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Citi – Digital Finance in Asia (June 2015)

Citi – Digital Finance in Asia (11th June 2015).pdf
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Digital Revolution: The Battle for Supremacy by Citibank

  • Digital disruption is here to stay — Digital disruption is transforming industries. Take Music, for example: its revenues have slumped 35% in a decade, with as much as 46% of the market shifting to digital channels. Digital disruption in finance is still small, revolving around retail, but this will accelerate with advanced technology and VC funding (fintech investment up 3x, to US$12.2bn in 2014). Customer behavior is rapidly changing. Faster internet connections and powerful smartphones are levelling the playing field, empowering the younger generation – the Millennials – who are digitally savvy, well informed and willing to embrace new entrants.
  • Uphill challenges for incumbents — Traditional banks are hamstrung by legacy systems, regulations and unwieldy corporate cultures. New digital start-ups are culturally different – nimble, and market share rather than profit focused. Before the holy grail of digitally-driven cost efficiency materializes, negative economics of erosion in market share and margin, and heavy investment in technology could be the norm in the next few years. In the US, Citi’s Digital Strategy team predicts that 14% of retail banking revenues will be disrupted by 2020, up from the current 1%.
  • Gradual erosion in developed Asia — Digital disruption will play out unevenly in Asia, contingent on banking and technology penetration. Local cultures and regulations are also critical for enabling change. The disruption risk is in retail banking, which is 41% of total revenues in Asia. Developed Asia will follow the digital path of the West, given its mature banking systems and high smartphone penetration. Disruption will be gradual and in some cases like Australia, where regulations deter new entrants, the impact could be small.
  • China is unique — China is the most advanced in digital disruption regionally, a result of a unique mix of a backward banking system, an advanced technology culture and supportive regulations. China is home to US$70bn of P2P loan originations (largest globally). Alipay processed US$778b retail payments in a year.
  • Emerging Asia could leapfrog others — Countries like India, Indonesia and the Philippines have huge unbanked populations (c600m) and poor digital infrastructure. Govt policy will be a critical enabler – several govts are pushing financial inclusion with digital technologies: India is the most aggressive (Jan Dhan, national IDs, payments) and on the cusp of major change; Indonesia has just launched branchless banking. This potentially allows far greater disruption than in developed markets as govt policies enable leapfrogging to leading edge solutions.
  • Banks to watch — Digital disruption is just starting. It is too early to pinpoint earnings winners/losers but investors should watch the disruptors in China: Alibaba, Tencent and Ping An; in India the financial inclusion/digital leaders HDFCB and SBI; in Indonesia BMRI (transaction banking) and BBRI (financial inclusion); BPI in the Philippines for mobile-based microfinance JV BPI Globe BanKO; in developed Asia, digital leaders CBA and E Sun; US-listed FIS for its fast growing bank IT and payments business in Asia
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