Hong Kong's eight virtual banks largely represent vested banking and tech interests in the city. Most of the newcomers are actually oldcomers if you stop to think about how well established they are outside of Hong Kong's nascent digital banking segment. WeLab, a Hong Kong-based fintech startup, is the exception. Founded in 2013 by ex-Citibank executive Simon Loong and two other partners, the company has steadily grown over the past seven years, and says it now has 40 million customers and disbursed more than HK$50 billion in loans in Hong Kong, mainland China and Indonesia. WeLab's Hong Kong virtual bank went live in July.
It's good to be Kakao Bank. Kakao was already South Korea's most successful neobank story before it reported record earnings in the second quarter of 26.8 billion won ($22.6 million), a nearly 900% year-on-year increase from 3.0 billion won a year earlier. Kakao's net profit for the first half of the year reached 45.3 billion won, a more than fourfold increase from 9.6 billion in the first half of 2019. That Kakao achieved this exponential growth amid the pandemic and a weak overall South Korean economy is particularly impressive.
According to Kakao, its profits surged on the back of rising net interest income and commissions from the sale of financial products. "We were able to make more profit from increased revenues from lending and fees from partnering with credit card companies and brokerages," the company said in a statement published by South Korean media.
The picture for Kakao Bank's lending business is fairly rosy. Its outstanding loan balance grew to 17.68 trillion won in the second quarter, up from 14.88 trillion won a year earlier. Financial inclusion is one name of the game as well: Kakao said it provided 660 billion won in mid-rate loans to consumers with mid- to low-level credit scores from January to June and plans to disburse a total of 1 trillion won of such loans in 2020.
Like many successful fintechs, Kakao Bank is steadily developing partnerships with key incumbents. It has four local credit card partners in South Korea, including Shinhan Card and Samsung Card. From April to July, Kakao issued 260,000 credit cards, according to The Korea Herald.
Kakao Bank also has a burgeoning equities trading business. As of late June, it had more than 2.18 million such accounts, up from 1.14 million in December 2019. Its partners among incumbents include Korea Investment & Securities, NH Investment Securities and KB Securities.
At the same time, Kakao Bank benefits from the stickiness of the Kakao ecosystem, which is a super app in all but name. Kakao Bank already has 11 million monthly active users, more than half who are under age 50. And there are many more potential customers where those came from: The dominant KakaoTalk messaging app has almost 45 million monthly users, about 87% of South Korea's population.
Thanks to its strong brand name and ecosystem, Kakao Bank managed to reach profitability in just two years from its establishment in 2017. Further buoying its growth was when its parent company Kakao Corp became the virtual bank's majority shareholder, the first instance in Korea of a non-financial firm holding a majority stake in a bank. That change allowed Kakao Bank to issue new shares worth 500 billion won and increase its paid-in capital to 1.8 trillion won.
When it comes to Asian financial centers, Hong Kong and Singapore are no longer the only games in town. Tokyo, Seoul and Sydney have recently signaled intent to bolster their financial sectors and take on a larger regional role. Yet right on Hong Kong's doorstep there is another potential contender: Taiwan. In recent weeks, Taiwan's government has highlighted its plan to develop a more globally oriented financial sector. That will be easier said than done. Taiwan takes a fundamentally conservative approach to finance that will not be easily changed.
Before covid-19, the sky seemed to be the limit for Australia's virtual banks. They were rapidly accruing users, in some cases surpassing their own forecasts. Venture capital kept flowing into their coffers. The pandemic slammed the brakes on the neobanks' ascendancy. Demand in Australia remains for innovative digital banking services - if the neobanks can survive the downturn. Since the neobanks are startups built for fast growth, rather than steely resilience, they face a long road ahead.
The pandemic has disrupted Malaysia's digital banking plans, but the ensuing delay may be a boon for interested firms that now have more time to select partners. The original contenders for up to five digital bank licenses include ride-hailing giant Grab, telecoms juggernaut Axiata Group Bhd (owner of e-wallet Boost) and the banks CIMB, Affin Hong Leong, AMMB Holdings and Standard Chartered Bank. Those banks are now reportedly less interested in obtaining a license, while several non-financial firms may throw their hat into the ring: gaming giant Razer, conglomerate Sunway Group, telecoms company Green Packet. Hong Kong investment bank AMTD may also bid for a license.
Southeast Asia's most valuable tech startup is coming down to earth at last, despite maintaining a sky-high valuation of more than US$14 billion. Faced with the pandemic-induced downturn, Singapore-based Grab is scaling back its ambitions and remarkably, cutting costs. That involves eliminating some superfluous business units and trimming about 5% of its workforce. Grab's professed goal is to rejig its operations to focus on three core businesses: ride-hailing, food delivery and digital banking. Its unstated goal is to get its finances in order so that its bid for a Singapore digital full back license is successful.
Australia launched its open banking regime on July 1, ushering in an era of increased competition and customer choice. The regime allows a customer of any of Australia's Big Four banks - National Australia Bank, Commonwealth Bank, Australia and New Zealand Banking Group and Westpac - to ask that their account and card data be sent to a third party accredited by the Australian Competition and Consumer Commission. In November, mortgages and personal loan data will be introduced, while smaller banks will join in 2021.
Cambodia's digital banking initiatives are increasingly on the money. The Kingdom has focused on fast-tracking digital banking to boost financial inclusion and develop the broader banking sector, which only serves a limited portion of the population. Just 22% of Cambodia's population of 16.2 million is banked. The good news is that fintech is bringing more Cambodians into the formal financial system. In 2019, active digital wallets in Cambodia jumped 64% to 5.22 million, according to a June report by the National Bank of Cambodia (NBC).
Taiwan's virtual banks were supposed to go live this summer but the coronavirus pandemic has delayed the launch date. The three neobanks, which include consortia led by Line Financial, Chunghwa Telecom and Japanese e-commerce giant Rakuten, will likely launch later in the year, according to Taiwan's Financial Supervisory Commission (FSC). The three neobanks have yet to start one-month operation simulation tests, a pilot period required by the FSC to ensure the banks are in shipshape.
The Singapore digital banking race is accelerating. The Monetary Authority of Singapaore (MAS) has winnowed down the applicant field from 21 to 14. While the MAS did not say which contenders failed to make the cut, observers close to the matter say that the consortia headed by Grab/Singtel, Sea, Razer and MatchMove have all advanced to the next round. Those four applicants are all bidding for a coveted digital full bank (DFB) license, which permits holders to serve both retail and non-retail customers. The MAS plans to issue a maximum of two DFB licenses.
Some things just weren't meant to be, like peer-to-peer lending in China. What began as a legitimate way to support financial inclusion through internet finance morphed into a scam-ridden zombie industry. Beijing has moved to shut down the majority of P2P lenders that haven't imploded on their own. The industry is going the way of crypto, another member of the fintech family that ran afoul of China's regulators. In a recent Sina Finance commentary, former Chongqing mayor Huang Qifan gave a scathing criticism of P2P lending, likening it to a digital version of traditional pyramid schemes he says have long existed in rural China.
The pandemic-induced economic downturn could be a catalyst for needed financial reform in China, where foreign firms have struggled to gain market share. The Chinese economy contracted in the first quarter and will likely grow just 1.2% for the year, according to the IMF. A new UN report estimates that FDI could drop 40% this year, falling below US$1 trillion for the first time since 2005. At the same time, China's trade surplus is narrowing. Capital outflows are rising despite stringent controls, reaching US$50 billion in March and April, according to Nikkei Asian Review. Capital inflows from foreign investors in the financial sector could help stabilize the renminbi.
Hong Kong's virtual banks will not easily unseat entrenched incumbents, but the newcomers are already succeeding in one respect: They are forcing traditional banks to up their digital game. This trend started well before the coronavirus pandemic, but has accelerated as concerns about the virus impede customer visits to physical branches. The virus is acting as a catalyst for digital transformation among Hong Kong's incumbent banks just as the virtual banks are launching.
South Korea's K bank, one of three licensed virtual banks in the country, is planning to reopen in July if it can secure additional capital. K bank suspended most of its services about a year ago amid fundraising travails. It would be an impressive feat for the bank to resolve those capital issues amid the pandemic-induced downturn. South Korea entered a technical recession in the second quarter with GDP expected to contract 2% compared to the January-March period, according to the Bank of Korea.
Indonesia's Gojek is one of Asia's most ambitious unicorns. It leads the ride-hailing and food-delivery markets in Indonesia, and is steadily increasing its digital banking services. In June, it filed trademarks for new business entities that could pave the way for expansion into corporate services, live-video conferencing and electronics repair. Yet the company remains unprofitable eight years after its founding. Gojek needs to boost the stickiness of its app and speed up monetization. That's why it's a wise move for the company to partner with Facebook and PayPal, which took took respective 2.4% and 0.6% stakes in Gojek's fintech arm GoPay, a regulatory filing shows. The U.S. tech giants' investments were part of a fundraising round that reportedly values at Gojek at more than US$10 billion.
In May the European Commission named Cambodia as one of 12 nations at a high risk for money laundering and terrorism financing. The EC's move is a setback for Cambodia, which aims to attract foreign investment and develop a thriving digital economy. The kingdom will likely be added to a list that includes countries such as North Korea Iran, Yemen, Syria and Afghanistan. The EC said that it sought to better align with the international money-laundering watchdog FATF, which put Cambodia on its gray list in February 2019 for having "significant deficiencies" in its anti-money laundering and counter-terrorism financing regime.
Judo Bank has become the first of Australia's neobanks to reach a AU$1 billion valuation and just the second so-called fintech "unicorn" in the country after Tencent-backed Airwallex. Investors shrugged off the coronavirus pandemic and economic doldrums - Australia is headed for its first recession since 1991- and handed Judo an additional AU$230 million in May. Melbourne-based Judo has now raised a total of AU$770 million in equity over three fundraising rounds. Among Judo's existing investors: the Abu Dhabi Capital Group, Bain Capital Credit, Ironbridge, Myer Family Investments, OPTrust, SPF Investment Management, and Tikehau Capital.
On May 17, the People’s Bank of China (PBOC) Shanghai branch announced the launch of the Shanghai Fintech Innovation Regulatory Trial, which follows the trial in Beijing last December. In addition, the Shanghai Fintech Industry Alliance (SFIA) was established to encourage innovative fintech programs in the Yangtze River Delta region.
Regulatory sandboxes provide fintech firms a controlled and supervised environment to test innovative products, services, or business models. Fintech innovation is an important driver of growth in the financial industry, especially in China. However, potential risks need to be addressed, notably customer security and data protection. At the same time, regulatory uncertainty could dissuade investors from investing in a company. For their part, meanwhile, regulators need to develop a deep understanding of innovative applications so that they are able to effectively regulate new business models and technologies. Thus, regulators use a regulatory sandbox to achieve a balance between technological innovation and risk prevention, so as to implement more universal policies.
In mid-January, the PBOC announced the first batch of trial applications, including the Internet of Things, APIs, smart tokens and trusted execution environment. Six projects have been approved to join in the trial scheme in Beijing, including API open banking (CITIC aiBank), supply chain finance based on IoT (Industrial and Commercial Bank of China), automatic loans for micro-credit products (Agricultural Bank of China), mobile POS (China UnionPay, Xiaomi and JD digits), Zhiling products managing smart token (CITIC Bank, UnionPay, Duxiaoman payment and Ctrip) and instant online loan (Bank of Ningbo).
In late April, the PBOC extended the second batch of sandbox experimental cities to Shanghai, Chongqing, Shenzhen, Hangzhou and Suzhou, as well as the Xiong’an New Area, a much-anticipated new economic zone. The Shanghai trial will guide licensed financial institutions and technology companies to join in the scheme, with the aim to protect consumers’ rights and assist SMEs with maintaining their operations during the COVID-19 crisis. The Shanghai financial regulator said that it would apply “soft regulatory methods” such as information disclosure, product notice, and social supervision. It will also support the local sandbox to connect with other sandboxes around the world.
Although there are similar products widely available on the market, such as instant internet loans issued by banks or internet loan providers, putting a project into the sandbox can allow it to grow freely without falling afoul of existing regulations, supporting the creation of new business models and helping familiarize regulators with them.. However, if a project does not progress fast enough in the sandbox, it may stand little chance of succeeding in the real market.
The British government first developed the concept of the "regulatory sandbox." The UK Financial Conduct Authority (FCA) launched its innovation program in 2014 and has supported more than 700 firms to test their innovation with real customers in the live market under controlled conditions. The access to regulatory expertise through the sandbox has reduced the time-to-market for firms and potentially lowered related costs. According to the FCA, 90% of the firms in the first cohort have continued towards a wider market launch. And at least 40% of firms that completed testing in cohort 1 received investment during or following their sandbox test.
Across ASEAN, regulatory sandboxes are also playing their role in managing risk in fintech innovation. In Singapore, the Monetary Authority of Singapore (MAS) launched its fintech sandbox in 2016 to encourage more fintech experimentation and innovation. One company, Inzsure Pte Ltd, was forbidden to continue serving as an insurance broker after the sandbox test.
The Bank of Thailand launched a regulatory sandbox in early 2017 and encouraged innovative companies to develop services and products. In the Thai model, a startup’s innovations stay in the sandbox for a fixed period of 6 to 12 months. Successful businesses after this period can apply for operating licenses.
Hangzhou is to release its Fintech Sandbox rules this week. The detailed establishment plan will be set by Hangzhou Central Sub-branch of PBC, Zhejiang Bureau of CBIRC, Financial Bureau of Zhejiang Province, and Hangzhou Municipal Bureau of Finance.
Meanwhile, in order to accelerate financial and trade integration of the “Greater Bay Area”, the PBOC announced the release of the “Opinions Concerning Financial Support for the Establishment of the Guangdong-Hong Kong-Macau Greater Bay Area” on May 14. The PBOC produced the Opinions in collaboration with the China Banking and Insurance Regulatory Commission (CBIRC), the China Securities Regulatory Commission (CSRC) and the State Administration of Foreign Exchange (SAFE). The options include plans to promote a cross-border regulatory sandbox.
These trial projects form part of China’s Fintech Development Plan (2019-2021). According to internet bank XWBank (XinWang Bank), the fintech regulatory trials will test the best regulatory methods and provide corresponding space and system guarantees for fintech innovations based on the “regulatory sandbox” innovative regulation model.
At first blush, UBS's bid for a digital bank license in China looks rather ambitious. Beijing doesn't give them out too often. In fact, no foreign lender in China has one. There are just four licensed digital banks in China: Ant Financial's MYBank, Tencent's WeBank, Baidu's AiBank and China Citic Bank. Retail banking has long been the holy grail just out of reach for foreign banks in China. Yet UBS sees a chance to develop a digital-first wealth management business in the country as Beijing prepares legislation that could open up the market to more foreign competition.
Singapore's Grab reckons it can become the first loss-making ride-hailing firm to reinvent itself as a viable digital bank. So confident is Grab in its fintech endeavor that it has applied for a digital full bank license in Singapore with telecoms giant Singtel. If Grab succeeds as a digital bank, it will be an outlier. China's Didi launched a fintech unit in early 2019, but has yet to make any progress in digital banking. Uber too thinks fintech can help it monetize and created a dedicated division about a year ago. Like Didi's, it has gone nowhere yet. And of course, there's Gojek, an Indonesia-based variant of Grab. It too is dabbling in digital banking.
The coronavirus pandemic is a day of reckoning for overvalued, overhyped and overextended fintechs. With a "go big or go home" ethos, these firms are finding that amid the virus-induced downturn they may have nowhere to go. Not so for South Korea's Viva Republica, the country's only fintech unicorn, which has been steadily building a business in its home market for nearly a decade. In fact, Viva Republica's mobile banking platform Toss just broke even in April for the first time in its five-year history. That's impressive given that the South Korean economy is in recession. South Korea's GDP contracted contracted 1.4% year-on-year in the first quarter, its worst performance since the 2008-09 global financial crisis.
Myanmar is gradually opening its banking sector to foreign investment in a bid to boost the economy. International lenders see strong potential in the Southeast Asian nation's underdeveloped financial industry. Myanmar has been one of the region's fastest growing economies in recent years. Thus far, it has not been hit hard by the coronavirus pandemic either. In April, the Central Bank of Myanmar approved seven Asian banks to enter the country: Taiwan's Cathay United Bank and Mega International Commercial Bank, South Korea's Industrial Bank of Korea, KB Kookmin Bank and Korea Development Bank, Bank of China Hong Kong and Siam Commercial Bank.
Indonesia's P2P lending sector has been growing fast for several years now, providing a vital credit channel for cash-strapped consumers and SMEs. In February, online lending increased 225% annually to reach US$6.1 billion, 80% of which was in the P2P segment, according to data compiled by the Indonesian government. Then the coronavirus pandemic hit the country of 267 million, plunging it into a technical recession. While several of the largest P2P lenders are weathering the coronavirus pandemic well, others are not so fortunate. The economic fallout from the virus may end up having a more profound impact on the industry's development than regulatory measures enacted last year to reduce compliance failures and protect consumers.
Xiaomi is the first Chinese smartphone maker to foray into digital banking. The Beijing-based firm secured a digital banking license in Hong Kong last year and began a trial period in late March. It also applied for a digital wholesale bank (DWB) license in Singapore, which allows the holder to provide non-retail banking services.
The Philippines has long been one of the most promising Asian markets for fintechs. The archipelago of more than 7,641 islands has a population of nearly 107 million, second only to Indonesia among Asean countries. Nearly 70% of adults in the Philippines are unbanked, while smartphone penetration in the country is growing steadily. Given the Philippines' geography - with many people living far from retail banks - and development stage, fintech adoption can drive financial inclusion.
Digital banking had been growing steadily in the Philippines prior to the coronavirus outbreak. The pandemic hit the country in early March, resulting in the government implementing a lockdown in the metro Manila area beginning from the middle of that month. Some banks have seen online banking grow more quickly since the restrictions were imposed than previously. Rizal Commercial Banking Corp. (RCBC) posted a 117% increase in new sign-ups for its online banking services from March 17-26 according to fintechnews.sg. RCBC also recorded a 633% increase in the number of times its cardless ATM withdrawal function was used during that period.
Finally after all the discussions about China's central bank digital currency, we're getting close to the actual launch as the platform goes into pilot.
2020 started well for Australia's neobanks. Deposit bases were growing quickly. Some Australian neobanks were on track to reach their deposit goals well ahead of their sales forecasts. That was before the coronavirus became a global pandemic. The virus has spread like wildfire globally in the past few months, sickening 2.5 million people and causing more than 170,000 fatalities. Australia has not become an epicenter of the outbreak, but it has still had to contend with thousands of cases and entered a strict lockdown on March 23. It is highly likely that the Australian economy will soon enter recession for the first time since 1991.
Under this scenario, neobanks may face a tough uphill climb. Grim economic conditions could affect Australians' willingness to switch their primary banking provider or even open a new account with a different provider.
Hong Kong issued eight digital banking licenses more than a year ago, but just one of the new virtual banks is fully operational, ZhongAn Insurance-backed ZA Bank. ZA Bank began operations this month after completing a mandatory trial in March. Three other Hong Kong digital banks recently began trials: Ant Financial's Ant Bank, Xiaomi and AMTD's Airstar Bank and Standard Chartered-backed Mox Bank. The other four Hong Kong digital banks have not announced when they will launch trials.
Initially, it seemed Hong Kong's virtual banks had arrived in the right place and at the right time. The city has plenty of banking options, but innovation among incumbents has been limited in recent years. Retail customers are eager for new digitally forward banking platforms. But last year's protests and the coronavirus outbreak have delivered a punishing blow to Hong Kong's economy. The city fell into recession well before the global economic malaise brought on by the coronavirus. Hong Kong's digital banks have struggled to gain momentum under these circumstances.
Singapore-based Arival Bank is one of the less high-profile applicants for a digital bank license in the city-state. It's easy to get lost in the crowd when you're competing against names like Ant Financial, Xiaomi and ByteDance. Arival Bank, a fintech startup, has applied for the same digital wholesale bank (DWB) license as those Chinese tech giants. In a nutshell, that license allows the holder to serve non-retail clients in Singapore. The Monetary Authority of Singapore (MAS) has said it would issue three DWB licenses.
China's ByteDance, best known as the owner of the popular TikTok video-sharing app, is reportedly now the world's most valuable startup with a US$75 billion valuation or more. That's quite a price tag. Of course, since the valuation is occurring in private markets, it is difficult to assess its accuracy. WeWork was once worth US$47 billion too. Now the company is fighting for its survival.
To be sure, ByteDance is on firmer footing than Adam Neumann's troubled company. In the quarter ended Dec. 2019, TikTok's short-video app revenue increased 310% annually, according to research firm Apptopia. Overall, ByteDance recorded between US$7 billion and US$8.4 billion in revenue in the first half of 2019, data from Reuters show.
The Kakao Talk messenger app's financial arm became the majority shareholder of Baro Investment & Securities in February, taking a 60% stake in the brokerage. This is the type of cooperation between incumbents and fintechs that Korea's Financial Services Commission (FSC) likes to see. Kakao is focusing largely on the underserved retail segment, with an eye on financial inclusion. Kakao could likely become the definitive Korean super app if its fintech business grows large enough.
Kakao is nearly as dominant in Korea as WeChat was in China when it moved into fintech. The Kakao Talk app has about 50 million active users in a country of about 51.5 million. Kakao Pay, which is already one of Korea's largest fintech platforms, has about 30 million registered users. Kakao Bank, one of the first two neobanks launched in Korea, has about 11.3 million customers.
The Financial Action Task Force (FATF ) told the Philippines in October to improve its anti-money laundering regime or else face the possibility of being placed on the organization's blacklist once again, an unenviable position. FATF gave Manila one year to get its house in order. The Philippines does not want to be on that blacklist: Banking sanctions could ensue that would make it harder for Filipino workers to remit money home, while foreign countries could increase due diligence checks on Philippine companies. Philippine banks might also charge higher interest rates as their own costs rise due to the tougher business environment.
“We cannot afford to have the Philippines in the FATF’s list of high risk and non-cooperative jurisdictions. Hence, we should be very strategic in our focus for the next 12 months,” Bangko Sentral ng Pilipinas Governor Benjamin Diokno said last October.
The competition for Singapore digital banking licenses is heating up as yet another fintech throws its hat into the ring. This time, the contender is homegrown fintech MatchMove which is applying for a digital full-bank (DFB) license together with Singapura Finance, the Thai blockchain startup LightNet and the London fintech startup OpenPayd. There are only two DFB licenses up for grabs. They allow licensees to conduct both retail and corporate banking. Digital wholesale bank (DWB) licenses are valid only for non-retail banking.
Yes Bank, one of India's largest private lenders, posted a US$2.5 billion loss in the October-December period as non-performing assets surged to 19% from just 2% a year earlier. To stymie further deterioration, the Reserve Bank of India (RBI) stepped in and took over Yes Bank in February. The bank's founder, billionaire Rana Kapoor, was arrested and accused of money laundering and taking kickbacks. Kapoor denies the charges.
Yes Bank's downfall is a cautionary tale of what can happen when a lender in an ascendant emerging market gets too big too fast, while taking on excessive risk. Yes Bank was the most gung-ho of India's non-public lenders established in the past two decades. Deep-pocketed foreign investors liked its focus on growth, which helped Kapoor and his colleagues ensure a steady flow of funding.