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 transferrable 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
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
Compared to their American or European counterparts, 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 face of disruption.