On April 29, Bank Negara Malaysia (BNM) awarded digital banking licenses to five consortia primarily led by large tech firms and incumbent financial institutions. The one exception was a consortium that includes Grab and Singtel and is co-led by Kuok Brothers, a massive conglomerate that focuses on real estate, shipping and agribusiness, among other things.
Indonesia’s digibanking sector continues to be among the busiest in Asia Pacific with a flurry of deals in recent weeks. Key deals include buy now pay later (BNPL) firm FinAccel’s purchase of a majority stake in PT Bank Bisnis Internasional and SME financing platform Funding Societies and used car marketplace Carro investing an undisclosed amount in Bank Index Selindo (Bank Index). Indonesian peer-to-peer lender Amartha is also reportedly in talks to acquire 70% of local bank PT Bank Victoria Syariah.
Digital banks tend to lose money in their early years of operation. It is usually not a question of if, but how much. In the case of Taiwan’s banks, the losses are sufficient to potentially require an increase in capitalization. Line Bank lost almost NT$2.3 billion (US$78.7 million) in about one year of operation while Rakuten Bank lost NT$705 million (US$24.1 million).
One good unicorn deserves another. Just five months after the Philippines minted its first fintech unicorn – and indeed first private company to hit a US$1 billion valuation – it has produced another. While the first unicorn was Alibaba-backed Mynt, operator of the GCash e-wallet, the latest one is Tencent-backed Voyager Innovations, which operates the digital wallet PayMaya.
Ant Group and Globe Telecom-backed Mynt was the Philippines' one and only unicorn until April 12 when Voyager hit the milestone. Mynt reached the status last November after raising US$300 million from global investors including Warburg Pincus and Insight Partners. Mynt made good on its promise to become a “double unicorn” by reaching a US$2 billion valuation. While its long-term prospects in the vastly underbanked Philippines look good, questions remain about Mynt’s business model and the timing of an eventual IPO.
Australia’s casino gaming sector has long had lax money laundering controls. However, historically, Australian banks have borne the brunt of regulatory ire for money laundering breaches. Both Commonwealth Bank of Australia and Westpac have paid massive fines for such violations in recent years. However, with AUSTRAC launching a probe into Crown Melbourne and Crown Perth on March 1 and allegations emerging later in the month that the Star Entertainment Group laundered money in Macau, the casino gaming sector is likely to come under much greater scrutiny.
Southeast Asia is the most dynamic market for the digital economy in the world, especially e-commerce and fintech. It has a population of 655.3 million, which ought to be big enough for most young tech companies. Not Sea Group though. Sea has done well in the region, but like many platform companies, it is getting overly ambitious, overextending itself, and making costly mistakes.
We had thought Bank Negara Malaysia (BNM) would have announced the winners of Malaysia’s five digital banking licenses by now, as the deadline was originally set for the end of March. The BNM has been mum about any reasons for a delay, though the longer deadline could give Capital A (the erstwhile AirAsia), one of the more enthusiastic applicants for a digital banking license, more time to improve its financial condition. With 29 applicants, there will be many more losers than winners in this race.
While Kakao’s fundamentals remain strong, the Korean super app has been struggling of late amid a perfect storm of regulatory travails, investor disappointment and awkward leadership changes. In the past six months, Kakao Bank and Kakao Pay’s shares have both fallen about 29%.
In mid-2021, Revolut became the UK’s most valuable fintech with a valuation of US$33 billion. Though the company lost US$280 million in the 2020 fiscal year, it has continued to spend heavily on expansion efforts in a bid to build a “global financial super app.” Revolut has long had its eye on the Asia-Pacific region and recently moved to strengthen its position in both the India and Australia markets.
Banking has been critical to Revolut’s ascendancy in Europe. However, the company’s origins do not lie in deposit taking and lending. Indeed, Revolut began as a multi-currency travel card offering favorable exchange rates. In India, Revolut is returning to its roots with a focus on cross-border payments, as seen in the company’s recent strategic acquisition of Indian international money transfer firm Arvog Forex for an undisclosed sum. This deal – which follows Revolut’s Indian arm raising US$45.5 million from its UK parent – will allow Revolut to launch a cross-border remittances service for Indian customers in the second half of the year.
The Philippine central bank BSP decided in October 2021 to cap the number of digital bank licenses at six for the next three years. It awarded licenses to Overseas Filipino Bank, Tonik Digital Bank, UNObank, Union Digital Bank, GOtyme and Maya Bank. The BSP wants to see how the arrival of digibanks affects the country’s financial industry before it issues any new licenses. Thus far, the digital lenders appear to be stimulating a huge amount of market activity.
Lax anti-money laundering (AML) controls resulted in Cambodia being placed on FATF’s grey list once again in February 2019. Since then, Cambodia has been trying to improve its AML capabilities but running into one obstacle after another. In Nov. 2021, the United States Department of State cautioned businesses about the risks of doing business in the kingdom in a new report, citing risks for the financial, real estate, casino, and infrastructure sectors.
Indonesia will probably be the first country in Southeast Asia where the reality of digital banking lives up to the hype. The vast archipelago nation has everything online banks need to thrive: a huge market, amenable regulators, sufficient connectivity and eager deep-pocketed investors. Even the complex geography of the country, which is made up of 17,508 islands (6000 of which are inhabited), favors branchless banking.
Thailand is late to Asia’s digital banking party, which formally began back in 2019 when Hong Kong and Singapore approved them – though South Korea had digital banks as early as 2017. Since Asia’s two main financial centers embraced digital banks, Taiwan, the Philippines, Indonesia and Malaysia have followed suit. Until now, middle-income and well-banked (85% of the population has a bank account) Thailand has been a hold-out. A recent announcement by the kingdom’s central bank suggests a change of direction.
Kakao seems to have a case of the super-app blues, notably in its two fintech units. Shares of Kakao Bank and Kakao Pay have fallen 39% and 32% since their respective August and November debuts. Between December and late January, the Kakao group lost roughly US$25 billion in market value.
Taiwan’s first two digital banks launched last year, Rakuten Bank in January and Line Bank in April. A third digital lender, Chunghwa Telecom-backed Next Bank, should have launched much earlier but has been hamstrung by repeated regulatory travails. It will go live in in the first quarter of 2022 at the earliest.
As one of the largest Asian economies to greenlight digital banks, Indonesia is attracting a lot of interest from investors. Digital lenders in Indonesia are not competing for mostly secondary accounts as they are in markets like Hong Kong and Singapore. Instead, they are trying to get in on the ground floor. About 66% of Indonesia’s 275 million people are unbanked.
The Covid-19 pandemic has aggravated the threat digital financial crime poses to Singapore. Since the pandemic began, the city-state has experienced a surge in online loan, e-commerce and phishing scams. Since 2016, scammers have made off with S$965 million, according to a recent investigation by The Straits Times. A record high of S$268.4 billion was taken in 2020 as the pandemic forced most banking and other transactions online. The threat did not recede in 2021 as seen with the OCBC phishing incident.
Over the past few years, Southeast Asia’s traditional banks, which have historically been digital laggards, have become much more relevant. Leveraging their internal fintech capabilities, as well as best of breed external solutions, across the region, traditional banks are gradually becoming much more digitally adept and able to better serve users in everything from contactless payments to wealth management. The benefits are clear - a Fitch Ratings report argues banks with stronger digital transformation are more likely to secure recurring business and hit profit and innovation targets.
Regulatory uncertainty and travel restrictions are forcing many of Hong Kong’s blockchain and crypto companies to shift their operations to more hospitable jurisdictions including finance-focused island-states Singapore, Gibraltar and Cyprus and technologically empowered innovation hubs including Israel, San Francisco and London. Crypto.com, the world’s third-largest spot exchange by 24-hour trading volume, shifted its headquarters last year from Hong Kong to Singapore.
Amid a digital banking craze that is sweeping much of the world, it has become fashionable for big incumbents to claim they are, in fact, digital banks, or at least as digitally adroit as their branchless counterparts. The truth is usually more nuanced. However, in Indonesia, Southeast Asia’s largest economy and most populous country, incumbents really can become digibanks. They just need to be acquired by tech companies or other deep-pocketed investors and rejigged.
Siam Commercial Bank (SCB) is the latest incumbent lender in Asia to wager that digitization is the key to its future. Thailand’s oldest commercial bank and established by royal charter in 1907, SCB is transforming into a financial technology group and moving into the digital assets business. The transformation, which involves the establishment of a “mothership company” called SCBx, will propel the bank “as a regional financial technology conglomerate by 2025,” SCB says on its official website.
In Asia Pacific, digital banking is a tale of two different types of markets. In advanced economies like Hong Kong, Singapore, digital banks often lack a clear value proposition and have limited disruptive capabilities. In developing countries, it is a very different story, and perhaps none more so than the Philippines. The Philippines’ geography, large unbanked population and fast-growing mobile internet connectivity make the country uniquely suited to branchless neobanks.
Indonesia’s peer-to-peer (P2P) lending sector has grown expeditiously in recent years, with significant benefits for financial inclusion in Southeast Asia’s largest economy. Put simply, P2P lenders can serve markets that incumbent lenders cannot. However, risk is also higher in every way because P2P lending lacks a robust regulatory regime. The challenge for Indonesia’s Financial Services Authority (OJK) is striking the right balance between encouraging healthy industry development and preventing malfeasance and excessive borrower delinquency.
Throughout Asia, e-commerce platforms are adding fintech functions as they look to build more comprehensive digital services platforms. Unfortunately for e-commerce platforms in Taiwan, regulations make it very difficult for them to offer banking services. This is by design: Taiwan’s financial regulators want to prevent internet companies from fomenting too much disruption in the financial services sector.
Singapore's largest banks have performed strongly throughout the year, and the third quarter was no exception. In the July to September period, the city-state’s three largest lenders (DBS, OCBC and UOB) once again beat analysts’ forecasts.
As Southeast Asia’s largest economy, Indonesia is among the most important market in the region for the financial services sector. With that in mind, Indonesia’s steady adoption of digital banking represents a huge market opportunity for both fintechs and incumbent banks engaged in digital transformation.
In early October, Toss Bank finally went live in South Korea. The process took several years and hit a few bumps in the road. The country’s third digital lender had to reapply for a digital bank license after its initial application was rejected in May 2019. Regulators gave Toss preliminary approval in December 2019, but nearly two more years were required before it could launch. As it turns out, Toss is entering the market amid the first real fintech crackdown in South Korea, which has important implications for its growth trajectory.
While a certain amount of hype surrounds digital banks, one thing about them is for sure: Their very presence intensifies competition in the market, drawing attention to incumbent complacency. Now that Malaysia’s central bank plans to issue five digital banking licenses in the first quarter of 2022, the country’s traditional banks are moving to head off the challenge – or at least prepare themselves well.
The digitization of life since the coronavirus pandemic began has made life more convenient in many respects. However, there is a downside to all of the digital activity: Criminals are now more active online than ever, and Singapore is no exception. The city-state known for its low crime rate – extremely low when compared with other developed countries – is a grappling with a surge in online crime, with loan and investment scams especially problematic.
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South Korea’s fintech crackdown has delayed Kakao Pay’s IPO and likely will force the company to do some restructuring to meet regulatory requirements. Kakao Pay’s parent company has also felt regulatory ire. Yet Kakao Bank, the digital bank unit of the platform company, has continued to perform well, as have its competitors K bank and Toss.
Given that Indonesia is Southeast Asia’s largest economy, the decisions it makes about digital banking will have a large effect on fintech development in the region. To date, Jakarta has moved cautiously, despite the pandemic-driven transition to online banking that has swept the region. There are signs, however, that Indonesian regulators are keen to get the ball rolling. They will take a somewhat different approach than their counterparts in Singapore, the Philippines and Malaysia though.
All good things come to an end, and sometimes the end is long and drawn out. Such is the state of the latest fintech crackdown in China, which has evolved into an all-out effort to reign in Big Tech/platform companies. The tightening of supervision over firms like Ant Group and Tencent represents a major escalation over prior regulatory campaigns, which focused on cryptocurrency and peer-to-peer (P2P) lending. This time, Beijing is keen to clip the wings of the firms that have come to dominate its once-booming fintech sector. Not all of them are equally affected though.
Just a few months into its digital bank fast-tracking experiment, the Philippines decided to slow things down by limiting the number of digital bank licenses to seven for the next three years, effective September 1. Interest in the digibanking licenses has been strong among both digital upstarts and incumbent lenders, perhaps even stronger than the Philippine central bank (BSP) had expected. The newest winner – and perhaps the last for some time – in the country’s digibanking race is Voyager Innovations’ PayMaya, one of the Philippines’ leading e-wallets.