Asia Banking Research

Peer-to-peer lending is one of the fintech segments that most struggles to gain credibility. Next to cryptocurrency, it may be the most susceptible to scams. But it is not only borrowers who are at risk. Lenders can easily get burned when borrowers default. Since many borrowers on P2P lending platforms are those unable to get a loan elsewhere, their credit is typically not optimal.

P2P lending began growing quickly in South Korea about four years ago, offering attractive returns to investors amidst very low interest rates. Some P2P businesses began venturing into risky investments such as real estate project funds, non-performing loans and mortgages. South Korea had 239 P2P lenders in December 2019, up from just 27 four years earlier. Their outstanding loan balance totaled 2.38 trillion won.

Singaporean ride-hailing giant Grab is set upon becoming a top digital bank in Asia. Over the past year, the company has raised billions from investors in a bid to fund the transformation from app-based neo-taxi service into neobank. It has inked numerous deals with financial services incumbents and applied for one of Singapore's coveted digital full banking (DFB) licenses. If Grab's application is successful, it will be allowed to conduct both retail banking and corporate lending in Southeast Asia's financial center.

While Grab has troves of user data and digital acumen, it lacks financial industry expertise. Addressing this shortfall is crucial for the company to gain the trust of customers as a financial services provider. The segue from ride hailing to banking is not as seamless as Grab sometimes suggests. Partnering with a large commercial bank could help Grab bridge that gap, and increase its chances of securing the DFB. Japan's Mitsubishi UJF Financial Group (MUFG), which led Grab's recent US$856 million funding round, is just that type of partner.

The novel coronavirus outbreak is crimping global business as people avoid travel and even going out in public. The sharp contraction in business activity augurs ill prospects for the financial industry. Banks are not optimistic about their first quarter results. If the virus isn't contained soon, the second quarter could be even worse.

For the nascent virtual banking segment, Covid-19 is a double-edged sword. On the one hand, e-commerce demand remains strong thus far. Consumers still need to buy essential everyday items. If they are hesitant about visiting a physical store, the best option is to make the purchases online. In the short term, that means a rise in online transactions and in many cases the use of digital wallets.

Malaysia is set to introduce digital banking following the passage of a new regulatory framework by its central bank in December. The central bank said it would issue up to five licenses to qualified applicants to set up digital banks. The licenses will allow the holders to conduct either conventional or Islamic banking business in Malaysia. Capital requirements are not low, with an absolute minimum of RM 100 million (US$23.7 million) necessary during a three to five year foundational phase and thereafter RM 300 million.

Roughly a year ago, Hong Kong looked set to take a leading position in Asia's nascent digital banking space. In late March 2019, the Hong Kong Monetary Authority (HKMA) awarded three digital banking licenses. It later issued five additional licenses. The eight neobanks, which include consortia led by Chinese tech giants Ant Financial, Tencent and Xiaomi, were reportedly set to begin operations in the second half of 2019.

Then came the Hong Kong protests. The political turmoil that erupted in June 2019 has shaken confidence in Hong Kong's once unassailable position as the region's top global financial center. Amidst the economic fallout, Hong Kong has slipped into recession for the first time since the global financial crisis of 2008-09. Given unenviable economic conditions, all but one of Hong Kong's digital banks have postponed their launch.

Singapore has 21 applicants for just five digital banking licenses. There are going to be many more losers than winners in this race. Speculation about the likely winners is reaching a feverish pitch ahead of the Monetary Authority of Singapore's (MAS) expected announcement of the winners. The decision is expected by June.

MAS has made clear that it has little interest in large-scale disruption of the financial-services sector. The regulator certainly wants to boost competition and the quality of digital-banking services in the city-state, but in a steady, incremental manner. Evolution is necessary. Revolution is not. With that in mind, the MAS designed the application process to ensure that only firms with ample capitalization and strong potential for profitability would meet the licensing criterion.

Some analysts are adamant that Singapore needs digital banks to boost financial inclusion. That's an interesting argument, given that 98% of Singaporeans over 25 have a bank account, according to research by Allianz Global Wealth. By Allianz's estimates, globally only Israel has a higher rate of financial inclusion than the Lion City.

In Singapore's case, this type of hard data is more instructive than a nebulous concept such as being "underbanked." A report published in October 2019 by Bain & Co., Google and Temaek Holdings found that 4 in 10 Singaporeans were underbanked, implying they don't have access to all the essential financial services they need. The findings might be more convincing if the same report had not also found that 40% of Thais and 45% of Malaysians were underbanked. The latter two countries are middle income, with per-capita GDP levels far below Singapore's.

The Monetary Authority of Singapore (MAS) announced on 28 January of the enforcement of a new Payment Services Act, the first comprehensive legislation of its kind that regulates distinct activities in payment services ranging from digital payments to the trading of cryptocurrency such as Bitcoin and Ether.

The Payment Services Act comes at a well-coordinated time before the MAS awards a total of five digital bank licenses to a select few of its 21 reported applicants. While that may be the case, some have begun to speculate on the effects and ramifications the Act will have on fintechs that are hoping to or have already begun operations in Singapore.

The Vietnam fintech market was Southeast Asia's hottest in 2019 after Singapore, an impressive feat given that the Lion City is a hub for the entire region. From Jan. to Sept. 2019, Vietnam accounted for 36% of Southeast Asia's venture-capital fintech investment compared to 51% for Singapore, according to a December report from the United Overseas Bank (UOB),  PricewaterhouseCoopers (PwC) and the Singapore Fintech Association (SFA). Vietnam was far ahead of other Asean economies, including Indonesia (12%) as well as the Philippines, Thailand and Malaysia (2% each).

Vietnam's Banking Strategy Institute reckons that the nation's fintech market will reach US$9 billion in value this year, which will make it the region's fourth largest. Fast growth in the fintech sector and the potential for the industry to boost financial inclusion probably explain why Hanoi nixed a plan to cap foreign ownership in payment service intermediaries at 49%, which was proposed by the State Bank of Vietnam (SBV) in November.

Australian neobanks are tapping strong demand for digital banking services to swiftly build up their deposit bases. Among the virtual banks reporting expeditious deposit growth are Xinja, Up!, Judo, 86 400 and Volt Bank. Xinja's growth has been especially impressive: It reports amassing $115 million in deposits in just 20 days. That would put Xinja on track to reach its goal of $120 million in deposits for the year by the end of February.

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