Asia Banking Research

South Korea’s digital banks are the exception to a rule in East Asia’s advanced economies: They are extremely successful by multiple metrics instead of redundant. While the relative weak digital offerings of incumbent banks in Korea helps explain the phenomenon, it is not the main reason. We believe that South Korea’s three digital banks – Kakao Bank, K Bank and Toss Bank –  have been able to develop truly competitive products, in contrast to their counterparts in the other Asian tiger economies of Hong Kong, Singapore and Taiwan, and gradually have made themselves indispensable to many Korean retail customers.

Digital banks have sprung up across Asia in recent years. In many cases, they are having little impact on the overall banking market. Affluent societies like Singapore, Hong Kong, Japan and Taiwan are not lacking banking options. Even middle-income countries like Malaysia and Thailand have limited financial inclusion needs.

The tumult in Indonesia’s P2P lending industry should not come as a surprise. It is exceedingly difficult to both regulate this industry fairly and allow it to maximize financial inclusion benefits. Strict regulation such as is practiced in Taiwan and South Korea (though Seoul may make some changes soon) minimizes malfeasance but also limits the usefulness of the platforms. Amid the current meltdown of P2P lending platforms, which is hitting retail investors hard, the sector faces an inflection point in Indonesia.

With Thailand finally getting its digital banking application process underway, it is worth taking a closer look at the prospective applicants. As expected, startups are nowhere to be found. Instead, the likely applicants – and winners – are a mix of Thailand’s ultra-wealthy tycoons, prominent incumbent banks and Asian tech giants.

Throughout Asia, most countries have introduced digital banks in some form, either to increase market competition, boost financial inclusion or both. Thailand is an exception. It has approached digital banking with a marked lack of urgency, with the Bank of Thailand (BoT) mulling the idea for several years before in Jan. 2023 stating that it would allow digital banks by 2025. In a March 5 announcement, the Kingdom’s Finance Ministry said that Thailand will accept applications for virtual banks within the next six months with the goal of supporting people with no or limited access to financial services.

Cybersecurity has always been a crucial aspect of operations for financial institutions and technology providers alike. However, the intensifying digitization of financial services, combined with increasing computational power and the ongoing shift of financial activities online, is amplifying cybersecurity’s importance. With the annual cost of cybercrime soaring worldwide, financial institutions and market participants across Asia Pacific must reevaluate and reinforce their cybersecurity.

Singapore has been battling a surge in financial crime since the coronavirus pandemic, with 2023 being notable as the city-state dealt with its largest ever money laundering case. The investigation is ongoing and thus far authorities have seized more than US$2.2 billion. However, more mundane types of financial crime continue to be a challenge for Singapore, notably online scams. In 2023, scams reported in Singapore rose roughly 47% to 46,563, the highest amount since the police began tracking this type of crime in 2016.

Japanese e-commerce giant Rakuten has struggled in recent years amid intensifying competition in its domestic market and high costs linked to its decision to move into mobile communications. However, digital financial services is a bright spot for Japan’s largest platform company and Rakuten Bank’s April 2023 IPO – which raised US$624 million – was Japan’s largest market debut since 2018 when SoftBank’s telecoms unit raised US$23 billion. The stock has gained more than 36% since then and is currently trading at 2,627 yen (US$17.49).

As a core fintech service, payments are often tougher to monetize than higher-margin segments like lending, and this helps to explain why Kakao’s digital banking unit continues to outperform its payments arm. While Kakao Bank had yet another record year in 2023, the South Korea tech juggernaut’s payments swung to a loss. Kakao Pay has been trying to follow the Ant Group (a key Kakao Pay investor) formula which worked so well for the Chinese company – operating payments and digibanking as two distinct businesses. But we wonder if this model will work for the Korean company in the long run.

Of the five digital banks in Singapore, just three are active in the retail market, and with good reason. The city-state’s population has an exceedingly low number of financially excluded people, with Allianz Global Investment estimating that 98% of Singaporeans aged 25 and up have a bank account. That is not to say there are not opportunities for digital banks, but it depends on how one defines “underbanked.” 

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