Across the Asia-Pacific region, digital banks have emerged at a rapid pace in recent years. Regulators have ostensibly encouraged the creation of online-only banks to spur greater competition in the banking industry, which in most markets is dominated by incumbent lenders afflicted with varying degrees of complacency.
In theory, the digital banking boom should introduce a large generation of startups to the market that would offer customers a vastly improved user experience. Alas, it wasn’t supposed to be in APAC.
In almost every major Asian market, big tech, incumbent banks or giant conglomerates dominate digital banking. Startups, which have been an integral part of online banking in North America and Europe – think Chime, Revolut, Monzo and N26 – are almost completely absent from the chart – with a few exceptions.
Regulatory conservatism, and even unease about handing out untested banking licenses to newbies, is a major reason for the lack of startups in Asian digital banking. The question is, can the cautious approach to digital banking still improve the competitive landscape? And the answer is yes, sometimes.
This is the world of Big Tech
It’s no surprise that digitally-minded Asian tech giants want to dabble in financial services. Since Alibaba and Tencent in China have created dueling fintech empires — which remain formidable despite Beijing’s regulatory crackdown — their counterparts in the region have been trying to replicate their success.
The most successful to date is South Korea’s Kakao, which established one of the region’s first profitable digital banks, Kakao Bank, which serves as the digital financial services arm of consumer tech juggernaut Kakao. At one point, many years ago, Kakao was a startup, but those days are long gone. It is now one of the largest Korean technology companies.
Kakao Bank has been a resounding success in part due to its ability to exploit weak digital offerings from incumbent Korean banks. Some incumbents are reportedly considering setting up their own digital subsidiaries to better compete with Kakao. This is what we call innovation.
In the case of Taiwan, the ever-cautious Financial Supervisory Commission (FSC) has encouraged Big Tech and a state-owned telecommunications giant to partner with incumbent financial services firms it trusts to manage banking responsibly, but acknowledges its tendency to fall short in the digital space. Thus, the Fubon Bank of Taiwan is allied with Line Bank; IBF International Holdings with Rakuten Bank and Chunghwa Telecom with Next Bank.
The most optimistic view of the digibanking situation in Taiwan is that newcomers are raising the bar for the industry in terms of online applications and services, which are currently among the least competitive in East Asia. A medium-sized Taiwanese lender still requires users to reset passwords in person on a PC using the Internet Explorer browser, to give you an idea.
In Southeast Asia, the triumvirate of platform companies Sea Group, Grab and GoTo have accumulated between them at least six banking licenses in three countries; Sea has one in Singapore, Malaysia and Indonesia; Grab has one in Singapore and Malaysia respectively and GoTo has one in its home market of Indonesia. The value propositions of platform companies are articulated, in one form or another, around their respective ecosystems of digital services. Whether you think they’ll succeed depends on how confident you are that it’s wise to use your ridesharing/food delivery app or e-commerce provider. To be fair to them, Indonesia is such a big market and has so much at hand in financial services – 181 million unbanked people – that they probably have a bright future there.
If you can’t beat them, join them – or stop
Australia is unique in the Asia-Pacific region for greenlighting genuine neo-banking startups, in part because of the unflattering Royal Commission report on incumbent financial services firms in the country. Regulators, for a brief shining moment or two, believed that allowing neobanks to directly compete with the country’s ever-indulgent Big Four incumbent banks would increase customer choice and pressure the Big Four to improve their Game.
In February 2019, Rod Sims, then chairman of the Australian Competition and Consumer Commission, told the Financial Times: “Market economies only work well if you have competition and we have to make sure that there are more in the banking sector.
“We have to fix the cozy oligopoly,” he said of the Big Four. “They must feel threatened.”
In practice, the neobanks haven’t exactly struck fear into the hearts of Westpac, NAB, ANZ and CBA. Of the cohort of four neobanks launched at the start of 2020, only Judo remains. Both Xinja and Volt collapsed after running out of cash, while 86,400 chose, probably wisely, to accept a National Australia Bank (NAB) takeover, and were brought into the world’s own digital bank. historical lender, UBank.
Australia’s three former neobanks likely erred in trying to directly compete with large incumbent lenders for retail customers. Most retail customers don’t switch primary banks casually, and enticing them to even open a secondary account is expensive. The main way neobanks do this is with subsidies such as high interest deposits.
Exceptions to the rule
Big tech and incumbent lenders will continue to dominate digital banking in APAC due to regulators’ preference to ensure that only established and well-capitalized companies get into financial services. This is not a bad approach, just a conservative approach, and not necessarily optimal for the client’s choice.
However, there are a handful of exceptions. In Australia, Judo Bank is the only one of the country’s original four neobanks still operational thanks to its focus on the underserved but profitable SME segment. Judo listed on the ASX in November 2021, raising A$657 million at a valuation of A$2.5 billion. In fiscal year 2022, Judo saw 73% growth in its loan portfolio, with gross loans and advances totaling A$6.1 billion. Although Judo is not yet profitable, its after-tax net loss of A$15.6 million in FY22 is small by neobank standards.
In the Philippines, Tonik, backed by Sequoia India, is a true pure payment digital banking start-up. It has cultivated something of a niche in the hinterland of the Philippines, having started as a licensed rural bank in early 2020, which obtained a full digital banking license last year. Tonik said it hit US$20 million in customer deposits in its first month of operation and US$100 million in the eighth, so it must be doing something right.
However, lenders like Judo Bank and Tonik are likely to remain scarce in the region. Thailand, one of the few major Asian economies yet to introduce digital banks, announced digital banking guidelines in October that appear to favor established financial services firms. The Bank of Thailand said it would not allow financial institutions with a commercial banking license to apply for a virtual banking license. However, entities that are part of a commercial banking group but do not currently have a banking license can apply for a digital license.
This likely means that some familiar licensee names will pop up among Thai digital banking license applicants. Indeed, SCB X, the holding company of Siam Commercial Bank, and Kasikorn Bank have already shown interest.
The more things change, the more they stay the same.