The digital services ecosystem approach works great when the key units are firing on all cylinders. The trouble is, that is increasingly easier said than done – especially as predictions about a permanent work-from-home culture during the pandemic have proven premature. It is thus no wonder that Sea’s digital entertainment business is struggling. Sales at Garena fell over 41% in the April to June period to US$529.4 million, declining for the fifth quarter in a row.
Fortunately, Garena’s travails are not indicative of a broader malaise at Sea. Quite the opposite: Its fintech business is growing briskly – though it has yet to reach profitability. In the second quarter, Sea’s digital financial services revenue rose 53.4% annually to US$427.9 million, while adjusted EBITDA was US$137 million, as compared to a loss of US$111.5 million for the second quarter of 2022.
Sea’s lending business seems stable, though not expanding rapidly. As of June 30, 2023, total loans receivable were US$2 billion. Nonperforming loans past due by more than 90 days as a percentage of the company’s total gross loans receivable also remained stable at around 2%.
The challenge for Sea in digital banking will be differentiating itself from other platform companies competing in this space in Southeast Asia. To be sure, there is low-hanging fruit. Shopee merchants will want to use SeaBank in its various incarnations in Singapore, Indonesia, the Philippines and Malaysia, but we are not sure about the broader public. Excessive reliance on subsidies could come back to haunt Sea.
To that end, in the Philippines, where SeaBank is a rural bank focusing on the country’s large unbanked and underbanked population, sky-high interest rates used to onboard customers are being cut. Since July 13, the interest rate on savings accounts with balances of up to PHP250,000 is 4.5% per annum, down from 5%. It was previously adjusted down from 6% to 5%.
It will be interesting to see if SeaBank in the Philippines can replicate the success of the company’s Indonesia digibank, which earned a net profit of US$18 million in FY2022, in part because it successfully leveraged the synergies between Shopee and the online bank. As in Indonesia, Shopee is one of the largest e-commerce platforms in the Philippines.