Asia Banking Research

Indonesia will probably be the first country in Southeast Asia where the reality of digital banking lives up to the hype. The vast archipelago nation has everything online banks need to thrive: a huge market, amenable regulators, sufficient connectivity and eager deep-pocketed investors. Even the complex geography of the country, which is made up of 17,508 islands (6000 of which are inhabited), favors branchless banking.

Thailand is late to Asia’s digital banking party, which formally began back in 2019 when Hong Kong and Singapore approved them – though South Korea had digital banks as early as 2017. Since Asia’s two main financial centers embraced digital banks, Taiwan, the Philippines, Indonesia and Malaysia have followed suit. Until now, middle-income and well-banked (85% of the population has a bank account) Thailand has been a hold-out. A recent announcement by the kingdom’s central bank suggests a change of direction.

Kakao seems to have a case of the super-app blues, notably in its two fintech units. Shares of Kakao Bank and Kakao Pay have fallen 39% and 32% since their respective August and November debuts. Between December and late January, the Kakao group lost roughly US$25 billion in market value. 

Taiwan’s first two digital banks launched last year, Rakuten Bank in January and Line Bank in April. A third digital lender, Chunghwa Telecom-backed Next Bank, should have launched much earlier but has been hamstrung by repeated regulatory travails. It will go live in in the first quarter of 2022 at the earliest.

As one of the largest Asian economies to greenlight digital banks, Indonesia is attracting a lot of interest from investors. Digital lenders in Indonesia are not competing for mostly secondary accounts as they are in markets like Hong Kong and Singapore. Instead, they are trying to get in on the ground floor. About 66% of Indonesia’s 275 million people are unbanked.

The Covid-19 pandemic has aggravated the threat digital financial crime poses to Singapore. Since the pandemic began, the city-state has experienced a surge in online loan, e-commerce and phishing scams. Since 2016, scammers have made off with S$965 million, according to a recent investigation by The Straits Times. A record high of S$268.4 billion was taken in 2020 as the pandemic forced most banking and other transactions online. The threat did not recede in 2021 as seen with the OCBC phishing incident.

Over the past few years, Southeast Asia’s traditional banks, which have historically been digital laggards, have become much more relevant. Leveraging their internal fintech capabilities, as well as best of breed external solutions, across the region, traditional banks are gradually becoming much more digitally adept and able to better serve users in everything from contactless payments to wealth management. The benefits are clear - a Fitch Ratings report argues banks with stronger digital transformation are more likely to secure recurring business and hit profit and innovation targets.

Amid a digital banking craze that is sweeping much of the world, it has become fashionable for big incumbents to claim they are, in fact, digital banks, or at least as digitally adroit as their branchless counterparts. The truth is usually more nuanced. However, in Indonesia, Southeast Asia’s largest economy and most populous country, incumbents really can become digibanks. They just need to be acquired by tech companies or other deep-pocketed investors and rejigged.

In Asia Pacific, digital banking is a tale of two different types of markets. In advanced economies like Hong Kong, Singapore, digital banks often lack a clear value proposition and have limited disruptive capabilities. In developing countries, it is a very different story, and perhaps none more so than the Philippines. The Philippines’ geography, large unbanked population and fast-growing mobile internet connectivity make the country uniquely suited to branchless neobanks.

Siam Commercial Bank (SCB) is the latest incumbent lender in Asia to wager that digitization is the key to its future. Thailand’s oldest commercial bank and established by royal charter in 1907, SCB is transforming into a financial technology group and moving into the digital assets business. The transformation, which involves the establishment of a “mothership company” called SCBx, will propel the bank “as a regional financial technology conglomerate by 2025,” SCB says on its official website.

Page 4 of 22