OVER THE PAST FIVE YEARS, the economy in Asia has been growing steadily and the largest banks have enjoyed double-digit growth in return on equity, staying well ahead of their European and American counterparts who are still recovering from the credit crisis. Today, the Asian financial sector accounts for close to 40% of the world’s banking and insurance market capitalization, more than double what it was a decade ago.

While banks in Asia have solid balance sheets, they are by no means immune to disruptive threats. A host of non-bank players have entered the industry to make banking simpler, cheaper and more accessible. Of course, not all of these new entrants will succeed, and success in one country may not be transferable to another given the region’s diversity. Through the lens of disruptive innovation theory as well as Innosight’s own framework for strategic transformation, our analysis shows where and how established players can grow by harnessing disruption and discovering new market opportunities across both emerging and developed markets in Asia.

Findings and insights include:

Disruptive new entrants are gaining ground in Asia’s financial service sector

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Across Asia, the financial services industry is now awash with new business models promising to redefine how transactions are brokered and how customers are served. Tech giants, telecom operators, retailers and FinTech startups are all rushing in to get a slice of the pie. These new entrants typically started small in underserved segments, but they have already started to advance upmarket and further disrupt the industry. For example, online payment provider Alipay started by enabling e-commerce payments but subsequently launched a money market fund that quickly captured one-third of the China’s 1.46 trillion-yuan market.

Knowing where and how disruptions occur will help banks formulate an effective response

The success of these new competitors in Asia should sound the alarm that broader industry transformation is on the horizon, but exactly which disruptive threats will materialize and which will fizzle out is difficult to pinpoint, especially given the diversity of the region’s economies. With bank account penetration ranging from 20% in Indonesia to 99% in Australia, market needs vary so widely that what is disruptive in one country may not work at all in another.

The patterns of disruptive innovations reveal three types of strong new entrants in Asia

Leveraging the theory of disruptive innovation, devised by Innosight’s co-founder and Harvard Business School professor Clayton Christensen, we have developed a set of patterns and indicators for assessing a new entrant’s potential to kick-start and sustain industry disruption. Successful entrants typically offer a unique solution for a niche segment that has strong unmet needs but where it is unprofitable for incumbents to compete. And once a foothold is established, entrants who can overcome performance gaps while maintaining a competitive edge will have a good chance of expanding into adjacencies and causing further industry disruption.

After screening a long list of new business models in financial services using the disruption patterns, we have identified three particularly strong archetypes of new entrants across different markets in Asia, based on bank account penetration.

  • In early-stage emerging markets such as Philippines and Indonesia (bank account penetration <40%), telecom operators have started to disrupt the financial services sector by creating mobile money services that initially target remittance, a prevalent pain point among the unbanked, and they could eventually offer a full range of mobile banking services.
  • In late-stage emerging markets such as China and Thailand (bank account penetration at 40%-80%), online payment providers have built a disruptive foothold by enabling fast and secure e-commerce payments among small merchants and consumers without credit cards, and they are expanding into other digital markets.
  • In developed markets such as Japan and Australia (bank account penetration over 80%), we have seen the emergence of peer-to-peer (P2P) lenders offering attractive interest rates to both lenders and investors by cutting out banks as the middleman. They started by offering small unsecured loans to those that are unable to borrow from a bank and could grow further by targeting larger, secured loans.

Banks can counter disruptive threats using the “dual transformation” approaCH

To sustain growth, banks will need to disrupt their own business model before someone else does. Pursuing such a large-scale transformation is complex and risky, and we believe that “dual transformation” is an effective framework for governing a long-term innovation strategy. This approach involves launching two parallel but distinct efforts, one focused on repositioning the core and the other on launching new businesses. For banks, this means revamping or getting rid of legacy assets that do not contribute to competitive advantage, while at the same time creating separate businesses that could become the engine of future growth.

Banks should start the process of strategic transformation while their market position is still strong

Banks in Asia are in relatively good financial and market positions and may not see the urgency to change. However, the best time to innovate is when the core business is still strong enough to finance new growth. By the time crisis strikes, the organization will be in such mayhem that any transformation effort will be substantially more difficult to execute. Although many banks are assuming a wait-and-see approach, transformation plans will have to start soon for banks to survive and thrive in the face of disruption.


Figure 1: Five Patterns of Industry Disruption

Figure 1: Five patterns of industry disruption

According to Christensen’s research, disruption typically begins when new entrants spot and fill a gap in niche markets where customers are underserved or when those niches are neglected by incumbents because they are deemed unattractive. By building a foothold among these highly frustrated customers who have no good options, new entrants can gain traction quickly and cheaply even when their initial “good enough” offering is inferior in key dimensions. As they continue to hone their business model at the foothold, some of these entrants will raise their performance enough to target more demanding, more profitable customers in the mainstream while keeping their business model advantage, thereby posing a more direct threat to incumbents.

Based on how disruptive innovations typically occur, we have summarized five key patterns and relevant indicators for the purpose of assessing the disruptive potential of new entrants in financial services (see Figure 1). The presence of all five patterns indicates that a new entrant has a high chance of causing industry-wide disruption.

Where entrants have gained footholds in Asia and how they will progress

Applying the disruptive patterns to a long list of new business models confirms that at least a handful of non-bank players have the potential to jump-start and sustain disruption in Asia’s financial service industry. To understand how disruptive threats may manifest themselves

Figure 2: Penetration of formal bank accounts in selected markets across Asia

Figure 2: Penetration of formal bank accounts in selected markets across Asia

differently depending on a market’s stage of development, we have categorized Asian countries into early-stage emerging, late-stage emerging and developed markets based on bank account penetration and potential growth paths (see Figures 2 and 3).

For each of these three market archetypes, we profile new entrants that align strongly with the patterns of disruptive innovation and discuss how they may profoundly disrupt financial services by first capturing a foothold and then pursuing adjacent growth paths in order to seize a greater share of the industry.

1. Mobile money providers in early-stage emerging markets

In early-stage emerging markets like Vietnam, Indonesia and Philippines, the vast majority (over 60%) of consumers do not have a bank account due to the lack of funds, access to bank branches or identity documentations. While the unbanked represents a huge untapped opportunity, they are costly and risky for banks to serve with their current business model. This creates a market space for telecom operators to introduce mobile money services, which leverage mobile data platforms and extensive third-party agency networks to enable low-cost, accessible transactions for the unbanked.

Market foothold: remittance for the unbanked

Mobile money players entered early-stage emerging markets over a decade ago, starting with the Philippines. Early movers Smart Communications launched Smart Money with Banco De Oro (BDO) in 2001 and Globe Telecom launched GCash in 2004. Both GCash and Smart Money built a foothold by enabling remittance, given that it is a strong, prevalent pain point in the Philippines — a country where remittance accounts for over a tenth of its GDP. By enabling users to send money via SMS wherever they are and conduct cash-in cash-out transactions at a wide network of merchant partners, mobile money players give consumers easy access to remittance services at a fee of less than 3%, significantly lower than the 8% average remittance fees at traditional channels.

Disruptive growth paths: extending payment services and becoming a mobile bank

Mobile money providers have also established an edge over banks in converting other payments into cashless transactions. For instance, GCash and Smart Money have successfully moved into bill payments, e-commerce payments, in-store payments and payroll in the Philippines. While facilitating business payments (e.g. e-commerce, payroll) would require a higher level of security and service reliability than consumer-to-consumer transactions, mobile money providers should be able to close this performance gap relatively easily by leveraging new cyber-security technologies and by streamlining operations. As a result, we expect mobile money providers who have built a stronghold in remittance to be able to disrupt the wider payment market.

Mobile money providers can cause an even greater competitive threat to banks by becoming pure-play mobile banks themselves, offering a range of basic financial products to the unbanked, including savings and loans. Even though the customer demand is there, this is a relatively challenging growth path for mobile money players since their third-party agent network will need to be upgraded to handle more complex transactions. In addition, new capabilities in liquidity, interest rate and credit risks management will need to be built, and new operating licenses and compliance polices will need to be put in place.

Figure 3: The new entrant's foothold and potential growth paths

Figure 3: The new entrant’s foothold and potential growth paths

Becoming a mobile bank is a challenging proposition, but those with a strong market position and access to resources still have a good chance of winning by taking advantage of new technologies, such as credit rating algorithms, air time top up, and partnerships. In particular, partnering is a very viable option. Given that each market is typically dominated by one or two mobile money operators, they have relatively strong negotiation power and should be able to form partnerships with banks under favorable terms. For example, Globe Telecom has successfully partnered with Bank of the Philippines Island (BPI) to form BanKo, a pureplay mobile bank. On the other hand, banks who do not manage to secure a partnership with mobile money providers may find themselves losing out on a huge growth segment as today’s unbanked become the middle class of tomorrow.

2. Online payment providers in late-stage emerging markets

In late-stage emerging markets like China, Thailand and Malaysia, where the unbanked population is a dwindling minority (less than 40%), we found that disruptions occur at a very different place in the market. Basic banking needs have been largely satisfied, yet the burgeoning middle class and the rapid rise in internet penetration are driving up demand for e-commerce. As credit card adoption remains low, a new breed of technology companies has emerged to facilitate secure e-commerce payments. The early movers among them not only are expanding into other types of payments, but they have started offering online financial products like savings and loans. If they manage to become pure-play online financial service providers, they could take away a significant share of the small and medium enterprise (SME) and middle-class consumer business away from banks.

Market foothold: e-commerce payments for small and medium enterprises & consumers

Spotlight 1: Improvements in cybersecurity and risk models through emerging technologies

Spotlight 1: Improvements in cybersecurity and risk models through emerging technologies

With a stronghold in e-commerce and over USD 7.9 billion cash on hand, China’s e-commerce conglomerate Alibaba is by far the biggest adversary of banks in Asia today. Alibaba launched its online payment platform Alipay alongside its e-commerce marketplace, Taobao, back in 2003. At that time, there were just 3 million credit cards in use in a 1.3 billion population, making payment a major barrier of e-commerce adoption. While the majority of online shoppers could pay via bank transfer, many worried that sellers would not hold up their end of the deal after receiving payments. To give buyers and sellers the peace of mind they needed, Alipay introduced a unique escrow model that takes funds from the buyer’s bank account and only releases it to the supplier after the buyer confirms order delivery. This helped fuel the growth of e-commerce from about USD 200 million in the mid 2000’s to USD 120 billion today.

Disruptive growth paths: extend payment services and become an online financial service provider

Leveraging low-cost e-commerce payment platforms, technology companies can enable other forms of payment and disrupt the broader payment market. The success of Alipay (China), iPay88 (Malaysia) and Paysbuy (Thailand) in providing in-store payments, bill payments and mobile payments demonstrate that this growth path is highly viable.

Taking it one step further, technology companies can offer other financial services, like investments and loans, to their SME and consumer base using their online platform. Given their understanding of online user behaviors, fast development cycles, and solid data analytics expertise, technology companies could differentiate themselves from banks by delivering a superior user experience. On the negative side, these players may not be seen as secure enough to hold one’s life savings. Moving into higher value, more missioncritical financial products will therefore require technology companies to ramp up their security measures without letting the bureaucracy defeat their original competitive advantage.

Closing the performance gap in security is challenging but not impossible, as new technologies in cybersecurity evolve (See Spotlight 1) and consumers get increasingly comfortable letting non-banks handle their finances beyond payments. The success of Alipay in expanding to SME loans (Aliloans) and money market funds (Yu’e Bao) goes to show that large technology companies with ample resources can improve performance enough to compete neck-andneck with banks. In particular, Yu’e Bao, which was launched by Alipay in 2013, quickly gained 554 billion yuan (USD 90 billion) worth in assets and became the market leader in less than a year. As a result, there is a strong possibility that technology players can leverage their user-friendly online and mobile financial tools to place themselves at the front end of customer transactions. This could potentially relegate banks to providing back-end administrative services (e.g. holding cash) and force them to compete on the basis of cost efficiency.

3. Peer-to-peer lenders in developed markets

In developed markets like Singapore, Australia and Japan, virtually everyone has a bank account (>85% penetration), yet there are pockets of unmet needs that are ripe for disruption. Specifically, we have seen the emergence of FinTech startups that use a peer-to-peer (P2P) model to offer small unsecured loans to individuals and small businesses that would otherwise be rejected by banks due to poor credit ratings.

Market foothold: Unsecured loans for “high-risk” individuals & small enterprises

The P2P lending model was first pioneered in the US and UK around 2005 by Prosper (US) and Zopa (UK) respectively. It matches borrowers directly with lenders by making credit risks and interest rates transparent. This gives borrowers without a sound credit record the chance to secure a loan at a rate that reflects their risk level, rather than getting rejected outright by banks. Also, by cutting out banks as the middleman and using only online channels, P2P lending platforms offer more attractive rates than banks to both borrowers and lenders.

P2P lenders have also emerged in Asia including Japan (e.g. maneo, AQUSH), Australia (e.g. SocietyOne, Lending Hub, iGrin), and Hong Kong (e.g. WeLab). Since small, unsecured loans fit well with the disruptive patterns, we expect to see more P2P lenders springing up across the region to capture this segment.

Spotlight 2: Near Field Communications-enabled mobile wallets are unlikely to cause major industry disruption.

Spotlight 2: Near Field Communications-enabled mobile wallets are unlikely to cause major industry disruption.

Disruptive growth paths: Moving upmarket to apply the P2P model to other financial services

P2P lenders’ online marketplace model enables them to offer attractive interest rates since, unlike banks, they do not need to invest significantly on liquidity, compliance and branch networks. Leveraging this cost advantage, P2P lenders can move upmarket and compete with banks on large, secured loans. For example, AQUSH in Japan started by providing loans to individuals, eventually targeted small businesses and then large businesses including solar energy power plant operators.

Even though lending has been the most prevalent application of the P2P model, other types of P2P financial services are emerging. These include P2P investment (i.e. crowdfunding), P2P insurance, and P2P foreign currency transfer. There are a handful of cases where P2P lenders managed to move into other P2P financial services. This includes Shacom, a P2P lender which was set up in Taiwan in 2000 and introduced a P2P insurance platform a decade later.

Part 2: How Banks Should Respond

Transforming the core while building the new

While it is important to know what types of disruptive threats are in the horizon, it doesn’t guarantee that incumbents can respond to these threats effectively. As Clayton Christensen explained in his best-selling book, The Innovator’s Dilemma, large organizations can do everything “right” and still lose the battle against industry challengers. The very structures, processes and norms that made large organizations successful also make them resistant to change in the face of new market realities.

This is especially true in financial services, where regulatory compliance and a high cost-base from legacy IT systems and branch networks prevent banks from transforming their business model radically. There is an overwhelming amount of work to be done in order for banks to fend off disruptive new entrants, so revamping the entire business model in one fell swoop is going to be challenging. Instead, bank executives may find it much more manageable to treat the transformation as two distinct innovation efforts, or what we call “dual transformation.”

The concept of dual transformation was first introduced by Innosight in the Harvard Business Review article Two Routes to Resilience in 2012. “Transformation A” is about repositioning the core business, adapting its current business model to new market realities. This requires finding and strengthening the business’s competitive advantage, while cutting resources devoted to low-priority areas. “Transformation B” is about creating a separate, disruptive business that could become the engine of future growth. Dividing the effort in two allows leaders to sustain and prolong the revenue potential of the core, while giving the new venture the required time and space to grow.

Transformation A: strengthening competitive advantage

Spotlight 3: Lesson from retailers on how to improve the in-branch experience

Spotlight 3: Lesson from retailers on how to improve the in-branch experience

As branch networks become redundant, customers increasingly trust non-banks with their finances. And as the Internet enables consumers to easily deal with multiple financial providers at once, banks’ traditional sources of competitive advantage are slowing fading away. To remain indispensable in the customer’s financial universe, banks will need to find new ways to differentiate. For most banks, transformation A is therefore about deepening and broadening customer relationships by improving their core business model. This necessitates adding new channels and services that create customer value, like adding new mobile and online payment functions which many banks are working on. Transformation A also involves repositioning legacy assets like the branch infrastructure and compliance policies so that they do not become liabilities in the future. This transformation is not dissimilar to what many brick-and-mortar retailers have gone through in face of disruption by e-commerce, and there are plenty of lessons that banks could learn from retailers in improving branch performance (see Spotlight 3).

Ultimately, success in transformation A depends on banks having a clear vision and knowing what capabilities are core to achieving that vision. Everything else that is not aligned with the vision should be eliminated or outsourced to save costs. As banks work towards transforming their core business, there are a couple of risks to be mindful of:

Outsourcing of core competencies: In the spirit of cutting costs while improving speed to market, banks could end up outsourcing parts of the business that are critical for long-term differentiation. For instance, while it may be easier to link up with an established mobile payment platform rather than building one internally, not owning the technology, the customer interaction and data in-house could take away a source of future competitive edge.

Overshooting on low-value dimensions: Banks could run into the trap of continuous, incremental improvements that eventually overshoot what customers are willing to pay for. For instance, as banks fight against each other for the business of high net-worth individuals, they are progressively pushing up service quality as well as cost. But not all wealthy customers see the value of the red-carpet treatment, and this may open up a market for “robo-advisors” like LearnVest and WealthFront to provide low-fee portfolio management services for passive investors.

Transformation B: building the new growth engine

If a new venture fits poorly with, or worse yet, competes with the incumbent’s core business, chances are it will not get the resources and focus it needs to succeed. That is why some innovations, especially those with the potential to disrupt the industry, should be nurtured outside of the core through transformation B.

There are, generally speaking, three types of innovation that should be treated as transformation B. Low-cost innovations with a slimmer profit margin than the core business is the most obvious one. For example, when the Danish Bank Lan & Spar set up a purely direct bank alongside its branch network, they kept the two concepts separate for three years to avoid cannibalization. Interest margin at the branch was 10% a year whereas at the direct bank it was only 3% a year.11 The potential profit loss if customers switch to the direct bank en masse would have been unacceptable to the core branch banking business. Keeping the new direct bank as an independent operation was essential in protecting it from potential sabotage by the core.Transformation - A Core Business - B New Business - Investment Capital - Enabling Capabilities

Innovations that create new conflicts of interest in the ecosystem also belong in transformation B. For example, when Admiral Group, a UK-based motor insurance company, acquired insurance price comparison website Confused.com, they had to keep it as a completely independent business to avoid conflict of interests. Fair and transparent insurance price comparison is crucial for both users and insurance companies advertising on the site. Keeping the Admiral and Confused.com separate prevented any perception that the price comparison site may favor Admiral.

Lastly, ventures that target non-customers could benefit from transformation B, since they are likely to require a completely different go-to-market approach and delivery model. Separation will enable the venture to focus on building in the right solution without feeling pressured to make use of the incumbent’s core infrastructure. For example, State Bank of India and Bank of Philippines Island (BPI) moved into pure-play mobile banking by setting up an independent joint venture with telco partners so that they could develop solutions and backend systems based on market needs rather than based on their legacy systems. Building and scaling up a new business through transformation B takes time and careful orchestration. Many things could go wrong in this transformation process, and in particular, large organizations and their independent new ventures should watch out for the risks below.

Share resources carefully: While maintaining strategic independence is important, transformation B should not be done in isolation. The venture should leverage capabilities of the core, whenever appropriate, to gain a competitive edge over other startups. For example, when Globe Telecom, BPI and Ayala Group set up BanKo, a mobile-based banking service that targets the Philippines’ unbanked population, they strategically excluded BPI bank branches or Globe Telecom business centers from the BanKo customer service network. Instead, customers can cash-in or cash-out at the 7,000 Globe GCash partner outlets, which are cheaper to operate.

Avoid getting drowned in ideas: Many banks have dabbled in FinTech startups through accelerator programs and innovation labs. While these mechanisms are great for building connections with entrepreneurs and keeping abreast of the latest technologies, they could be a distraction if banks do not have established processes to filter top solutions and integrate them with their operations.

Don’t shy away from ecosystem misfits: Banks are naturally reluctant to embrace disruptive startups like P2P lenders and crypto-currency providers that aim to displace them. For instance, it took a decade for a major bank, Australia’s Westpac, to invest in a P2P lending venture, which first appeared in 2005. But because disruptive new entrants have the potential to transform the entire banking ecosystem, these are precisely the types of businesses banks need to invest in.

Set vision and boundaries: Providing the new venture with sufficient funding and resources to grow in the early years is likely to be an uphill battle, especially when the incumbent’s core business itself is shrinking and undergoing cost-cutting. It will be up to the top management to set out a clear vision of how the new venture and the core business will co-exist in the future—carefully policing the boundaries so that each of the two transformation efforts gets what it needs and is protected from interference by the other.


While the future of banking is still a big unknown, we believe that established banks will not be completely eliminated by new industry entrants, in the same way that e-commerce did not lead to an end of high-street retail and online advertising did not kill off all TV broadcasters. Having said that, those who survived disruption saw their business model transformed, both in terms of how they make money and how they operate. Similarly, while banks will continue to play a role in the financial system for decades to come, that role is likely to look very different from today.

In early-stage emerging markets in Asia, the biggest disruptive risk is that non-bank entrants completely seize today’s unbanked population and their future financial needs as they gradually move up to the middle and upper-middle class, leaving banks to serve niche segments at the fringe. If banks continue to lose sight of consumer-facing transaction activities, they could eventually be relegated to back-end administrative and infrastructure services and be forced to compete with each other on the basis of cost efficiency. In developed markets, banks in Asia could see chunks of their retail and business banking business being eaten away by the P2P model, starting from unsecured personal and SME loans, and eventually in areas like mortgages, foreign currency and insurance.

Banks in Asia have an advantage in their modern IT infrastructure. Yet there is really no room for complacency. While many banks in Asia are still taking a wait-and-see approach, while placing small bets here and there and making changes that are low-hanging fruit, more radical organizational transformation will have to start soon if banks want to survive and thrive in the face of disruption.