5 Trends Ahead as Asian Retail Banks Go Virtual

March 8, 2011. More than 90% of all transactions in developed markets are now done via non-branch channels, according to an Asian Banker Research and Diebold whitepaper published in 2010. Furthermore, 90% of the procedures for new account opening might be streamlined and automated by 2012. How will such global banking trends affect Asian retail banks? How will the future of retail banks in Asia transform? The answer to all these questions might lie in virtual banking.

In Asian city centers such as Hong Kong, Taiwan, Singapore and Japan, consumers are already relying less on cash and more on other payment platforms such as credit/debit cards and stored value smartcards. Various contactless smartcards have been successfully launched in the past decade across different cities in Asia, from the Octopus card in Hong Kong in 1997, to the Yikatong card in Beijing in 2003 and the myki in Melbourne in 2008. Fewer consumers are making the trip to withdraw cash from branches or automated teller machines (ATMs).

This is good news for retail banks, considering how real estate prices have risen across Asia, with city centers such as Hong Kong, Tokyo, and Kuala Lumpur seeing prime retail rents rising by as much as 13%, 20% and 26% respectively in 2010, according to CB Richard Ellis. In addition, overhead costs of rent, staff and utilities all add up. According to the Asian Banker Research and Diebold whitepaper, banks need to add an average of five staff for every 1,000 square feet of extra space.

The study also says that 43% of branches in emerging markets and 32% in mature markets in Asia Pacific perform below expectations.

As a result, banks in Asia may have to start thinking of setting up virtual banks and come up with different ways of servicing customers. There are other terms that are synonymous with virtual banking, such as direct banking or e-banking. The basic idea of virtual banking refers to banks without any physical branch network. There were virtual banks set up in the past but none of them was very successful. The timing might finally be upon banks to start thinking of setting up virtual banks now. This is especially true after recent natural disasters that struck hard in Australia, New Zealand and Japan, where physical properties were destroyed.

We foresee some important trends for Asia’s retail banking industry.

1. Physical branches reassigned to small-scale branches and wealth management centers

Banks will need to strategically re-align their physical branch network with their virtual banking business model. They will have to study the residential and commercial spread and foothold in the city, and to revisit or even revamp its customer segmentation strategy as a result of the ability to offload some customer base and transaction to virtual banking.

Some key banking transactions could be conducted online while small-scale branches could be dedicated to transactions such as account openings, signature endorsements and some cash transactions. Physical wealth management centers would still be required to serve the investment needs of high networth individuals.

Virtual banking, in the aftermath of natural disasters such as what was recently witnessed in Australia and Japan, might prove to be especially welcoming for its relative quick turnaround in serving customers, compared to waiting for the rebuilding of physically damaged branches.

2. Different strategies for serving different segments of clients

By using virtual banking, banks can segment their customer bases further and use different strategies to serve mass affluent customers. Virtual banking can also help to provide a self-serving channel for the mass affluent at a lower fee.

Banks can offer full online portfolio management functionalities for investors to check the latest value of their portfolios and the performance of the funds they are tracking. This would provide investors with a more convenient way to manage their own wealth, and benefit those with smaller investment amounts who want to reduce handling fees by doing things themselves.

Effective segmentation can increase bank profits by many-fold and virtual banking allows for that.

3. Reduced virtual banking fees

The savings from not paying for brick and mortar may mean that virtual banking customers can enjoy lower servicing and investment management fees. There are also cost savings from a cash management standpoint, in terms of reduced expenses for tellers, transport and storage, and the opportunity to segment customers into more clearly differentiated consumer groups.

On the other hand, if there are enough useful online banking services, consumers might even agree to higher virtual banking surcharges in exchange for greater convenience.

4. More banks to market via social media

With fewer branches and traditional direct marketing channels, banks could be forced to diversify into other direct marketing channels.

With greater online connectivity, banking customers may be more open to their banks reaching out to them via social media. Citibank’s revamp of its twitter account (http://twitter.com/citi) is one example of how banks are trying to incorporate social media more and more into their marketing and communications, rather than using such platforms just for corporate announcements. Compared to other consumer services industries however, banks are still lagging behind in the use of social media. That could change once virtual banking gains popularity. With next to zero in financial commitments in using social media as marketing tools, banks will be willing to exploit this channel more in the near future.

5. Greater demand for online security services

Higher security and more functionality will be required before banks can serve their virtual banking customers through computers or mobile platforms such as their iPhones, iPads or Blackberries for example. With more virtual banking will come demand for more secure online banking solutions. This could involve anything from signature recognition programs or fingerprint scans or even voice recognition programs.

Once banks can securely verify the virtual identity of their customers, they will be able to conduct virtual face-to-face services more cost-efficiently through video conferencing and screen-sharing functions. It would also be more convenient for customers to discuss their financial situations with someone that they can put a face to, and save time from not having to visit a branch.

There is no “one-size-fits-all” virtual banking strategy. The exact shape and form will depend on customer needs, local regulations and technology. Each individual bank will also have to study and identify their best strategy based on brand image, customer base demographics, branch operating costs, local regulation and existing retail strategy, just to name a few factors. To differentiate themselves, banks may even use opposing strategies.

Virtual banking is likely to emerge in Asia within the next five years, starting with more mature and spread-out markets such as Australia and Japan and followed by other places such as Malaysia and Indonesia, where commuting can be very time consuming.

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