The greatest risk for banks is their failure to invest sufficiently in technologies or to align themselves with rapidly developing new platforms of delivery.”

For more than a decade, retail banking in Asia enjoyed strong growth and solid returns on equity, but the sector is starting to face an uncertain future.

Weak economic growth, new global regulatory changes to capital and liquidity requirements, historically low interest rates and non-traditional players are challenging the established order.

Mark Young, head of the financial institutions group for Asia Pacific at Fitch Ratings, one of the “big three” international credit rating agencies, said he sees continued “downside” pressure on the banking system across the region next year as the negative credit cycle becomes more entrenched.

He said the pressure will come from rising credit losses and slower credit growth which will dampen profit growth.

“The credit losses will stem from the crystallization of risks that have built up in recent years which will be tested by a slowing China, higher interest rates and potential currency volatility,” he told China Daily.

“Most sensitive would be sectors having a build-up of leverage in the corporate and household sectors, and those with potential commodity risks.”

Aside from the traditional risks faced by the banking system, financial technology, or fintech, will present medium-term opportunities and challenges for banks in Asia, Young said.

“The greatest risk for banks is their failure to invest sufficiently in technologies or to align themselves with rapidly developing new platforms of delivery.

“The other important and more immediate risk is cyber risk, which could cause potential losses and undermine the public’s confidence in a bank,” he said.

The global banking industry made a profit of $1.1 trillion last year, with 46 percent of that coming from the Asia-Pacific region, according to McKinsey & Company in its report Weathering the Storm: Asia-Pacific Banking Review 2016.

The bulk of this increase was the result of growth linked to dynamic economies throughout Asia Pacific, especially China, which accounted for about half of the region’s banking revenue pool in 2015, the management consulting firm said.

McKinsey said the momentum of the “golden decade is already fading” for banks.

Joydeep Sengupta, senior partner and leader of McKinsey’s Asia-Pacific banking practice, said the impact of fintechs is primarily in terms of “increasing the level of competitive intensity, and as a result, pricing and margin pressures”.

“Often, regulatory changes — designed for instance to reach unbanked populations — have supported the entry of these new attackers,” he said.

“This, coupled with consumer willingness to try new digital banking propositions, has pressured banking profit pools and taken away customers.”

Sengupta said retail services are a particular target, though there is a steady emergence of solutions that focus on small and medium-sized enterprises, as well as encroachments into capital markets.

“Underscoring the threat to digital banks, our research found that 83 percent of survey respondents in developed markets in Asia Pacific, and 56 percent of those in emerging markets, said they might be willing to open an account with a bank that offered advanced digital services.

Overall, Sengupta added, the impact on incumbent banks in Asia Pacific could be massive.

“For example, if these attackers cause margin compression of 20 percent, banks in several countries would have to cut costs by more than 20 percent to avoid a drop in return on equity. Some countries such as Singapore, South Korea and Vietnam would be especially hard hit.”

Sengupta said slowing macroeconomic growth, a trend rolling across the region, will affect banks and their customers.

McKinsey expects growth of banking profits will slow from 10 percent annually in 2011-2014 to 3 percent in 2016-21, he said.

Fintechs and established companies from outside the industry, such as Alibaba, will encroach on traditional banking territory, Sengupta said.

“An increasing volume of nonperforming loans is putting added stress on banks, as interest-coverage ratios decline at large companies throughout the region, especially those in China and India,” he said.

“Our analysis indicates that by 2020, banks in Asia need to raise $400 billion to $600 billion in additional capital to cover losses from nonperforming loans while maintaining capital-adequacy ratios.”

Jan Bellens, Asia-Pacific banking and capital markets leader and global emerging markets leader at financial services firm EY, said banks previously faced little or no competition in providing financial advice and services “and therefore played a prominent role in the lives of most consumers”.

“However, there has been a change in customers’ perception of traditional banks with the recent emergence of non-banks such as digital native companies and e-commerce firms, raising excitement about what credible financial offerings alternative companies can provide,” Bellens said.

“These non-banks are changing consumer behaviors and expectations by showing them what great customer experience looks like.

“This has raised demand for instant gratification, outstanding service quality, simple, intuitive processes, 24/7 availability, transparency of products and pricing, personalization and tailoring for the ‘customer of one’, and for a consistent experience across distribution channels.”

But not all banks are rising to the challenge.

“Many traditional banks are illequipped to deliver against these elevated expectations, given challenges from legacy technology, siloed organizational structure and riskadverse cultures that make it difficult to deliver innovation and change swiftly,” Bellens said.

While the market share that new competition is capturing remains limited in most cases, it is only a matter of time before it becomes material, especially around payments, lending and foreign exchange.

“With only 14 percent of retail banking customers feeling extremely confident in the banking industry today, as reflected in our recent consumer banking survey, incumbents are highly vulnerable to losing market share to non-traditional financial services providers,” Bellens said.

Trust is essential in banking, because of its intensely personal nature and because trust is a predictor of advocacy and future business.

Bellens noted that the emergence of strong digital capabilities and the trend toward financial self-management have partly resulted in a decline in trust for traditional banks.

“Disjointed customer experiences and low levels of confidence in key relationship components, such as unbiased advice and concern for financial well-being, have also played a role.

“Our research indicates that less than one-fourth of global consumers (23 percent) have complete trust in their bank to recommend a product best suited for their needs. These individuals are instead turning to financial self-management, especially now that non-bank competitors are luring them with improved experiences and new tools.”

Bellens said the EY research shows trust is highest in the emerging economies in the Asia-Pacific region, with complete trust at 54 percent. This compares to 36 percent in Europe and 31 percent in the mature economies of Asia Pacific.

“For instance, Chinese banks enjoy the highest level of complete trust (79 percent), followed by banks in India (65 percent),” he said.

“However, we need to note that we were surveying consumers on trust levels in their primary financial service providers (PFSPs), which for some respondents is a non-traditional bank (such as Ant Financial in China).”

At the end of the spectrum are Japanese banks with the lowest level of complete trust (11 percent). Respondents in Japan rated their PFSPs much lower than average on both the basic ‘hygiene’ elements (such as keeping their money safe) and the strategic, relationship-building elements (such as providing truly unbiased advice suited for individual needs).

Bellens said traditional banks will still maintain their relevance. “But they cannot assume this is a given.”

He noted that incumbents have the benefits of brand, scale, customer base and infrastructure on their side. However, they need to increase their relevance to consumers and deal with this erosion of trust.

“To do so, my suggestion is to ensure the delivery of complete transparency in product features and transaction fees; proactively protect customer data and defend against cybersecurity threats; and address how they can transform the front line’s ability to provide unbiased, high-quality advice.”

head of the financial institutions group for Asia Pacific at Fitch Ratings