Core functions possibly at stake without sufficient digitalisation

November 06, 2020 | 08:56
Payment intermediary is one among three core functions, and has always been considered as a unique and unparalleled feature of commercial banks. However, this might not be the case anymore as a number of century-old brands have collapsed due to their conservative mindset and unwillingness to change.
1516 p19 core functions possibly at stake without sufficient digitalisation
By Dam Nhan Duc - Head of Research and Corporate Development, Military Bank

Over the past 20 years, the digital revolution has crossed the name of many major brands out of the map. For instance, iTunes has completely destroyed the traditional music industry, and Netflix has done the same to DVD, while Uber and Grab are putting the traditional taxi industry at risk. This revolution has also created global unicorn companies such as Facebook and Google, or Ant Financial in the financial sector. If traditional banks fail to change in order to maintain their competitive advantage, they will lose their piece of cake, especially payment fees and related services, to outside industry competitors. According to McKinsey’s research, payment fees and related services account for roughly 50 per cent of the profit of leading retail banks.

Many experts believe banks’ failure to cooperate with fintech companies might leave them behind in this competition. However, I believe that banks have their own competitive advantages, which can be named as large numbers of traditional customers, brand, reputation, customer data, and more importantly, solid systems such as validation, risk management, and information security.

On that basis, cooperating with fintech companies to succeed is not the only way. On the contrary, I strongly believe that banks can certainly win this fierce battle if they know how to promote their advantage and seize opportunities. To do so, banks need to quickly apply new technologies, acquire know-how and expertise from fintech and big tech, and change business models, sale approaches, and credit decisions in addition to promoting their inherent advantages.

Vietnamese banks can fully take advantage of this golden perioed if they actively learn from the world’s successful organisations operating in digital business sphere, such as Ant Financial, OakNorth, Kakaobank, or Lenddo and find the answer to three questions in particular: how to leverage assets and unparalleled advantages; how to apply big data and technologies to their business activities; and how to maintain their top-of-mind position in their customers.

In the past few years Vietnamese regulators, public service providers, and banks have been transforming and implementing certain technology solutions to quickly reach out digitalisation trends, such as the application of server virtualisation to optimise the efficiency of hardware investment.

Many banks have pioneered in digital transformation, hailing it as a central mission by establishing a digital banking division, promoting payments via banking apps. Some of them are Vietnam’s leading banks such as Vietcombank, Military Bank, and Techcombank.

In order to enhance digital transformation and digital payment, authorities need to speed up the construction of a national personal identification database and put in place a regulated electronic identity system which, according to McKinsey’s research, can reduce the cost of customer registration by 90 per cent.

Moreover, such system will contribute to increasing people’s accessibility to financial services, especially in remote and rural areas. It also offers great benefits in the context of COVID-19 as people can open a bank account online and make payments on electronic channels, reducing the risk of infections.

Along with that, it is necessary to build regulations on user data protection and finalise regulations on transaction confidentiality and information security. A report by Google and Temasek Holdings shows that Vietnam’s digital economy experiences the second-largest growth rate in the region (following Indonesia) and is forecasted to reach $12 billion by 2020 and reach $43 billion by 2025.

With such enormous potential, the exploitation and protection of user data and personal information of customers is significantly important and should be the top priority. Regulatory agencies need to build a legal corridor with detailed instructions on data sharing, information protection, and network security risks.

Additionally, state authorities need to accelerate the application of digital solutions to public services, possibly in coordination with banks.

That solution will help to spread banking and financial services to people, promote digital transformation process, create more transparency, and save resources for society.

In the field of humanitarianism and social security, in the first step it is hoped financial support for individuals and businesses can be directly transferred to the account of beneficiaries to save social resources.

Both the government and businesses have taken first steps. Military Commercial Joint Stock Bank (MB) in collaboration with Red Cross and Vietnam Post, under the support of a digitalised Vietnamese project called iTrithuc, has developed the iNhandao platform, which directly connects philanthropists with those in difficult circumstances.

Digital transformation is an imperative and its solutions should be applied in administrative work and public services, such as automatically answering questions about administrative procedures, medical examinations, schedules, and arranging appointments at local agencies.

Businesses and banks also need to act quickly, optimise their core strengths and resources, and learn from fintech and big tech to meet customers’ demand.

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