The banking system in Singapore has been under greater scrutiny ever since a few banks operating in the city were ensnared in Malaysia’s massive 1MDB scandal. There is an inherent contradiction that all financial hubs face when they try to attract the ultra-wealthy and their assets, but also want to ensure the highest degree of compliance. Inevitably, some clients have something to hide. When there is possible unusual activity, banks have to make the call whether it is necessary to flag the transactions and report them. Thus it is not surprising that Singapore said in a new report that its banking sector poses the highest money laundering risks following a scandal involving more than S$3 billion (US$2.2 billion) in illicit assets.
It is hard to believe that more than five years have passed since Hong Kong first approved virtual banks. The disruption that had been forecast has not come to pass and we wonder how much longer some of the online lenders will endure. Those backed by large public companies – which have to explain to investors why they are supporting unprofitable endeavors – could be the first to throw in the towel. That said, Hong Kong-based WeLab Bank, which is backed by billionaire Li Ka-shing, has seemingly defied the odds thus far with its performance. It says it is on a clear path to profitability and is expanding strategically in Southeast Asia.
Not so long ago, when Hong Kong was struggling with the impact of civil unrest and strict Covid-19 controls, other cities in Asia sensed an opportunity to bolster their respective financial center credentials. Not Singapore, which is already an established Asian financial center – and has grown in recent years – but cities such as Tokyo and Taipei.
Indonesia has no shortage of digital banks, but it is also a huge market with a significant population that has limited access to formal financial services. It is a key market for Southeast Asian platform companies as well. While Grab has digital banking licenses for Singapore and Malaysia, Indonesia is where it has the best opportunity to prove the skeptics wrong.
Singapore has become one of Asia’s most important green finance centers, which is well exemplified by its third sale of green bonds in late May. The S$6 billion order book for the city-state’s third sale of green bonds was 2.45 times the amount offered to institutional investors. In addition, the offering of S$2.5 billion in bonds reached the maximum of the S$2.1 billion to S$2.5 billion range provided by the Monetary Authority of Singapore (MAS). The Singapore government has said there there is a pipeline of up to S$35 billion in sovereign and public-sector green bonds that will be issued by 2030.
Across Asia Pacific, criminals are using cryptocurrency to fund increasingly nefarious schemes. While early crime involving digital assets tended to target crypto exchanges themselves, the most infamous being the 880,000 Bitcoin stolen from Japan’s Mt. Gox between 2011 and 2014 now worth $45 billion – today digital assets are linked to money laundering, large-scale scams and funding of illegal arms programs. Crypto proponents usually insist that proper regulation can do much to mitigate this problem. Though regulation can boost investor protection and establish rules of the road, we believe that decentralized virtual currencies’ inherent nature means that potential for abuse will remain high. Regulators in some major jurisdictions in the region have come to similar conclusions and are acting accordingly.
With three of Asia’s most successful digital banks, South Korea is now considering adding a fourth. Though the country was well banked before the arrival of the digital challengers, Kakao Bank, K Bank and Toss Bank have all found a way to build market share rapidly without burning an inordinate amount of cash. The former two are profitable, while the latter should reach that milestone soon. Consumer interest in digital banks in Korea is such that the market can very likely support a fourth online lender.
The Philippines is one of Asia’s most promising digital banking markets thanks to a favorable combination of underbanked consumers, island geography that limits the footprint of physical bank branches and incumbents with average digital capabilities. That said, it will take time for online banks to be profitable, and in March, the Philippine central bank (BSP) said that just two of the official digital lenders – which it did not identify – are profitable and it may take five to seven years before the others reach that milestone. Investors, however, appear to be willing to play the long game in this market segment.
In the past six months, Indian regulators have been active tightening regulation of fintechs in different industry segments. The most notable action came earlier this year with the effective shutdown of Paytm Payments Bank. It is hard to say exactly why the Reserve Bank of India (RBI) is taking a harder line – but we suspect it may have something to do with the industry reaching a certain stage of development and the RBI believing that once they have been allowed enough space to grow, digital finance companies should be bound by similar constraints as incumbent financial institutions. One of the areas where they are focusing their attention is peer-to-peer (P2P) lending.
South Korea’s digital banks have long been outliers, with market leader Kakao Bank one of the most successful online lenders in Asia. Though Kakao Bank’s share price has fallen about 65% since its November 2021 IPO, that reflects macroeconomic conditions and investors adjusting overly high expectations for the company more than any underlying issues with its business model or earnings. To that end, in the March quarter Kakao Bank posted a record profit of 111.2 billion won (US$81.44 million), up 9% year-on-year.
In late 2019 as the 20-year anniversary of Macau’s return to China was celebrated, there was speculation that Beijing sought to elevate the status of the former Portuguese crown colony from a mere gambling hub to an offshore financial center. While there was never an intention to replace Hong Kong, Beijing seemed to be considering transforming Macau into a secondary offshore financial center for China.
South Korea’s digital banks are the exception to a rule in East Asia’s advanced economies: They are extremely successful by multiple metrics instead of redundant. While the relative weak digital offerings of incumbent banks in Korea helps explain the phenomenon, it is not the main reason. We believe that South Korea’s three digital banks – Kakao Bank, K Bank and Toss Bank – have been able to develop truly competitive products, in contrast to their counterparts in the other Asian tiger economies of Hong Kong, Singapore and Taiwan, and gradually have made themselves indispensable to many Korean retail customers.
Digital banks have sprung up across Asia in recent years. In many cases, they are having little impact on the overall banking market. Affluent societies like Singapore, Hong Kong, Japan and Taiwan are not lacking banking options. Even middle-income countries like Malaysia and Thailand have limited financial inclusion needs.
In the fourth quarter of 2023, China emerged as the top green bond market globally. Sales of internationally aligned green bonds in China reached US$21.83 billion in the final three months of 2023, up 131% on a quarterly basis, according to the Climate Bonds Initiative data. This was well ahead of the No. 2 market, the U.S., which had green bond sales of US$12.87 billion and No. 3 Germany, which recorded sales of US$7.14 billion.
The tumult in Indonesia’s P2P lending industry should not come as a surprise. It is exceedingly difficult to both regulate this industry fairly and allow it to maximize financial inclusion benefits. Strict regulation such as is practiced in Taiwan and South Korea (though Seoul may make some changes soon) minimizes malfeasance but also limits the usefulness of the platforms. Amid the current meltdown of P2P lending platforms, which is hitting retail investors hard, the sector faces an inflection point in Indonesia.
With Thailand finally getting its digital banking application process underway, it is worth taking a closer look at the prospective applicants. As expected, startups are nowhere to be found. Instead, the likely applicants – and winners – are a mix of Thailand’s ultra-wealthy tycoons, prominent incumbent banks and Asian tech giants.
Throughout Asia, most countries have introduced digital banks in some form, either to increase market competition, boost financial inclusion or both. Thailand is an exception. It has approached digital banking with a marked lack of urgency, with the Bank of Thailand (BoT) mulling the idea for several years before in Jan. 2023 stating that it would allow digital banks by 2025. In a March 5 announcement, the Kingdom’s Finance Ministry said that Thailand will accept applications for virtual banks within the next six months with the goal of supporting people with no or limited access to financial services.
Cybersecurity has always been a crucial aspect of operations for financial institutions and technology providers alike. However, the intensifying digitization of financial services, combined with increasing computational power and the ongoing shift of financial activities online, is amplifying cybersecurity’s importance. With the annual cost of cybercrime soaring worldwide, financial institutions and market participants across Asia Pacific must reevaluate and reinforce their cybersecurity.
Singapore has been battling a surge in financial crime since the coronavirus pandemic, with 2023 being notable as the city-state dealt with its largest ever money laundering case. The investigation is ongoing and thus far authorities have seized more than US$2.2 billion. However, more mundane types of financial crime continue to be a challenge for Singapore, notably online scams. In 2023, scams reported in Singapore rose roughly 47% to 46,563, the highest amount since the police began tracking this type of crime in 2016.
Japanese e-commerce giant Rakuten has struggled in recent years amid intensifying competition in its domestic market and high costs linked to its decision to move into mobile communications. However, digital financial services is a bright spot for Japan’s largest platform company and Rakuten Bank’s April 2023 IPO – which raised US$624 million – was Japan’s largest market debut since 2018 when SoftBank’s telecoms unit raised US$23 billion. The stock has gained more than 36% since then and is currently trading at 2,627 yen (US$17.49).
As a core fintech service, payments are often tougher to monetize than higher-margin segments like lending, and this helps to explain why Kakao’s digital banking unit continues to outperform its payments arm. While Kakao Bank had yet another record year in 2023, the South Korea tech juggernaut’s payments swung to a loss. Kakao Pay has been trying to follow the Ant Group (a key Kakao Pay investor) formula which worked so well for the Chinese company – operating payments and digibanking as two distinct businesses. But we wonder if this model will work for the Korean company in the long run.
Of the five digital banks in Singapore, just three are active in the retail market, and with good reason. The city-state’s population has an exceedingly low number of financially excluded people, with Allianz Global Investment estimating that 98% of Singaporeans aged 25 and up have a bank account. That is not to say there are not opportunities for digital banks, but it depends on how one defines “underbanked.”
As recently as October 2023, Indonesia’s peer-to-peer (P2P) lending company Investree was riding high. It was then that the company, which focuses on the B2B segment, announced it had raised $231 million in a Series D funding round led by Qatar’s JTA International Holding which also included participation from Japan’s SBI Holdings. The Series D round suggested high investor confidence in Investree, which had previously raised $23.5 million in a March 2020 Series C round led by MUFG Innovation Partners and Bank Rakyat Indonesia Ventures. Yet the events of recent weeks suggest all is not well at Investree – and that the viability of the company’s business model is shaky.
Despite the Philippines’ large unbanked population and geography that favors branchless banking, its digital lenders have yet to significantly disrupt the market. In fact, as it stands now, their market share appears to be a drop in the bucket.
South Korea’s K Bank has been thinking about going public for a while now. Its business has grown briskly since it restarted normal operations in mid-2021. Market conditions, however, have been suboptimal and the digital lender undoubtedly has observed how its rival Kakao Bank has yet to live up to lofty investor expectations. Though Kakao’s stock has recovered somewhat over the past year, rising about 4.5%, it is still down almost 58% from its market debut in November 2021. K Bank wants to avoid such a scenario.
Southeast Asia’s most exciting digital banking market at the moment also happens to be the region’s largest economy. No other country in the region offers the same breadth of digital banking opportunities as Indonesia. Much of the market development to date has involved strategic tie-ups between the country’s powerful conglomerates and Asian platform companies. However, incumbent banks unto themselves are increasingly emerging as a force to be reckoned with in the burgeoning digital banking market.
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.
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).
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.
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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.
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.
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.
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.