It will take many years before we can make a definitive conclusion on whether digital banks have staying power in any of these markets. But at present, we can say with certainty that their capabilities will be tested rigorously in the short term. With the ebbing of the growth-first, cash-incinerating business model of late 2010s technology companies, digital banks will be under pressure to prove they can turn a profit sooner rather than later.
In particular, the super app/all-in-one business model that Alipay and WeChat Pay pioneered will be put to the test, as other platform companies attempt to replicate their massive success in digital financial services: Kakao in South Korea, Line in Taiwan, Grab and Sea in Singapore. We are circumspect about how well this approach can work outside of mainland China, where a unique confluence of factors propelled Alipay and WeChat Pay to the top of the industry – where they still stand today, despite falling out of favor with regulators.
Though big platform companies have a lot of cash to spend on subsidizing retail customers, we expect that in most of the region’s advanced economies, a narrower focus, such as cross-border e-commerce, cryptocurrency or wealth management, will ultimately serve digital lenders best. In some cases, eschewing retail customers altogether may even be advisable.
Leveraging platforms and ecosystems
Some of the most prominent digital banks in East Asia are larger platform companies aiming to leverage their sizable user bases. Of them South Korea’s Kakao Bank has been the most successful so far, reaching profitability in 2019, less than two years after its founding and raising US$2.3 billion in an IPO last year that valued the company at a whopping US$29 billion. Kakao Bank was briefly the most valuable financial institution in South Korea, surpassing KB Financial Group.
"Shareholders are bullish as it's a platform, not just a bank," Seo Young-soo, an analyst at Kiwoom Securities, told Reuters at the time of Kakao’s IPO.
However, it was not long before Kakao Bank got a reality check. Though the Korean digital lender remains profitable – an anomaly among digibanks – it has struggled amid a broader battering of tech stocks and an inability to meet investors’ lofty expectations. In the second quarter, Kakao Bank’s earnings fell 17.7% year-on-year to 57 billion won (US$43.3 million). Since its IPO, Kakao Bank has lost about 67% of its market capitalization and is now valued at about 8.75 trillion won (US$12.9 billion). Kakao shares have yet to show signs of a rebound, as investors worry about additional rate hikes by the U.S. Federal Reserve.
Line Bank also intends to leverage its platform in a similar manner to Kakao. With a dominant digital services ecosystem in Taiwan, Line has certain structural advantages as it pushes into online banking. It has 21 million users of its messaging app in Taiwan as well about 10 million users of its e-wallet.
This gives Line easy access to a large potential customer base and indeed, by the end of April its client base reached 1.1 million. The challenge will be to ensure that the accounts have substantial balances. Data cited by Taiwan’s Central News Agency (CNA) earlier this year show that the average account balance in Line Bank is just NT$31,000 (US$973).
Line Bank faces a particular challenge in that some of Taiwan’s prominent incumbent lenders already have successful dedicated digital subsidiaries. These dedicated digital units have captured the largest share of Taiwan’s pure-play online banking market. Research by McKinsey shows that Richart, a digital subsidiary of Taishin Bank, Cathay Pacific’s Koko and Bank SinoPac’s DAWHO have the most digital accounts in Taiwan. Line Bank is No. 4.
Second, Taiwan’s Financial Supervisory Commission (FSC) has restricted digital banks from foraying into lucrative market segments like wealth management and forex that would allow them to reach profitability faster.
Third, capitalization requirements for digital banks are especially strict in Taiwan. Just a year into its operation, Line Bank required an increase in paid-in capital of NT$7.5 billion after its accumulated pretax losses approached one-third of its paid-in capital of NT$10 billion.
Cultivating niche markets
Instead of casting a wide net, some digital banks in Asia Pacific are focusing on narrower markets, some which can be called niche. In Taiwan, for instance, Rakuten Bank is targeting customers who engage in cross-border e-commerce with Japan, facilitated by the tie-up of its parent company with Taiwan’s PChome.
Although Rakuten Bank had just roughly 67,000 clients after a year of operation, its average account balance is NT$84,000 (US$2,637), which is equivalent to about two months of the median salary in Taiwan, and well above Line’s NT$31,000.
In Australia, Judo Bank is the only of the country’s original four neobanks still standing thanks to its focus on the underserved but highly profitable SME segment. Judo went public on the ASX in November 2021, raising AU$657 million at a valuation of AU$2.5 billion. In the 2022 financial year, Judo reported 73% growth in its lending portfolio, with gross loans and advancements totaling AU$6.1 billion. Though Judo is not profitable, its net loss after tax of AU$15.6 million in FY22 is low by neobank standards.
For its part, South Korea’s K bank is focused on the cryptocurrency segment through its partnership with leading crypto exchange Upbit, which began in June 2020 after South Korean regulators began requiring exchanges to work with lenders like K bank to ensure the use of valid, real-name accounts for trading. Over the next 11 months coinciding with the crypto bull market, K bank more than tripled its customers, adding 4.8 million new users. Further, the digital lender recorded a net profit of 22.5 billion won (US$16.2 million) in 2021, according to KRX data.
To be sure, K bank’s crypto dependency could be a double-edged sword should the bear market not ease. According to data submitted to Korea's National Assembly, 5.56 trillion won (US$4.5 billion), or nearly half of K bank’s deposits of 11.54 trillion won (US$9.28 billion), were for crypto trade at Upbit as of the end of March.
Nevertheless, Korean regulators have given K bank the go-ahead to proceed with its initial public offering. In late September, the Korea Exchange (KRX) said K bank "sufficiently meets listing requirements and therefore is suitable for the initial public offering (IPO)."
Meanwhile, four of Hong Kong’s eight digital banks are taking tentative steps to foray into wealth management: ZhongAn Insurance-backed ZA Bank, Standard Chartered-backed Mox Bank, WeLab and Tencent-backed Livi. The Hong Kong wealth market is huge: HSBC and other traditional lenders held HK$2.7 trillion worth of online investment products for clients as of June 30 according to the Hong Kong Monetary Authority (HKMA).
Yet given the paramountcy of trust and relationships in wealth management, it is unlikely that virtual banks in Hong Kong will be able to disrupt big incumbents anytime soon. The ultra-wealthy in Hong Kong will not be lured away from HSBC, JPMorgan, UBS and Morgan Stanley because of a slick app or 24/7 service.
Perhaps cognizant of this reality, Hong Kong’s digital banks are targeting a different demographic: those with assets of HK$200,000 to HK$1 million in assets to invest, a market the virtual banks believe is underserved. In July, WeLab rolled out its GoWealth digital wealth advisory, its tie-up with Allianz Global Investors (AllianzGI). In August, ZA Bank began offering investment funds to its customers from asset managers including Franklin Templeton, AllianceBernstein, Invesco, Amundi, Pictet and Janus Henderson.
The long road ahead
Most digital banks in APAC’s advanced economies continue to lose money, with the only exceptions being Kakao Bank and K bank. With the exception of Australia’s Judo, others are not even close to reaching the profitability milestone. For instance, Korea’s Toss Bank, which launched in 2021, lost 124.3 billion won in the first half of the year. Hong Kong’s virtual banks’ net losses ranged between HK$214 million and HK$687 million in 2021, according to KPMG.
Whether foraying into wealth management will lead to profitability for Hong Kong’s virtual banks remains to be seen. On the one hand, they have high labor costs and must spend a lot on human capital without a robust revenue base to support the cost. On the other, they continue to rely on subsidies to attract customers. ZA Bank, for instance, is waiving the subscription fee to investors who open an account with the digital lender by the end of the year. For its part, WeLab is offering new customers a “kickstart fund” of up to HK$500 and a rebate of subscription fee of up to HK$30,000.
Among platform companies engaged in digital banking in the region’s advanced economies, Kakao’s long-term outlook remains strong. Kakao Bank is the only digital lender in the region to have both a large user base – 18 million customers in a country of 52 million – and be consistently profitable. Kakao Bank has benefited from being the first digital bank on the scene in Korea and from the fact that the country’s incumbent banks are notorious for being slow on digitization.
Line Bank will have a tougher time in Taiwan. Though its digital services ecosystem is dominant there, Taiwanese regulators have deliberately sought to prevent digital banks from directly challenging incumbents. Regulatory decisions will significantly shape Line Bank’s future prospects.
Both Grab-Singtel and Sea Group are counting on their ecosystems and deep pockets to propel them to success in digital financial services in Singapore. There is no question Grab-Singtel’s GXS Bank can draw customers from both Grab’s platform and Singtel’s large network. The question is what exactly the bank can offer Singaporeans. GXS Bank reckons about 3 million Singaporeans are potential customers, around half the city-state’s population, and is focused on “underserved segments” such as gig workers, entrepreneurs, and fresh workers. Thus far, GXS Bank’s products look fairly standard for a neobank. It says that customers can create up to eight “pockets” designed for specific saving goals, each of which earns 1.58% interest per annum.
One thing to keep in mind is that Grab’s overall performance will affect GXS’s fortunes. Grab lost US$547 million in the second quarter, while its share price has fallen 72% since its Dec. 2021 debut on the Nasdaq.
The same holds true for Sea Group, which has yet to launch its Singaporean digital bank Maribank. Sea is currently navigating some choppy waters, having lost around US$170 billion of market value since an October 2021, battered by rising interest rates and intensifying competition from Alibaba-backed Lazada in Southeast Asia. Given strict capitalization requirements for digital banks in Singapore, Sea will have to pare down its loss-making global operations or else Maribank’s future will be in doubt. Exiting failing businesses in Latin America and Europe is a good first step, but it remains to be seen if more drastic measures will be necessary to assuage investors’ concerns.
Despite lingering regulatory issues its parent company is facing in its home market of China, ANEXT may have the clearest market potential of any of the first four Singaporean digital banks. Indeed, the Ant Group-backed digital bank has brand recognition as well as deep digital financial services experience that neither Grab-Singtel nor Sea Group can boast. On top of that, ANEXT is only focusing on SME customers, which compared to retail customers – even perhaps gig workers – can be more accurately described as “underserved” in Singapore.
Ultimately, the large platform companies dominating digital banking in Singapore will sink or swim depending on their broader ecosystems. Because Ant and its parent Alibaba are already profitable and well established, and ANEXT is wisely eschewing the retail segment, its prospects look reasonably good.
In the case of Grab and Sea Group, they must prove that their platforms are built on firm foundations. If ride hailing and food delivery fail to turn profitable in a timely manner for Grab, it is highly unlikely that it will thrive in digital financial services. The same holds true for Sea, given its travails in gaming and e-commerce. These two Singaporean tech giants’ respective ecosystems will ultimately sink or swim together.