The Digital Transformation of Financial Services - Will banking hand the baton to insurance?

By Paul Sommerin, Partner and Head of Digital and Technology, Capco

Conventional wisdom says that digital transformation, including the advent of new fintechs and insurtechs and the metamorphosis of incumbent firms, is revolutionizing banking and insurance in Hong Kong and the wider APAC region – and that banking has got off to a flying head start. We think that the truth on the ground is more nuanced.

So where exactly are banking and insurance in the digital transformation journey and what role is Hong Kong shaping for itself?

Banking – Faster start, some stumbles?

In global terms, Hong Kong was not particularly quick to embark on the digitalization of its banking sector. However, the city stepped into the vanguard of Asian financial centers by issuing its first digital banking licenses in 2019. Eight virtual banks have since been welcomed by customers, with more than 1.2 million accounts opened by end 2021.

More recently new account openings look to be plateauing and there is a sense of a loss of momentum. One reason is that onboarding customers can still be slow and demanding.Regulations have not much changed with the digital times, for example, in terms of Know Your Customer requirements, and can require a large amount of supporting documentation, potentially negating the digital experience. Before investing their time and effort, some potential customers are waiting to see which of the eight contenders come out on top.

So far, virtual bank customers have been attracted in part by promotions such as higher deposit rates. However, Forrester’s latest data suggests that over half of Hong Kong consumers say they will return to their original bank if this kind of promotion is reined in. That suggests that the new entrants have improved, but not yet transformed, the customer banking experience compared to their more traditional online equivalents.

Even so, the virtual banks have brought real change. At an industry level, the new licenses led to an across-theboard acceleration of innovation in both existing and new products being offered to customers. Alongside non-bank fintechs, seen by banks as direct competitors in specific segments, the new entrants forced a change in incumbent thinking, particularly in the payments, remittances, lending and savings markets where new entrants are using low fees and charges and introductory deposit rates to attract customers.

Together with Covid, the competitive threat forced incumbents to lift their game in terms of technology transformation, particularly regarding banking’s move to the cloud, which accelerates ‘speed to market’ for new products and lowers the cost of serving customers. However, in recent months, the news on incumbent digital transformation, too, has become more mixed.

Some 36 months into the pandemic, several digital transformations of incumbent banks have stalled or slowed to a snail’s pace. That’s partly because, over the last couple of years, new entrants and the need for digital transformation has created a war for technology talent such as cloud engineers and Big Data, AI and robotics specialists, in Hong Kong and across the region.

The ever-increasing backlog of digital projects will not get substantially better any time soon and may need structural fixes such as new ways of working, including greater openness to remote working across regions, and more use of low code/no code technology. Low code/no code platforms allow business users to write software via drag-and-drop visual and pre-built functional blocks. This helps banking business lines to innovate and fix their own daily tech issues and allows bank tech specialists to focus on more strategic priorities.

We are confident there will be continuing pressure for digital transformation in Hong Kong. One reason is regional competition: several countries in Asia have now identified Digital and Technology as a cornerstone of their country’s growth. Singapore and Malaysia, for example, are transforming their digital and technology agenda to position themselves at the forefront of the financial services’ digital revolution.

Another reason is that the real prize for some of the new digital banks and transforming incumbents may not prove to be the Hong Kong banking market itself, now well served by both incumbents and the eight new market entrants. Instead, many virtual and incumbent banks hope that digital transformation is their gateway to managing the wealth of the mass affluent, including in the Greater Bay Area and China more widely.

Banks are presently the main players in fund distribution within Hong Kong. However, new distribution channels are likely to open up in the GBA to create a highly competitive market. Success is likely to involve layering a clear and compelling proposition onto a low cost, cloud-enabled and scalable platform that enables rapid expansion.

The strength of each proposition will lie partly in the ease of the customer journey, but will also likely require a more transformational strategy, such as offering customers transparency across all their financial affairs through integrated banking, wealth management and insurance products – alongside investment education, personalized insights and access to remote coaching.

At the moment, the mass affluent tend to see their financial products in product boxes, which in turn tends to make them less likely to transact and also less likely to take a well-judged risk in line with their overall risk/return profile. When customers can see and control their whole portfolio it will become much easier to offer them personalized insights, investment education and appropriate products to fill any portfolio gaps.

It will also become easier for banks and new digital-first entrants to understand the psychology underpinning investment decisions and to identify the most profitable customers. These won’t always turn out to be the typical target customers of a digital bank, e.g. the 25-40 year old demographic. Instead, the key to early profitability may be older customers with more investable assets and a post-Covid willingness to use well-constructed digital platforms.

Insurance – Slower start, surer transformation?

Compared to banking, insurance faced no formal ‘big bang’ moment in terms of the planned mass entrance into the market of regulated virtual competitors. Up until recently, many large insurers remained significantly agent-centered in terms of distribution, with call centers and paper-based processes playing a central role in customer servicing, and they made slower progress than banks in replacing legacy platforms and putting end-to-end straight-through processing (STP) in place.

Covid changed all that. The pandemic came as a huge shock, disabling the traditional analog model almost overnight, obliging insurers to move toward a remote and virtual environment, and providing them with an unexpected ‘big bang’ moment that massively accelerated investment in technology, communications, and STP.

The larger players in the industry have already achieved STP in well over half of their simpler servicing and low value claims processes, and are setting realistic if challenging targets of over 90% STP in these areas in the near future. The human touch may always be required in high value, sensitive transactions but automation and STP is otherwise transforming the whole insurance value chain from distribution, underwriting and pricing through to claims and disbursement.

Digitalization looks likely to reshape the customer relationship most profoundly in the APAC health insurance sector, some of whose leaders are based in Hong Kong – a city that increasingly recognizes the opportunities in digital health. Long-term regional fundamentals are setting the stage, as rising health care costs combine with low health insurance penetration rates, at a time of increasing pressure on Asia’s healthcare systems from societal issues such as aging populations, urbanization and chronic lifestyle-driven diseases. For example, around one in eight adults in the Western Pacific, which includes China, are already living with diabetes.

The rising rates of non-communicable disease are a huge social challenge but are also part of a huge market opportunity if health insurers can build the right strategic solution – and fight off any new major-name healthcare entrants. The big health insurers are increasingly sure that the key lies in using digital transformation, new health technologies and customer connectivity to partner with customers, insurtech and health providers to improve customer health and treatment outcomes. It helps that insurers generally feel less threatened than banks by the smaller new virtual startups, viewing many as a means of speeding up their own digital transformation or as an investment opportunity, rather than as direct competitors.

The concept of a wellness ecosystem is not new. What is new is that insurers are increasingly not only promoting preventive physical health measures (e.g. improved physical activity, gym membership and diet), but also diagnostic services (facial scanners and other bio markers), symptom assessment, and easy access to remote interventions such as virtual medical consultations as well as efficient postintervention monitoring for the chronically ill. Digital and physical services are beginning to mesh.

Insurers hope to use these extensive ecosystems to cut costs and drive their spending further towards value-driven health care. However, their approach is also becoming more holistic – focusing not only on physical health but also on mental, social and financial well-being and the links between these spheres. This in turn is driving a potential convergence between the insurance industry’s health and investment sectors.

Perhaps the most exciting aspect of the health insurer digital transformation is that it promises to bring together so many different types of information (lifestyle, fitness, biomarker, electronic health record, home sensor, environmental, workplace and financial information). The ultimate goal is to apply machine learning and AI to research which interventions – preventive and medical – work best and to fine tune ongoing care, therapies and monitoring using real-time data.

Major challenges lie ahead for insurers before this can be realized at scale, particularly in terms of working out how to share and analyze data while preserving the trust of customers, regulators and ecosystem partners. Even so, the large APAC health insurers are now moving towards a transformational ecosystem model faster than any other insurance – or perhaps banking – sector.

The race to digitally transform financial services has a long way to run. However, insurers have raised their pace and could yet inspire other financial services sectors to reconfigure business and operating models towards more fundamental goals – the transformation not simply of processes, or even of customer experiences, but of customer outcomes.

About Capco

Capco, a Wipro company, is a global technology and management consultancy specializing in driving digital transformation across the financial services industry. With a growing client portfolio comprising of +100 global organizations, Capco operates at the intersection of business and technology, by combining innovative thinking with unrivalled industry knowledge to fast-track digital initiatives for banking and payments, capital markets, wealth and asset management, and insurance.