In the Asia-Pacific area, large banks are facing challenges from digital banks. Digital banking adoption is growing globally, driven by evolving customer expectations and enhanced digital penetration. The COVID-19 pandemic has accelerated this trend, as enforced digital transitions have embedded a more immediate impetus for change.

For example, in Hong Kong, large banks face competition from virtual banks and respond to them. For instance, HSBC launched the PayMe mobile-based application, which was launched well after AliPayHK and WeChatPay in Hong Kong, has since skyrocketed to two million users and secured an impressive 68% market share. Beyond doubling down on their digital transformation efforts, many of Hong Kong's large banks are responding to the arrival of new competition by cutting or eliminating fees, like HSBC has scrapped 26 general banking and transaction fees. It has also removed its monthly fee for customers with a minimum deposit. Fellow incumbent bank Citi has responded by tying up with AAStocks.com to enable their customers to trade stocks through phones.

Another example, in Malaysia, banks are underspending on tech, raising the concern that virtual banks' looming arrival may threaten incumbents. Meanwhile, FinTech developments are changing Malaysia's financial sector landscape as there are close to 200 FinTech startups as of April 2019. The most significant areas of growth are e-wallets and payment. Mobile and internet banking has been on the rise in recent years, with mobile banking reaching close to 34% penetration and internet banking reaching around 90% in 2018.

Besides, with high levels of digital and mobile penetration in Thailand and a young demographic, Thailand is well-positioned to become a key ASEAN FinTech hub. Despite a large proportion of the Thai population being unbanked with 22%, it has high digital payments, lending and P2P that specially target the unbanked. The volume of mobile and internet banking transactions has been overgrown in recent years, with mobile banking growing the fastest at a 123% Compound annual growth rate (CAGR) from 2014-to 2018. All large banks identify digitisation as a key strategic initiative in the future.

Overall, the secular trend favouring virtual banks goes beyond the borders and is currently sweeping across various parts of Asia-Pacific. The Financial Supervisory Commission (FSC) also approved three virtual bank licenses in Taiwan. On 4th December 2020, the Monetary Authority of Singapore (MAS) recently announced the issuance of four virtual banking licenses. Taking a closer look at other countries, such as Philipines, Vietnam and Indonesia, that possess a vast underbanked and unbanked population, could make a strong case for virtual banking introduction. It will be a continual challenge for large banks to respond.

In London, JPMorgan Chase is opening the first overseas retail bank in its 222-year history with the launch of a digital-only lender that aims to upend the UK banking market. The biggest bank in the US would invest heavily to turn Chase into a serious force in the UK before potentially expanding into other countries in Europe and Latin America. Chase will initially offer only current accounts with a rewards programme but intends to quickie expand into areas including personal lending and investment, and eventually even mortgages. Chase's arrival brings a well-resourced new entrance to an increasingly competitive UK market. Digital-only startups such as Monzon, Starling and Revolut have poached millions of customers from traditional banks.

In New York, the market is dominated by Tier 1 banks. They have vast businesses with a large number of customers and are very profitable. The market's tolerance to huge fees is pretty high, thus making a high revenue per customer. They also stand out for the lack of demand from customers for new products and instant payments. The New York retail market is seen as a follower of banking trends in the Asia-Pacific area. Banks have spent on digital transformations focused on channels but have spent little on product innovation. For example, there is still a heavy reliance in the market on cheques. There has not been the same explosion of new digital banking entrants into the market in Asia-Pacific. It is due to the difficult and expensive regulatory regime to navigate and enter a highly competitive market. However, there are signs that this will change for FinTech applications.

In Tokyo, the Japanese Fintech market has been rapidly growing since 2017, reaching HKD38 billion in 2019, based on the FinTech venture sales revenue. This is projected to reach HKD80 billion by 2022, giving a Compound annual growth rate (CAGR) of 51% from 2017-to 2022 and an increase in revenue of 111% between 2020-2022. Most of the top-funded FinTech applications are within cryptocurrency, investment management and trading, and all digital based on apps or online web platforms. The banking sector of Tokyo is heavily impacted by a few demographic trends in Japan, such as a declining population, an ageing population and declining economic activity in the rural area. These factors have led to declining profits in the overall banking industry. For example, ordinary profits of the Japanese banking industry were HKD249 billion in 2020, down 9.4% from HKD275 billion in 2019.

In other large markets, digital banking is enjoying a period of remarkable growth. The transformation of consumer expectations creates significant challenges for traditional large bank operators who have been slow to meet evolving consumer needs. They faced several hurdles with traditional mindsets that have hampered evolution—rigid and complex operating models presenting an equally intractable force. A highly regulated market and analogue governance structure create additional barriers to agility in transformation. The lack of digital talent has further hampered this transition. While initially slow to react, it is essential for top banks to be aware of the trend and protect market share against incursions by emerging challengers.