Retail financial services – Asian leadership in innovation

In this series, we asked speakers at the Milken Institute Asia Summit to make one prediction for where Asia is headed in the next 20 years. Join the conversation by writing your own article here and including #MIGlobal. Follow the Milken Institute to get updates from the Asia Summit.

International financial services companies have long tagged Asia as their growth opportunity. Large young populations, rapidly growing urbanization, high savings rates and fast paced economic growth have for the past three decades suggested lucrative opportunities for international firms willing to commit.

There have been some notable successes as the region has continued to develop as the engine of global growth. However too many predictions have proven unrealistic and in aggregate these pioneers of Asian regional expansion have been disappointed.

Some success has been achieved in retail banking, stock broking, investment banking, insurance, asset management and private banking - though with questionable sustainability. The so-called Asian footprint for most international players has not realized its potential contribution to the bottom line and increasing costs have slowed the pace of investment. International firms have struggled to overcome restrictions to market access and a lack of understanding of local practices. More recently the emergence of strong local competitors able to adapt business models and take advantage of technology innovation is impacting global firms’ ability to stay competitive.

As I look ahead to the next 20 years, having spent the last 30 in Asia, is there reason to be optimistic that retail financial services will overcome this ephemeral state of the past and prove to be a sustainable source of profits for global firms?

Alternatively will the region continue to build its own local champions that understand the culture and behavioural preferences of the region’s retail consumers better than their international counterparts, and most importantly have the commitment and staying power to overcome challenges and anticipate how innovation will drive growth in retail financial services?

The current rate of change is rapid. The need to overcome geographic and distribution challenges has lead to the region being an early adopter of digital technology to offer; sell; and service financial services customers. For example, online platforms in China are at the vanguard of this innovation and have quickly achieved scale. Industry leading companies have earned the support of local and global capital and in the process have reshaped the Mainland economy.

Despite Asians being known as high savers, the bulk of this deferred consumption sits in low yielding and unproductive bank accounts with anywhere from 45% - 55% of household savings waiting to be mobilized. Without this mobilization, economic growth will not achieve its potential and retail financial services will suffer from arrested development. Banks have struggled to convert these deposits even as interest rates have fallen post the global financial crisis.

China is an example of how behaviours can change and how providers can re-write the rules on how business is conducted. Yu’e Bao, an online money market fund that scoops up residual cash from an online consumer platform, reached USD165bn in assets at its peak earlier this year. Challenging conventional views of how to mobilize savings and the role of banks in the process.

Faced with local innovation and with competitors able to raise capital, employ local talent and provide excellent career opportunities, international firms will struggle to stay relevant. In the 80s it was the large US banks that provided training and opportunity for the bright and the best. This is no longer the case.

The rate of economic progress and the need for long-term savings and insurance products that help people protect their newly acquired wealth will drive the demand of retail financial services. The promise of the 80s and 90s will be realized over the next 20 years – and it will not take that long for discernable trends to emerge.

Technological innovation will enable providers to achieve scale and a generation of early adopters will help providers learn quickly. Whilst it may appear that barriers to entry are being lowered through disruption, and new players with non-financial services backgrounds are able to enter and challenge – the intense competition and required know-how will result in only a small number of truly successful regional providers. The successful amalgamation of online technology tools and financial services know-how will prove critical.

The retail financial services industry will grow to challenge the size of those in the developed economies. The Mainland bond market will be a major source of local, regional and global capital and will lead the setting of global interest rates. Asia will be the epicenter of financial innovation in savings, insurance and banking services. In this way the next 20 years will reshape the map of financial services leadership.