More than four years after the financial centers of Hong Kong and Singapore announced they would allow digital banks, the online lenders have failed to disrupt those respective markets. They have opened plenty of customer accounts, but their deposit bases remain modest, as does their addressable market.

Elsewhere in the region, digital banks have larger potential markets, especially in Indonesia and the Philippines. Still, stiff competition and a lack of product differentiation mean that it is often necessary to subsidize customers to secure temporary loyalty. Some of these digibanks are also constrained by the focus of their parent companies on other businesses unrelated to financial services, like ride-hailing and food delivery.

The only countries in Asia where digital banks have found the secret sauce are China and South Korea, which can be attributed to both the innovative business models of online lenders and the unique market characteristics of these two countries.

China as a digital banking pioneer

In 2023, China’s fintech market is both mature and constrained by a lingering crackdown on Big Tech. But rewind to roughly a decade earlier and it was a hotbed of digital financial innovation. China’s preeminent platform companies Alibaba and Tencent, having found success in e-commerce and gaming, respectively, pushed aggressively into digital financial services with implicit support from regulators that supported the financial inclusion benefits and the efficiency gains from the widespread digitization of payments. They capitalized on weak digital offerings from incumbents, incumbents who often chose to work with the tech giants in consumer lending – when regulators still permitted it, of course.

In 2019, the last year before the pandemic and China’s tech crackdown (both of which have weighed on earnings), Tencent-backed WeBank posted a net profit of $565 million and Alibaba-backed MYbank recorded net income of $180 million. Both online lenders first became profitable in 2016, about a year after being founded.

Amid China’s tech crackdown and the country’s economic travails, MYbank has pivoted to supporting social welfare and rural entrepreneurship – and has also joined the digital yuan pilot program. WeBank has also joined the digital RMB initiative.

While it remains to be seen if either of China’s digital banks can ascend to their previous zenith, their leveraging of the respective Alibaba and Tencent ecosystems, surging smartphone adoption and strong customer demand for digital financial products has proven to be a winning formula.

First mover’s advantage

Besides China, South Korea is the only other Asian country where digital banks have reached profitability and seem able to stay there. Kakao Bank is by far the country’s most profitable online lender, benefiting from its super-app approach with the ubiquitous Kakao Talk messaging app at its core. Like WeChat in China, Kakao Talk is a way of life in Korea. When Kakao Bank launched in 2017, it had a ready potential market of millions of Kakao Talk users – who are now estimated at around 47.6 million in South Korea – a majority of the population of 52 million.

Kakao Bank can be thought of as the first mover among Korea digibanks, and it only needed two years to reach profitability. It exploited the lack of competition to grow briskly while simultaneously eschewing the incautious – and expensive – international expansion we have seen from Western digibanks like Revolut.

In the first three quarters of 2023, Kakao achieved a record-high net profit of 279.3 billion won ($214.12 million) thanks to increased lending to borrowers attracted by its low-interest rates.

In the first nine months of the year, Kakao’s deposit balance also increased from 34.6 trillion won to 45.7 trillion won, a growth of 11.1 trillion won, or 32.1%.

Crypto fever

K Bank is another profitable digital bank in South Korea, though its business model seems to be less sustainable than Kakao’s given its reliance on cryptocurrency. In fact, K Bank had to suspend operations a few years ago due to capitalization problems and when it re-emerged it inked a deal with leading Korean crypto exchange Upbit in which the exchange’s customers use K Bank for deposits. Since then, K Bank’s deposits have surged.

K Bank recorded a profit of 13.2 billion won in the third quarter, down significantly from 25.6 billion won during the same period in 2022. K Bank attributed the fall in profit to one-off provisions.

There could be trouble ahead for K Bank though. Korean media recently reported that a remarkable 70% of its deposits are tied to cryptocurrency. Since K Bank has about 15 trillion won (US$11.5 billion) in deposits, more than US$8 billion of the total is linked to crypto. What makes this worrisome is that the rules are murky when it comes to protecting customer deposits in the event of say, a run, on the crypto exchange Upbit – or a serious hack.

More exceptions to the rule?

Looking ahead, we do not expect many other digital banks in Asia will be able to replicate the success of WeBank and MYbank in China or Kakao and K Bank in Korea. Incumbent banks have entrenched strategic market positions in both Hong Kong and Singapore, and while there may be niche market opportunities in segments like wealth management for non-ultra high net worth individuals, overall, low-hanging fruit is scarce.

In Southeast Asia, both Indonesia and the Philippines present ample market opportunities, but competition is fierce, while in well-banked Malaysia and Thailand it is unclear how much of an opportunity there really is. What we have observed in Southeast Asia thus far is that large conglomerates are teaming up with platform companies like Sea GroupSE +1.5%, Grab and GoTo as well as Alibaba and Kakao, pooling their significant capital and resources to pursue strategic long-term plays. These juggernauts can afford to be patient and burn a little cash since they are in it for the long run.

Noticeably absent from any of this activity, with very few exceptions, are pure-play digibanking startups, and we expect it will remain that way. In Asia, it seems that digital banking is primarily a means for established tech companies – or telecoms in the case of K Bank, which is backed by KT Corporation – to expand into financial services and thus find new avenues for growth.

It is hard to believe China used to be a hub for Bitcoin mining. While the crackdown on mining activity has been ongoing for several years now, things got real in August when a Chinese government official was sentenced to life in prison for illegitimate business operations related to running an RMB 2.4 billion (US$329 million) Bitcoin mining enterprise and for unrelated charges of corruption. Maybe it was the corruption that landed the official, Xiao Yi, such a stiff sentence from the Intermediate People’s Court of Hangzhou, but regardless, this type of precedent will probably be enough to deter most people in China from trying their luck at crypto mining.

Ant Group has an ambitious international expansion strategy with Asia Pacific at its core. However, one of the largest markets in the region is increasingly not part of Ant’s vision. Suffice to say that when Ant was ramping up expansion in Asia a few years ago, it did not foresee geopolitical tensions with India impacting its investments in the subcontinent, a market the Chinese tech giant once saw as very promising. But the business environment for Chinese companies in India is likely to remain highly challenging for the foreseeable future. 

Despite headwinds, there are reasons for optimism about fintech funding in Southeast Asia, a new report by UOB, PwC Singapore and the Singapore FinTech Association (SFA) finds. While funding has dropped precipitously from its peak pandemic heyday, there are still some bright spots, including growing investor interest in green fintechs, the enduring attractiveness of the Singaporean and Indonesian markets, and an abundance of strong early-stage startups.

At the Singapore FinTech Festival last week, IMF managing director Kristalina Georgieva made the case for central bank digital currencies (CBDCs) in her keynote address. She succinctly highlighted most of the key reasons central bankers like the concept of a digital fiat currency: the potential for improved financial inclusion where it is most needed, replacing cash, enhanced efficiency, speed and transparency in cross-border payments.

Japan’s stock market rally seems to have staying power: The Nikkei 225 climbed 0.52% to reach its highest level since July 3 on November 24 while the TOPIX advanced 0.54% to end at 2,390.94. Investors appear to have been reacting to inflation data suggesting that the Bank of Japan will exit its ultra-loose monetary policy sooner rather than later. Data compiled by Goldman Sachs show that the TOPIX had risen 24% in 2023 as November 10 in local currency terms, its fourth-best annual performance since 2001. The Japanese benchmark has significantly outperformed the S&P500 Index of U.S. stocks and Hong Kong’s Hang Seng Index.

By several metrics, GCash is the most successful Philippine fintech. As of May, it claimed to have 81 million users (in a country of about 114 million) while the company said last year that it achieved profitability three years ahead of schedule. That said, GCash is not resting on its laurels and is stepping up both international expansion and a push into the B2B market.

The market opportunity for digital banks in Hong Kong has always been open to interpretation, and their balance sheets (with a few exceptions) 4.5 years after the Hong Kong Monetary Authority (HKMA) announced it would allow online lenders reflects that reality. The Greater Bay Area could offer some additional opportunities, but like most of China, it has achieved a reasonably strong level of financial inclusion. For these reasons, as we observe Hong Kong-based WeLab launch a digital bank in Indonesia, we think that it has a more promising business strategy than some of its competitors. To be sure, Indonesia has increasing digital banking competition, but a large segment of the population remains unbanked and underbanked.

In August, the China Securities Regulatory Commission unveiled some potential modest market reforms to strengthen investor confidence and trading in Chinese capital markets. These measures included extension to trading hours for the country’s stock and bond markets, lower transaction fees for brokers and the encouragement of share buybacks. While these measures are welcome and could help boost China’s capital markets, there are underlying economic and political issues that need to be addressed if China’s stock market is to recover definitively.

It was not long ago that we were wondering if the Melborne-founded and Singapore-headquartered fintech unicorn Airwallex had scaled back its ambitions, which historically have been lofty. It is safe to say that is not the case. Indeed, Airwallex continues to push into new markets aggressively, including in the past six months both Israel and Mexico.