Why Asia's growth depends on digitalising the boring parts of banking

Asia has quickly embraced digital transformation in its continued pursuit of growth. The region has even been able to leapfrog more developed markets, thanks in part to collective policy action by governments and rising investments from the private sector.

By many measures, Asia is now a clear leader among its global peers. In fact, over the last decade, the region has accounted for 52% of global growth in technology company revenues, 43% of start-up funding, 51% of spending on research and development, and 87% of patents filed, according to research from the McKinsey Global Institute.

Amid recent economic uncertainty and slowing global growth, the region’s technological leadership is vital for continued success and resilience. An essential part of this will be the innovating and digitising areas that may be considered relatively “boring” aspects of the economic value chain yet hold the potential for significant enhancements to productivity, efficiency, and security. Digitalisation will make the biggest incremental impacts in the often overlooked and underappreciated areas of businesses.

Underappreciated: The treasury function’s empowering role

In Asia’s financial services sector, many banking institutions are trying to double down on their digital transformation plans to meet rising competition and evolving customer demands.

Significant investment has flowed into front-end offerings and holistic user experiences, the visible facets of the banking value chain that are commonly viewed as competitive differentiators and revenue generators. This has been especially so for the consumer and wealth management segments.

Unfortunately, this has often come at the expense of advancing critical middle- and back-office infrastructures that underpin front-office functionalities and products. The lag has meant foregone opportunities to drive broader efficiencies and better manage risks that could provide a compounding return on investment through further innovation and operational flexibility.

The treasury function, in particular, is often overlooked and perceived as mere support to a bank’s core activities. This leads to misunderstanding its role at best and significant undervaluation at worst.

However, the centrality of treasury management cannot be stressed enough. At its heart, it enables the very essence of what a bank is and does, allowing it to serve the diverse capital needs of customers while managing risk to ensure the continuity of the firm. It is fundamental in driving product innovation, providing client value, and inclusive access to capital across the financial ecosystem.

On a positive note, our conversations with senior banking leaders in Asia suggest that this vital realisation is finally taking hold as appetite to build competitive banking-as-a-service (BaaS) business models rises, as outlined in Finastra’s State of the Nation 2023 survey.

This enlightenment has been inspired by a confluence of factors that have allowed the strategic importance of the treasury function to shine. Coming out of the pandemic-induced lockdowns and market volatility of the early 2020s, banks faced unprecedented uncertainty, requiring a real-time view of balance sheet risks and liquidity. This, coupled with high-profile collapses of financial institutions in the US and a struggling real estate market at home, saw governments step up oversight pressures to shore up the banking system.

Those who had the foresight to invest in upgrading their treasury operations reaped rewards by nimbly navigating a tumultuous economic environment to confidently serve customers and capture new sources of revenue. For those who didn’t, let’s say that the shortcomings of their internal capabilities became increasingly evident.

Catalysing economic growth through intelligent treasury management

This shift in perspective toward supporting the modernisation of the treasury function is critically important for Asia’s future growth ambitions.

The region faces a widening financing shortfall that development organisations and alternative lenders will struggle to close alone. According to the Asian Development Bank, small and medium-sized enterprises (SMEs) make up 98% of all businesses and provide jobs for around 66% of the labour force in Asia. Despite this, the International Finance Corporation estimates that an annual funding gap of around US$2.4 trillion ($3.26 trillion) threatens the region’s potential to harness further opportunities for economic growth and development.

Corporate clients’ expectations and needs are also becoming more sophisticated as their operations expand across the region and supply chains evolve to adapt to geopolitical realities. This has meant leaning more on their regional banking network to supplement internal treasury and financial planning capabilities with access to multi-currency trade and supply chain finance, foreign exchange solutions, cash management products and much more. Bringing all of these pieces together seamlessly and tailored to individual circumstances is, however, easier said than done.

The important thing to point out is that local banks are well-positioned to adapt but they need to build future-proof core treasury management systems. A robust platform that facilitates automated workflows and access to real-time pricing and analytics capabilities directly empowers banks to make better and faster decisions across hedging, lending, trading, investment and market-making activities.

Small efficiency gains from digitising workflows alone can translate to a bank’s ability to increase lending activities by reducing the time and effort required to complete tasks such as loan origination, approval, documentation, risk monitoring, and regulatory reporting. With the ability to handle a larger volume of loan applications, banks can expand their lending activities to serve a broader customer base. As such, they can play a bigger role in building a more inclusive and open financial ecosystem.

There are many proven case studies for this in action from across Southeast Asia, including recent work we have done with VPBank. Through the partnership, we have effectively implemented a core treasury management solution, aligning with international standards, best practices and local regulatory requirements. This strategic approach not only addressed the firm’s current business needs but also paved the way for future business growth.

Amid the prevailing narrative focused on bleeding-edge, disruptive technologies in the fintech space, it is crucial we do not lose sight of bringing the “boring” parts of operations and systems along the digital transformation journey. Striking a balance between the two will ensure a promising future where growth has all the ingredients to thrive and live up to its true potential.

Richard Zhu is the Managing Director, Treasury & Capital Markets, Asia Pacific at Finastra.

Previously appeared in The Edge Singapore.