In China, it is clear that Big Tech can transition to Big Fintech – and probably can continue to play a large role in the financial sector under stricter regulatory oversight. Elsewhere in the region, the results are more mixed. In South Korea, Kakao Bank is thriving after borrowing heavily from the WeChat playbook. In Hong Kong, which has a surplus of digital lenders, some virtual banks (the term used in the former British colony to describe them) are failing to make much of an impact, as the largest incumbent lenders are responding aggressively by slashing fees and improving digital services. Finally, the Australia market is turning into a cautionary tale about digital bank hype following the abrupt collapse of erstwhile high-flying neobank Xinja in December 2020 and the merger of 86 400 with National Australian Bank (NAB) earlier this year.
Overall, in Asia-Pacific’s well-banked, rich economies, digital lenders must have exceptional value propositions to be successful. Thus far the stand-out digital banks are more the exception than the rule, and that looks unlikely to change anytime soon.
Kakao Bank: winning with a big and sticky ecosystem
Kakao Bank is arguably the most successful digital bank in the Asia-Pacific region outside of mainland China. By digibanking standards, Kakao is an anomaly. It not only is the largest digital bank in South Korea by users, with 13.35 million, and assets, with 28.6 trillion won (US$25 billion) but also reached profitability less than two years after its founding (in 2019). Following a blockbuster US$2.2 billion IPO in which its shares surged more than 79%, Kakao Bank is now also the most valuable publicly-listed South Korean financial firm. That is impressive for a neobank founded just four years ago.
The primary reason for Kakao’s success is its ability to leverage an ultra-sticky ecosystem to turn users of its free messaging app (Kakao Talk) into paying banking customers. The strategy works because the Kakao Talk app is ubiquitous like WeChat is in China (nearly 90% of South Korea’s 51 million people use it), South Korea is ultra-connected, with the fastest internet connection speeds in the world, and incumbent banks have an unusually weak digital game, much more so than their counterparts in Hong Kong and Singapore.
Once users are in the Kakao ecosystem, it can prove hard to leave, as the tech juggernaut has evolved into a super app. Besides Kakao Talk, Kakao Bank and the e-wallet Kakao Pay, users can play Kakao Games, peruse monetized content on Kakao Page and hail a ride with Kakao Mobility. Kakao's strategic partners in these various ventures include both Ant Group (Kakao Pay) and Tencent (Kakao Games and Kakao Bank).
At the same time, Kakao Bank has been innovative when it comes to products, in many cases being the first in Korea to offer them digitally. Because of its huge user base, the neobank can recommend and collect fees on products offered by other financial firms on a larger scale than most incumbents, and also has an advertising business. The demand in Korea for digital banking services has surged, meanwhile, during the coronavirus pandemic as people cut down on face-to-face interactions.
While Kakao Bank is facing increasing competition from fellow digital lenders K Bank and Toss (soon to go live), the company is looking to keep its edge by aggressively expanding into new market segments like mortgages and merchant loans. Moody’s reckons that entering those segments will help Kakao to grow its “addressable market” of won-denominated loans from 14% to 65% over the next 12 to 18 months.
Hong Kong virtual banks: differentiate to win
Compared to Kakao, virtual banks in Hong Kong have yet to identify their value propositions so clearly, and none of them are yet profitable. Losses are to be expected at the onset, given the high cost of customer acquisition. More important is achieving meaningful differentiation in a crowded field of eight neobanks offering similar services.
Thus far, a few of Hong Kong’s digital lenders have distinguished themselves from the pack. One of them is ZhongAn Insurance-backed ZA Bank, which as the end of 2020, had accrued more than HK$6 billion in deposits and 300,000 customers, more than any other Hong Kong virtual bank.
ZA Bank has likely benefited from high promotional deposit rates. For three-month Hong Kong dollar deposits capped at HK$200,000, accounts were set at a 2% rate, but the neobank reportedly offered some clients up to 4% more interest, for a total of 6%. ZA Bank also has an insurance agency license due to its affiliation with ZhongAn Insurance, which allows it to offer a more comprehensive product suite than some of its competitors.
In terms of size, Mox is second only to ZA Bank, having reached HK$5.2 billion in deposits and 100,000 customers as of the end of 2020, However, it is the native unicorn WeLab with the more intriguing value proposition and differentiation. WeLab is teaming up with Allianz Group, focusing on wealth management services and eventually serving the entire Greater Bay Area (GBA). WeLab’s virtual banking license will allow it to participate in the forthcoming cross-border wealth management connect scheme, which will facilitate two-way investment between Hong Kong and Macau and GBA cities in Guangdong Province. The scheme, which will allow RMB 300 billion (US$45 billion) for fund movement in both directions, will permit each investor to invest up to RMB 1 million.
As for the other five digital lenders in Hong Kong – Airstar Bank, Fusion Bank, Livi Bank, Ping An OneConnect Bank and Ant Bank – their fate could depend on how long their backers want to subsidize loss-making enterprises. For some, consolidation may eventually be in the cards. Prior to Ant Group’s regulatory travails, Ant Bank looked like one of the more promising Hong Kong virtual banks. But for now, the Ant ecosystem has lost some of its luster, especially with so many other options available.
Crucially, unlike South Korea, Hong Kong's large incumbent banks have relatively strong digital capabilities and have also been quick to slash unpopular fees to prevent virtual banks from being able to undercut them as easily on price. HSBC is notable for such efforts. Thus, virtual banks in the former British colony could struggle without stronger product innovation.
Judo Bank: focus bears fruit
Perhaps no APAC market has hyped neobanks as much as Australia, where digital upstarts were initially celebrated as much-needed competition for the big four incumbent banks that have long dominated the country's banking sector. It did not take long for expectations to deflate though. Aussie neobanks got off a fast start in early 2020, with deposits rising exponentially – which is not a surprise given the sky-high interest rates offered – and then the pandemic hit.
Among Australia’s digital lenders, there has only been able to clearly turn this crisis into an opportunity: Melbourne-based Judo Bank. Judo decided from its inception in 2019 to eschew the potentially lucrative but troublesome retail banking market, choosing instead to focus purely on providing services to underserved small and medium-sized enterprises (SMEs).
SMEs are a vital part of the Australian economy, and many were hit hard by pandemic-related restrictions. While Judo knew it might be risky to extend credit to them at this time, it correctly wagered that its clients would be able to use loans to stay afloat amid lockdown. Once restrictions eased, Judo believed they would bounce back, and many did as Australia’s economy recovered and the country enjoyed many months of nearly virus-free life until the Delta variant hit.
Meanwhile, Judo has reached numerous milestones over the past 16 months. In May 2020, it became a unicorn after raising an additional AU$230 million and was profitable by October 2020. Now boasting a valuation of AU$1.9 billion, Judo is turning its attention towards going public. According to Reuters, Judo is considering an IPO on the Australia Stock Exchange (ASX) in October or November that could raise up to AU$350 million.
Xinja Bank: what not to do
For some neobanks, losing money while growing their customer base is a badge of honor. It is expensive to build scale, they say, but it will pay off in the end.
Except when it doesn’t.
In December 2020, Sydney-based Xinja collapsed, driving home the risks of reliance on an unsustainable, growth-first business model. To put it simply, the company ran out of cash to burn. Its leadership blamed the pandemic for disrupting the fundraising process, but that excuse rang hollow. Many fintechs have raised eye-watering sums of money over the past 18 months despite restrictions on international travel and reduced face-to-face meetings.
Xinja’s biggest mistake was spending aggressively on customer acquisition before launching lending services that could have provided a reliable revenue stream. The strategy initially succeeded in quickly growing the company’s deposit base, which reached AU$500 million. However, as Xinja’s capital was depleted it had to cut deposit interest rates from 2.25% to 1.8%, then 1.65%, and finally 1.5%.
Xinja’s abrupt implosion illustrates a lack of appreciation for the paramountcy of customer trust in banking. Although the company was in dire straits as early as March 2020, right up until the end, its leadership assured customers that a massive capital injection from Dubai-based investors was on the way.
Playing fast and loose with the truth may come back to bite Xinja. According to The Sydney Morning Herald, regulators are taking a strong interest in Xinja’s capital-raising tactics, to the extent that they are threatening the defunct neobank’s investors with imprisonment if they refuse to hand over related books, records and correspondence.
Less than a month after Xinja surrendered its banking license, the Aussie neobank 86 400 also bowed out. But it did not collapse. Rather, 86 400 was acquired by NAB for AU$220 million. The deal may be a win-win for the two lenders, giving NAB stronger digital capabilities and 86 400 a path to sustainable growth, but it does not exactly broaden customer choice or put pressure on incumbents – two of the reasons Australia greenlighted neobanks in the first place.
Key success factors for new digital banks
The experiences of digital banks in South Korea, Hong Kong and Australia have important implications for the rest of the region, and Singapore in particular as the city-state is also a well-banked, developed economy. The Monetary Authority of Singapore (MAS) has thus far issued digital bank licenses to Grab-Singtel, Sea, Ant Group and a consortium led by the Shanghai-based real estate developer Greenland Holdings.
Both Grab-Singtel and Sea will be looking to leverage their large respective ecosystems to build scale quickly. Kakao's experience in Korea suggests such an approach can bear fruit, but Singapore's incumbent lenders are more digitally adroit than South Korea's, and Kakao did not have to square off against another large platform company. Further, the stickiness proposition of the Grab ecosystem is shaky; ride-hailing and food delivery do not engage users as messaging does. For Sea, which has gaming and e-commerce in its ecosystem, prospects look better.
Because of their immensely deep pockets, both Grab-Singtel and Sea will be able to subsidize their digital banking ventures for the foreseeable future. If they are willing to serve as secondary banks for Singaporeans, who are unlikely to give up their DBS, OCBC or UOB accounts to bank primarily with Big Tech, they likely have a way forward.
As for Ant Group and Greenland, their licenses only allow them to serve non-retail customers. Of course, in some cases that can work out for the best as Judo has shown in Australia. The SME segment in Singapore is not as well served as retail anyway.
Ultimately, in APAC’s developed economies, digital banks may prove to be less disruptive than expected as the hype fades and reality sets in. It takes time to build customer trust and time is on the side of incumbents.