Expect ‘great convergence’ in banking industry

Guillaume de Gantès —CONTRIBUTED PHOTO

Digitization of the banking industry is inevitable.

Guillaume de Gantès, senior partner at McKinsey & Company, a business management consultancy group, says banks have to adopt and adapt to the new financial technologies (fintech) to keep their existing customers and to further grow their client base, especially with the growing number of totally digitized financial institutions.

How slow or how fast banks make the update and upgrade depends on need and available resources.

De Gantès was the keynote speaker at the 3rd Bankers Association of the Philippines Chief Executive Officers Forum on “Digital Banking: Lessons Learned from Emerging Markets.” He shared his company’s experience working in Indonesia, a member of the Association of Southeast Asian Nations, with many similarities to the Philippines.

As digitization become a necessity for financial institutions, the McKinsey executive expects “a great convergence” of traditional banks and fintech firms.

De Gantès does not anticipate that brick-and-mortar banks will disappear despite the significant growth of digital banks. What he expects to happen is for the two to merge, or for one to buy the other.

One of his more important observations is the significant impact of consumers and small and medium enterprises (SMEs) on the growth of Indonesia’s banking industry. He says Indonesia’s banking sector is “expected to grow at 9.5 percent (by 2025) driven by consumer and SME segments”.

This has important implications for the Philippines where micro, small and medium enterprises (MSMEs) constitute the backbone of the country’s economy, accounting for more than 90 percent of businesses.

The devastation caused by the COVID-19 pandemic hastened the growth of a digital economy and cashless transactions, driven by both businesses’ struggle to remain viable and the consumers’ need for essential products and services despite lockdowns and quarantines.

In his presentation, de Gantès points out that the factors that drive the growth of digital banking in Indonesia are present in the Philippines: a growing and more affluent population, banks’ innovations that provide consumers more convenience and better and easier access to financial products, growing consumer adoption of technology and regulatory and infrastructural developments.

For the Philippines, the Bangko Sentral ng Pilipinas has consistently and continuously adopted and adapted regulatory and infrastructural changes to advance digitization as a major strategy for financial inclusion – bringing financial services to the millions of unbanked Filipinos.

Like in the Philippines, the current players in the Indonesian digital banking landscape include both traditional institutions that have adapted to the restrictions of the recent pandemic by upgrading and updating their services for the convenience of their clients; and new fintech players that started out by offering non-banking products.

But fintechs in both the Philippines and Indonesia have expanded into deposit-taking and lending, and have introduced new products.

And now digital technology is pushing the convergence of the two – physical banks and fintechs.

“Fintechs (in Indonesia), after quickly scaling up, are now converging with banking,” de Gantes says, “some by acquiring a bank . . . some by becoming ‘companions’ for successful banks.”

He adds, “Traditional banks and fintechs, through acquisitions, are shifting towards building a full stack digital app (application).” In other words, instead of being competitors, they are combining their individual strengths and capabilities to bring clients better products and services.