Banks are now in a rush to be the “digitally-fittest”, with a key focus on artificial intelligence (AI) in the wake of the COVID-19 pandemic and the wait for the government to implement the Royal Commission recommendations.

The second edition of the Fintech and Digital Banking 2025 (Asia-Pacific) IDC report, commissioned by Backbase, found that banks are now fast-tracking the incorporation of emerging technologies like AI in an effort to drive revenue and customer engagement.

It identified that customers are now demanding that regular services, such as banking, are available digitally, and banks are now having to make up for lost time.

“The events of 2020 have shown the resilience of the financial services industry, and that organisations must refocus their efforts on becoming even more customer-driven and platform-orientated,” IDC Financial Insights associate vice-president of APAC Michael Araneta said.

“The insights from this report will help banks, neobanks and fintechs identify key areas of investment in preparation for 2025 and beyond.”

The report found that in Australia, the use of AI by banks for customer engagement is expected to increase revenue by 20 per cent for retail banks, and by 15 per cent for wealth management.

About 60 per cent of banks in the Asia-Pacific will leverage artificial intelligence and machine learning technologies for data-driven decisions, up from 48 per cent in the previous year, according to the report.

There is a growing demand for digital banking, with 20 per cent of customers’ retail transactions to be through mobile devices by 2025, and 90 per cent of customers now being “open” to mobile transactions.

With just half of the recommendations from the Royal Banking Commission being implemented so far, and the impact of the ongoing pandemic still being felt, banks are now rushing to implement new customer engagement strategies and embrace the new digital norm.

The study found that digital banks in APAC experienced three times the growth in their customer bases in 2019-20 compared to traditional banks.

The incumbent big banks also saw at least a 50 per cent growth in the quantity of digital customer transactions and interactions.

With half of the Tier 1 banks already having agile frameworks in place, the turmoil of 2020 may drive significant innovation in the banking sector, Backbase Australia regional vice-president Malcolm Macnaughtan said.

“It is clear from this report that the shockwaves sent by COVID-19 throughout the banking and fintech landscape in Australia and the wider APAC region will continue to be felt for years to come,” Macnaughtan said.

“Australian banks will need to develop modern architectural foundations that enable them to aggregate customer data to develop hyper-personalised customer experiences. Our top priority at Backbase is to help Australian banks refresh their digital-first strategies, deepen their relationships with customers and win new business.”

The fintech and banking study also found that going digital helped the large banks withstand the impact of the pandemic, and this focus, especially on AI, will continue in the future.

While a number of neobanks and fintech companies shut their doors during the pandemic, the report found that there will likely be about 100 new challengers to the big banks in the Asia-Pacific by 2025, with at least two in every market.

Earlier this year, NAB subsidiary UBank acquired one-time banking disruptor 86 400 after it had been in operation for less than two years, with neobanks facing an existential threat throughout 2020.

The findings of the bank reaffirm a recent report which found that just 2.1 per cent of all payments in Australia would be with cash by 2024, far lower than the projected global average of 12.7 per cent.