Financial Industry Blog - Kapronasia

Singapore-based multicurrency wallet YouTrip announced on January 3 that its users can now hold up to S$20,000 (US$15,025) in their e-wallets and have an annual spending limit of S$100,000, up from S$5,000 and S$30,000, respectively. The new maximum limits are the same as those recently adjusted upward by the Monetary Authority of Singapore (MAS).

Cryptocurrency’s future looks uncertain in many respects, but that is not deterring Hong Kong from doubling down on its digital assets bet. The erstwhile British crown colony seems determined to transform itself into Asia Pacific’s premier cryptocurrency hub at the soonest and recently launched both stablecoin regulation consultation and signaled its intention to allow retail access to exchange-traded funds (ETFs) that invest directly into cryptocurrencies.

Big Tech considers India an important market when it comes to search, social media, messaging and e-commerce. Fintech, however, is another story.

Mitsubishi UJF Financial Group (MUFG), Japan’s largest bank, is increasingly investing in Indonesia's burgeoning financial services sector as its home market is mature, slow to digitally transform and constrained to some degree by an aging population. In contrast, Southeast Asia’s largest economy offers low-hanging fruit in many different segments of financial services.

Internationalization of China’s currency has moved more slowly than many analysts had expected. The renminbi remains far behind not only the dollar but also the euro as a reserve currency, and several percentage points behind the both Japanese yen and pound sterling in that area. However, when it comes to payments, China’s currency has done better of late. From January 2023 to October 2023, its share of cross-border payments jumped from 1.9% to 3.6%, according to the International Monetary Fund (IMF).

In what was not a banner year for capital markets, India’s IPO market performed surprisingly well, exceeding expectations and the performance of numerous competitors. We had been expecting Hong Kong to stage a strong comeback in 2023 – which did not happen – while mainland China also did not perform as all as we expected, despite contributing about 40% of global proceeds last year. Overall, in 2023 732 companies went public in Asia Pacific raising US$69.4 billion, an annual decrease of 18% and 44% respectively. India, however, recorded 57 deals that raised roughly US$6 billion. While proceeds were down from 2022’s US$7.2 billion, the number of IPOs was up by more than 25% and among the most of any single market in the world.

One of the biggest pieces of news at November’s Singapore FinTech Festival was the city-state’s decision to award in-license approvals to stablecoin issuers Paxos Digital Singapore Pte and StraitsX. That move came with a cautious endorsement of the less-volatile form of cryptocurrency that is typically pegged to a fiat currency at 1 to 1 and backed by reserves such as cash and bonds.

We have learned by now not to get our hopes up for digital banks to dramatically alter the market landscape in most countries – but there are still exceptions to the rule. With one of the world’s largest unbanked populations – 60 million adults – and an overall population of 169 million not especially well served by incumbent banks, Bangladesh appears to be an exception. For that reason, the Bangladeshi central bank’s recent decision to allow eight digital lenders will not be overkill.

It has become apparent in 2023 that South Korea intends to regulate cryptocurrencies, an important development given the country’s economic and geopolitical significance. South Korean has long had an active crypto retail investing community, which is one of Asia’s largest, so to a certain extent implementing regulations simply represents regulators acquiescing to reality. The devil, of course, will be in the details, and it is those details that remain hazy. After all, what do regulators mean when they say they will aim to strike a balance between protecting investors and fostering innovation?

There is a disconnect between Singapore’s ascendancy and the performance of the Singapore Exchange (SGX). Indeed, the city-state has in recent years solidified its status as Asia’s premier fintech hub as well as the most important financial center in Southeast Asia. In some aspects of financial services, Singapore has surpassed its long-time competitor Hong Kong. Yet definitely not in capital markets. Despite a subpar IPO year for the Hong Kong Stock Exchange (HKEX), it has still been far more active than SGX.

At the recent Singapore Fintech Festival, the city-state’s announcement that it would pursue a wholesale central bank digital currency (CBDC) pilot next year was big news, and justifiably so. As Southeast Asia’s key financial center, Singapore’s monetary policy decisions usually have regional implications.

There is something about digital banks in South Korea. Just like most incumbent banks – and unlike many of their digital peers – they tend to be profitable. Toss Bank, the digital banking unit of fintech unicorn Viva Republica, is no exception to the rule. In the July to September period, it recorded its first profitable quarter, which means that all three of the country’s digital lenders, which also include Kakao Bank and K Bank, are now moneymakers.

The Japanese financial services group SBI Holdings has become an aggressive fintech investor, taking stakes in many different digital financial services startups that it views as promising. Earlier this year, it led a US$28 million Series A round in German fintech Pliant, while its digital banking unit SBI Sumishin Net Bank went public in March, becoming the first Japanese online lender to do so – despite the less-than-optimal market conditions. In recent months, SBI has made a series of new investments that show its growing interest in digital assets.

After a long moment in the sun, buy now, pay later (BNPL) has lost some of its luster. That’s not to say it will fade away. Far from it. In fact, many deep-pocketed fintechs and prominent incumbents in advanced economies have introduced the service because consumers like interest-free installment payments. However, pure-play BNPL firms that are essentially one-trick, loss-making ponies are in varying degrees of trouble. In the case of India’s ZestMoney, once a high flyer in the subcontinent’s erstwhile red-hot BNPL segment, the trouble seems to be terminal – and the company will reportedly throw in the towel at the end of this month.

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.

South Korea is unique in that the majority of its digital banks are profitable. While Kakao Bank generates the most headlines, and has been successful in many regards, its competitor K Bank is the one we find the most intriguing. The reason is that K Bank, majority owned by the telecoms giant KT Corporation, was dogged by financial travails in its early years and even had to pause operations for a while. When the digital lender re-emerged, it was powered by a tie-up with South Korea’s leading cryptocurrency exchange Upbit. While regulatory intentions were good in this case, building a bank on the foundation of crypto seems at the very least to be a bit risky – and it brings into question K Bank’s overall business model.

Across Southeast Asia, the business models of platform companies are being put to the test – and the results are still inconclusive. We can appreciate that a focus on quarterly earnings may obscure positive long-term trends – and Sea did not have the best quarter – but it is undeniable that the much-heralded ecosystem business model that emerged in the past few years could have some fundamental problems. In the case of Sea Group, it has a promising digital financial services business that grew out of its earlier ventures in e-commerce and gaming, but the latter two businesses are struggling. We still like their odds better than ride hailing and food delivery, but Sea has figure out a way to turn them around and revamp the synergies that drove the company’s share price to an apex of almost US$367 in October 2021. It has since lost about 90% of its value and trades around US$37.

Not all Southeast Asian platform companies are created equal, nor do they perform equally. Unlike some of its counterparts, Bukalapak has never swung for the fences. Rather, it has focused on its substantial home market of Indonesia and building a digital services ecosystem for Southeast Asia’s largest economy that increasingly features more financial products. The strategy appears to be bearing fruit, and Bukalapak has recorded seven straight quarters of adjusted EBITDA profitability.

We have been writing for a while now about the potential for credit cards to capture market share in India, irrespective of the trajectory of buy, now pay later (BNPL) and e-wallets. In a nutshell, there is nothing quite like a credit card when it comes to cashless payments: the potential for rewards, the potentially significant credit limit, and in some cases, the prestige of holding a specific card. And then there is the bonus that paying off the balance promptly helps one build a solid credit profile over time. Even though India’s credit card penetration is estimated at just 5.5%, in absolute terms, that’s still about 77 million people because the subcontinent’s population is 1.4 billion. So even at that low level of penetration, India has a larger credit card market than all of France or the UK.

The plot continues to thicken in one of the largest money laundering cases in Singapore’s history. Complicating matters is the sensitivity of certain aspects of the case, given the large number of ethnic suspects with ties to China and the multiple banks both local and international ensnared in the ongoing investigations.

Grab, founded in 2012, hit a milestone in the third quarter: It recorded its first profit on an adjusted EBITDA basis. The Singapore-based platform company is better known for burning almost unfathomable amounts of cash in a race to build scale, so adjusted EBITDA of US$29 million is a significant achievement. The company’s revenue rose 61% on an annual basis to US$615 million while its losses fell to US$99 million. The question now is if Grab has turned a corner decisively and is headed for long-term profitability in the vein of Alibaba, Tencent and Amazon, or if it is more likely to struggle to stay out of the red like Uber and Lyft.

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