetration, alongside emerging 5G opportunities, unlocks further potential for connected digital banking customers.
With the advantage of a digitally-savvy population, and despite high banking penetration, there is still room for significant growth in Malaysia’s digital banking, particularly in the area of underserved individuals and SMEs.
Moreover, Malaysia recently opened up applications for digital banking licenses. Additionally, being Southeast Asia’s most populous nation where half the population is aged 30 or younger, Indonesia offers a huge market opportunity.
With a growing appetite for digital financial services solutions, as well as supporting regulations for digital-only banks being under revision, this country ranks the second-highest e-payment penetration in Southeast Asia, next to Singapore.
Similarly, the Philippines has encouraging demographics around the potential for digital banking adoption, including a young and digitally-engaged population. So far, the central bank has awarded three digital banking licenses to Tonik Digital Bank, UNObank, and state-backed Overseas Filipino Bank.
Meanwhile, Vietnam has one of the fastest-growing economies and a rapidly expanding banking sector. More than 40 per cent of the population is now banked and bank cards are seeing accelerating penetration as well. Although many banks are digitalising, no clear dominant winner in the digital banking space has emerged yet.
On the other hand, Thailand offers a steady and more mature economy, with relatively high banking penetration. It’s also one of Southeast Asia’s most receptive markets to digital challenger banks.
Digital banking in Vietnam
Theoretically, digital banking can be divided into four stages:
- Stage 1: Focuses on multi-channel banks providing various services such as internet banking or mobile banking
- Stage 2: The multiplexing period, integrating all services into one application, which creates convenience for the users
- Stage 3: is when customers can use all financial services without the existence of a physical bank
- Stage 4: emphasises banks improve user experience and personalisation
Currently, the process of digital transformation in Vietnamese banks is in the early stages with the most active field in electronic payment and e-wallet. This appealing piece has seduced commercial banks as well as big technology companies to gradually penetrate the market.
Up to now, a number of banks have developed electronic payment systems. Typically, Bank Plus e-wallet with a collaboration between Viettel and MBBank, VPBank with Timo (later sold to Vietcapital Bank), and Maritime Bank with MEED, LienVietPostbank with Vi Viet. In December 2018, Sacombank launched Sacombank Pay which is fully integrated with modern banking features and utilities.
According to the survey results of the State Bank (SBV), as of the first quarter of 2021, about 95 per cent of banks have been developing strategies and implementing digital transformation. Of this 88 per cent plans to digitalise all products and services from customer communication channels to internal business administration.
Most banks have applied new technical solutions and technologies in operation and service provision, of which 9 out of 19 operations have been completely digitized by some banks.
Furthermore, Vietnamese users are considered to have the highest acceptance rate of digital banking and digital payments in the region, reaching 82 per cent in 2021, two times higher than in 2017 (McKinsey). This increase is largely due to GenZ and Millennials – a potential customer segment for digital banks and challengers.
The SBV forecast Vietnam digital banks will have at least a 10 per cent revenue growth, and 58.1 per cent of credit institutions are expected to attract more than 60 per cent of customers in digital transaction channels with an expectation of customer growth rate to reach over 50 per cent in the next three to five years.
Additionally, Vietnam ranks second in the world with 69 per cent of people not having access to financial services and no bank accounts (Merchant Machine, 2021). According to Viettonkin’s assessment, with a combination of supporting policies with the improvement of the recent legal framework and the construction of digital infrastructure by the government, the potential of the digital banking market in Vietnam is still very large.
Policies for developing digital banking in Veitnam
With the implementation and development of mobile money through Decision 316/QD-TTg in 2021, users in rural, remote, and isolated areas will have access to financial services, hence promoting cashless payments.
On the other hand, banks, fintech companies, and mobile network operators can collaborate to offer services, and exploit the networks of VNPT, MobiFone, Viettel as well as a customer base of 130 million mobile accounts.
In November 2021, the Prime Minister issued Decision 1911/QD-TTg 2021 on connection and sharing between the National Population Database (NPD) and other national databases as well as specialised databases. This will build a unified national database system on personal identification towards open sharing and connection with service industries such as banking, telecommunications, insurance to help verify customers’ information and identity with ease and certainty.
As a result, it will reduce the effort and costs for all subjects in society, promote digital transformation in the economy, and allow fast, safe, convenient, and low-cost digital service to a large number of people and businesses.
The policy creates a legal framework for credit institutions to accelerate digital transformation, and establish a comprehensive digital banking ecosystem with the goal of developing digital banking models and increasing utility and customer experience
In addition, the State Bank also allows the opening of personal payment accounts in electronic methods (e-KYC), thus encouraging users to change their habits from physical transactions to online transactions in order to lead a cashless society.
Under the viewpoints of the banks, e-KYC application is also economical in investment in facilities and human resources compared to traditional paperwork, promoting the digital transformation of the banking industry.
Policies for legal framework improvement
Although there is a document on the national database, so far there are no specific regulations on the methods of the exploitation of the national database for credit institutions. It is suggested that the Government should have documents of permissions for organisations namely banks, insurance.
Even though eKYC is implemented and banks can now use identification measures such as taking a photo of an ID card on both sides, recording a person’s face online, in Vietnam, there remains ID card counterfeiting. Viettonkin recommended that a mechanism should be developed to allow banks to identify customers based on the verified information of third parties with equivalent standards, or the national database, and organisational databases.
Besides, Vietnam lacks legal testing mechanisms (sandboxes) to support the implementation of new technologies and new business models. Simultaneously, allowing banks in the digital transformation process to have certain exceptions in meeting safety and efficiency criteria as prescribed by the State Bank will help banks boldly research and test new things. As a result, the Vietnamese government should issue a draft decree on Sandbox Regulatory for Fintech in the banking sector.
The impediment of digital transformation in banking is security infrastructure as data security is weak. The Vietnamese government should build regulations on user data protection, digital identity, and an e-KYC alliance, along with completing regulations on transaction security, information security, and detailed regulations on electronic signatures, electronic certificates, and electronic transactions in accordance with international practices.
Likewise, there is no unification in the definition of digital assets, and the definition of evidence in electronic contracts in the field of digital assets, or the definition of electronic transactions, digital transactions, and what is the integrity and originality of digital evidence. Therefore, there should be a document to expand the understanding of Property which includes digital assets in the Civil Code.
When it comes to Intellectual Property Law, the concept of business secrets is still very general and abstract. The process of reviewing and amending it should include the recognition and protection of intellectual property in the digital economy. The Government should also
- Amend the Law on Electronic Transactions in the direction of adding new contents of the digital economy in line with the development requirements of the field;
- Formulate the Government’s Decree on the management of the platform economy and business on the Internet;
- Finalise and promulgate the Decree on electronic identification and authentication;
- Finalise and submit for approval the Decree on personal data protection;
- Promulgate legal documents on codes of conduct in the digital environment as well as regulations to create trust and assess credit in cyberspace.
Policies on the construction of digital infrastructure
The Strategy for Development of Vietnam’s Banking Industry to 2025, Orientation to 2030, and the Strategy for IT Development of Vietnam’s Banking Industry have identified technology as the leading solution for the development of the banking system, in which the objectives are to focus on developing banking products and services based on modern information technology; IT infrastructure development, safety, and security.
In addition, the 2030 project will promote the application of the cloud computing model; prioritise the use of digital infrastructure solutions developed by domestic units. In order to develop infrastructure to serve important systems, it is necessary to assign large prestigious state-owned enterprises with experience and human resources to implement.
Moreover, this project boasts the telecommunications infrastructure, and information technology in terms of speed, to meet the requirements of developing the IoT in digital transformation.
The pandemic and the high demand for online banking services, as well as the high level of mobile usage among the Vietnamese population, has promoted the number of online transactions, hence accelerating the process of digital transformation in the banking sector.
This is, therefore, the turning point for Vietnamese banks as there are tremendous opportunities for banks to develop and catch up with the digital trends.
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