In the second article of our Super Apps series, Alex Guzelkececiyan discusses the three key financial services sectors being most disrupted by the apps, implications for the market, and how incumbents are reacting.
In the first part of our Super Apps series we looked at what defines the apps, how Asian market conditions provide growth opportunities and, whether we should expect to see Super Apps on smartphones in the West anytime soon (western devices can currently only access watered-down versions). As Super Apps become endemic, their philosophy of digitising every aspect of their customers’ lives combined with their search for profits quickly drew them to the financial services industry.
Super apps and the financial services industry
Almost every Super App’s financial services offering will have an e-wallet solution to allow customers to make instant payments or purchases. These have become particularly popular in Asia and can be tied either to credit cards or bank accounts. It would also be possible for them to operate on a standalone basis, without being tied to a bank account or credit card, making them attractive to the non-banked or under-banked. Providing payment services helps to build trust in the platform’s capabilities and provides opportunities to cross-sell and up-sell.1 The partnerships that enable Super Apps to provide these services can be with large, multi-national corporations, the reputations of which further enhance the credibility of these services.
The fintech industry is booming in Asia, with over 800 fintechs receiving funding in the three-year period between December 2016 and December 2019.2 Many of these companies are targeting the AliPay or WeChat ecosystems to gain access to their user bases. This activity and innovation in the financial services space points to an increase in digitisation of financial services and integration with Super Apps.
Super Apps have concentrated their financial services activities in three sectors: banking, investments and insurance. Ant Group’s Alipay provides a good case study. One of its businesses, CreditTech, provides microfinance services to retail customers and small and medium enterprises (SMEs). It is an entirely digitised process with traditional banks underwriting the loans. In investments, they partner with over 170 wealth managers and have around RMB 4.1 trillion under management. Yu’e Bao is their completely digital advisor that sweeps up left-over cash in your AliPay account and allows you to invest it directly into other financial products.3 This business was so successful that at one point it was the largest money market fund in the world with USD 166 billion under management. In insurance, it is the largest online insurance platform with partnerships with over 90 insurers.4
Implications for the financial services industry
As Super Apps continue to expand into the territory of traditional financial institutions, they will significantly disrupt the wider financial services industry. In the following section, we explore some of the potential disruptive plays:
As a region which is still developing economically, Southeast Asia has a high unbanked population – this, combined with the high penetration of mobile devices, means that Super Apps are well-placed to provide services to customers that banks find it difficult (remote locations) or unprofitable (small balances, and poor credit risks) to serve. This is best exemplified by a quote from the Head of Ant Group who said, “Banks are the arteries of the economy while Ant is the capillaries making sure funds are transmitted to the extremities”.5
Large unbanked populations can now obtain access to basic checking and savings services. These retail consumers along with underbanked SMEs now have access to credit that will help drive economic growth and social and geographic mobility. Similarly, insurance and investment opportunities are opened to a completely new set of savers and investors benefitting both the consumers and also the service providers that can access this new client base. The scope for disruption to major players is limited however as the super apps target niche unbanked segments of the population rather than attempting to steal away market share from traditional players. The challenge for traditional players is that the Super Apps will help new entrants reach customers at an earlier stage in the customer life-cycle – and the West has shown that bank and insurance customers tend to be ‘sticky’, and once the Super Apps have them, incumbents may find it hard to entice them across.
New Entrants and Business Models
The financial services sector has high barriers to entry, principally complexity, regulation and significant amounts of capital. This new distribution channel removes these barriers and opens up new possibilities to engage and transact with customers. Of course, with Super Apps the key theme here is digitisation. Kakao Bank in South Korea (Kakao is a messaging platform) is completely digital and was able to gain two million customers in a fortnight and now has USD 12.6bn in deposits. As highlighted above, regulation is a significant barrier to new entrants, so WeBank (from WeChat) is a digital distributor – it handles the client experience while all the regulated activity is executed by traditional banks in the background.
Insurance has the potential to be the most disrupted, or enabled depending on your perspective, part of the sector with three new major business models appearing within the Super App environment. The first is the aggregator model where the Super App acts as a marketplace for cover, creating a new digital distribution channel for traditional players. The second is at the core of a movement in the insurance industry, the development of an ecosystem. Large tech companies such as Tencent further monetise their user base and create an ecosystem , that allows specific demographics or segments to be targeted based on applied artificial intelligence. As with other insurance partnership distribution models the policies themselves are still underwritten by traditional firms. Finally, there is the complete digital insurer model which digitises the entire experience and acts as a direct competitor to traditional insurance providers.6
Enhanced Customer Experience
Super Apps present a major challenge to traditional providers because of their ability to provide a tailored customer experience. They offer a more targeted experience with products and services that have been selected by tracking a consumer’s interactions withthe app. Other insurtech firms such as Hong Kong’s Covergo7 and Coherent8 are developing low-code or no-code product development suites that allow traditional insurers to develop and launch new products in days rather than months. Because of the reduced development time and cost, insurers can more easily target smaller segments with tailored products at a more competitive price point.
Regulations Limiting Impact
Regulators are continuously trying to keep up with developments in the market. Throughout Asia, regulators are establishing frameworks and increasing licencing allocations for digital financial services providers. However, regulators are being careful to also create a level playing field to make sure that these new services have to meet the same safety standards as their competitors.
How should incumbents react?
Traditional players are presented with three strategic options: The first is to collaborate – the incumbent an leverage their existing customer base and obtains improved data on how to improve their product and service capability. The second it to compete – invest heavily in digitalisation so that incumbents can compete on a technological level. In Hong Kong, AIA has invested heavily in its ‘Vitality’9 application, as has Manulife with ‘Move’10, both focused on improving users’ wellness. This is a very expensive strategy for large firms to pursue however with CIOs responding to a recent McKinsey survey estimating their technical debt (the value of investment required to bring technological capabilities up to standard) is up to 30% of the value of their entire technology estate. This is billions of dollars for large companies.11 And finally there is the null strategy – do nothing and trust that these new-entrants will stick to the niche markets and they won’t compete directly with you.12 This strategy is high risk, although some incumbent have deliberately chosen not to be ‘early adopters’ or ‘fast followers’, as a valid strategy is to let others undertake expensive, time consuming and distracting digital transformations, and then to follow the path once it has become more well-worn and technology has been proven.
Super Apps are creating new ecosystems of services for consumers and disruption for incumbents, across many industries, from ride-hailing and food delivery to financial services. They have concentrated their efforts in the banking, investments and insurance sectors establishing new business models, challenging existing regulatory frameworks and fuelling a congested fintech competitive environment. Increased financial inclusion, lower cost services and improved customer experience are impacts already being felt by consumers. Super Apps are here to stay and financial services firms must develop strategies either to leverage the platforms they provide, or develop competitive strategies.
4 DBS Asian Insights: Super Apps in Financial Services, September 2019
6 DBS Asian Insights: Super Apps in Financial Services, September 2019
12 DBS Asian Insights: Super Apps in Financial Services, September 2019