Malaysia has been one of the least hurried Asian countries when it comes to digital banking, owing to its middle-income status and high percentage of banked people – above 90%. The Malaysian central bank first mooted the idea of digital banks in December 2020 but nothing happened with regards to commencing operations for almost three years. That is finally changing, first with the low-key launch of Grab, Singtel and Kuok Group’s GXBank in the fall of 2023 and now with the respective soft launches of Boost Bank – a joint venture between fintech company Boost and RHB Banking Group – and AEON Bank, which is a subsidiary of AEON Financial Service in mid-January.

In recent years, the fintech landscape in Asia has developed rapidly, with a diverse array of startups and established companies transforming how financial services are delivered and consumed. As we typically do, Kapronasia will be publishing our Asia fintech top-10 trends report for 2024 in the next few weeks, but in the meantime,  it’s worthwhile previewing some of the key trends, challenges, and opportunities that will shape the Asian fintech industry in 2024.

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).

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

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).

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.

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?

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.

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.

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.