A SEA of Transformation: Southeast Asia’s Digital Banking Landscape
Transformation stems from the need for innovation – to unlock novel ways of generating value. Just like the tides in a sea cause ripples of rising and falling changes through the influence of gravity, global economies experience waves of metamorphosis thanks to the impact of soaring and shifting demands from consumers and businesses in the digital era. The financial industry across the world is going through the pangs of transformation by embracing digitalisation, business model transformation, and product innovation.
The financial industry transformation wave has cascaded its way to the shores of Southeast Asia (SEA) – in the form of the digital banking swell that is triggering the push for economic growth. Home to a population of more than 675 million (of which 60% remain unbanked) and more than 71 million micro, small and medium-sized enterprises (MSMEs), SEA is emerging as a breeding ground for digital-first business models. 100 million additional internet users have joined the digital economy in the last three years since the pandemic broke out in 2019. The current number of internet users in SEA stands at a mighty 460 million, with 20 million new users getting added in 2022 alone.
This is where digital banks came in – to close the gap of inaccessibility to financial services with the changing dynamics of digital readiness of consumers. Incumbents, regulators, digital platforms, and specialised FinTech players are all joining the melting pot of digital financial inclusion initiatives, further acting as catalysts to the digitisation scrabble.
The ASEAN-6 (Singapore, Malaysia, Vietnam, Thailand, Indonesia, and the Philippines) are the flag-bearer economies of digital financial services in the region. Financial regulators in Singapore, Malaysia, the Philippines, and Indonesia have awarded multiple licences to new entrants in the last couple of years. Thailand and Vietnam are in the midst of preparing for their digital banking forays.
In Singapore, Grab remains a household name for providing a broad suite of financial products – from savings to investments. Concurrently, initiatives such as the Green Link Digital Bank launch are also fueling the growth of digitisation. Vietnam’s Cake Bank recently cakewalked its way to attract more than 1.5 million customers in just over a year. Likewise, the Indonesian market has been witnessing an influx of profitability triumphs, with Bank Jago reaching profitability – after six years of losses – in Q3 of 2021, and Bank Neo Commerce’s Neobank accumulating 13.4 million new account openings in just nine months. Tonik Bank is all the hype in the Philippines, breaking national records after reaching $100M in customer deposits in just eight months.
However, the ship has only set sail from here, with the tides of responsibility for reliability, security, and the brewing competition continuing to rock the boat for the industry ahead. With incumbents also redoubling their efforts to meet the challenges amid the digital banking heat, Southeast Asia’s digital ecosystem unfolds many curious questions for the road ahead. In order to derive insights into this ripening market, it is equally important to consider how far the region has progressed and where it stands today.
Swaying through the Scene: SEA’s Digital Licencing Map
The digital economy in SEA has observed several entrances from tech firms, FinTechs, e-commerce firms, and super-apps alike. And while these entrants have had a level playing field in elevating the game for online and offline payments, e-wallets, digital lending, investments and savings products, not all countries have set their regulatory frameworks to grant them licences. Singapore, Malaysia, and the Philippines epitomise regulatory action for the region, having published their respective digital banking guidelines.
The Monetary Authority of Singapore (MAS) announced the opening of two digital full bank licences (DFB) and three digital wholesale bank licences (DWB) in August 2019, of which four licences were awarded to a consortium of Singapore Telecommunications Ltd (Singtel) and Grab Holding Inc (Grab); Sea Limited; Ant Financial; and a consortium of Greenland Financial Holdings Group Co. Ltd, Linklogis Hong Kong Ltd, and Beijing Co-operative Equity Investment Fund Management Co. Ltd.
As for Malaysia, the Bank Negara Malaysia (BNM) picked five consortiums as approved by the Ministry of Finance for digital banking licences. The consortiums of Boost Holdings-RHB Bank; GXS Bank-Kuok Brothers; and Sea Group-YLT fall under the Financial Services Act 2013 (FSA), and consortiums of AEON Credit Service, AEON Financial Service, and MoneyLion; and KAF Investment Bank under the Islamic Financial Services Act 2013 (IFSA).
In the Philippines, the Bangko Sentral ng Pilipinas (BSP) published the Guidelines for the Establishment of Digital Banks, which recognises digital banking institutions that can operate and deploy financial services via fully digital platforms. So far, six licensees have been issued Certificates of Authority (COA) by the central bank, including UnionDigital Bank Inc. (UDB); GoTyme Bank Operation (GTYME); Tonik Digital Bank Inc. (TONDB); Maya Bank Inc. (MAYA); Overseas Filipino Bank Inc. (OFBank); and UNObank Inc. (UBI).
Regulations on digital banking in Indonesia seem to paint a slightly different picture, with the Financial Services Authority (OJK) addressing the growth by issuing regulations on commercial banks, where the commercial banking licencing regime encompasses the digital bank provisions. The country is currently home to seven licenced digital banks: Jenius (Bank BTPN); Bank Jago; MotionBanking (MNC Bank); Bank Aladin; Wokee (Bank KB Bukopin); Digibank (Bank DBS); and TMRW (Bank UOB).
Vietnam and Thailand are still gearing up to commit to a regulatory framework for digital banks. With no defined legalisation of digital banking yet in place, aspiring Vietnamese digital players either join forces with or act as a digital unit of existing licenced traditional banks. Digital banks, such as Timo, TNEX, and Cake – to name a few – have become household names for leveraging technology and targeting the digitally-savvy population to make banking more convenient.
Thailand is pursuing a rather cautious approach in evaluating the digital banking regulatory framework, with the Bank of Thailand (BoT) carefully treading around the transition to the digital realm. While the central bank envisions a technologically advanced, competitive, and sustainable digital economy for society, it also has its fair share of scepticism about certain segments, such as those with digital assets and their role in the payments industry. Nevertheless, BoT seems open to issuing guidelines and seeking feedback for virtual banks in the country through a newly published consultation paper titled “Repositioning Thailand’s financial sector for a sustainable digital economy”.
Harbouring through the Events: Digital Banking Timeline
The convenience of broader digital offerings bundled via a one-destination model led to the growing popularity of digital banks in the SEA region in no time. With online payments becoming the new norm for the digitally-inclined consumers of the region, existing stalwarts made strides towards expanding their current archetypes, while the new entrants joined in the battleground with unique propositions for niche segments such as GenZ and Micro-SMEs and startups.
The digital banking trend arrived in Southeast Asia relatively early. Timo, launched in 2015, remains one of the earliest digital banks to offer a fee-free, easy, and convenient digital banking experience in Vietnam. The following year, Bank BTPN made a Jenius move by launching its digital banking arm and strengthening Indonesia’s position in the regional digital banking map.
Singaporean FinTech as a service platform FlexM also flexed its abilities, with the intent to increase financial inclusion and bank the unbanked through digital banking and e-remittance services. The Union Bank of the Philippines (UBP) ‘captured’ industry attention with the launch of EON, a FinTech that enables customers to log in with a “selfie”. UBP also recently obtained approval from the country’s regulator – Bangko Sentral ng Pilipinas – to establish a wholly-owned digital banking subsidiary known as Union Digital Bank.
Taking big steps towards the digital realm, BigPay, the FinTech arm of airline AirAsia, offered users a digital wallet complete with prepaid debit cards, local and international money transfers, micro-insurance, bill payments and a budgeting tool. Singapore-based FinTech Aspire set quite the aspirations for the ecosystem by providing a one-stop-shop for all digital banking services and financing options for entrepreneurs and emerging businesses in a bid to facilitate access to working capital for SMEs in Southeast Asia. Vietnamese FinTech TNEX took a strategic route for its venture, as it worked closely with Mambu’s cloud-based banking platform and AWS before rolling out its services in phases. Although its primary target segment remains the Gen Z population, it also has a separate app and banking system for SME merchants.
Launched in 2021, Philippines-based digital bank Tonik introduced a unique “Dream Big. Save Bigger” campaign to reach out to the Filipino community. The challenger bank aims to drive financial inclusion in the country by focusing on retail banking products and secured a banking licence in 2020. Similarly, in Vietnam, with an ambition to serve the country's underbanked young and digitally-savvy population, Be Group – the organisation behind Vietnam’s ‘Be’ ride-hailing app – collaborated with VP Bank to introduce Cake, a challenger bank appearing on the interface of the ride-hailing app.
Bank Neo Commerce, the Indonesian digital bank backed by FinTech unicorn Akulaku, remains one of the most downloaded banking apps in Indonesia because of its high-interest rates on deposits. Recognised as one of the world’s best banks in a joint survey by Forbes and Statista, the challenger bank remains true to its motto of “Banking, Above and Beyond” by providing rapid and seamless digital banking services. Digital bank Jago, one of Indonesia’s most valuable publicly traded companies, is the first organisation to benefit from the global partnership between Mambu and Google Cloud, which allows financial institutions in countries like Indonesia, where banking data must remain ‘in the country’, to operate in the cloud. Ride-hailing firm Grab and Singaporean telecommunication giant Singtel also ride in style in the digital bank battle with the launch of their joint venture GXS Bank, almost two years after securing a full digital banking licence from the Monetary Authority of Singapore.
2022 is proving to be quite a significant year for the Singaporean digital banking space, with Ant Group-backed digital wholesale bank ANEXT joining the latest wave of challenger banks in the country. A unique partnership between Standard Chartered Bank and FairPrice Group resulted in the launch of Trust Bank, another new digital player for Singapore, designed to offer a savings account, credit cards, family personal accident insurance and a rewards and loyalty programme integrated with FairPrice Group. Standard Chartered was grabbing headlines again, as it collaborated with Indonesian e-commerce firm Bukalapak to launch BukaTabungan, a digital banking service, in a bid to widen financial inclusion to the country’s underbanked segment.
Surfing through the Digits: Digital Banking Licence Capital Requirements
As much as digital banks make it easier to manage funds, things are not so breezy when it comes to the capital requirement for a digital banking licence. More often than not, digital bank capital requirements are pretty much in line with those of traditional banks. Despite them not having a physical presence, incorporating the technological infrastructure and interface required for seamless, secure delivery of the same banking activities as incumbents certainly demands the big bucks.
For SEA, the licencing capital requirements between the two types of institutions seem to set contrasting expectations. With challenges of attaining scale and competitive pricing already acting as barriers to the road of profitability, the uneven licencing landscape doesn’t add much to help either. Nevertheless, to maintain effective operations and ensure the scalability factor for the future, many ecosystem participants have relied on going down the consortia course. Not only does a consortium help various participants to bring diverse experiences together, but it also allows the uniform distribution of capital. It makes it easier to throw together the parts and parcels that will help put up a successful show in the long term – be it meaningful customer relationships, risk management, compliance, or even analytics for leveraging data.
The regulatory requirements in each country have furthered the ability of innovation bringers to function as a consortium and serve the needs of society. Most of the authorities in the region have kept an open mind in recognising the role digital players play in retaining the country’s position as a leading financial centre. Applicants of the DFB or DWB licence in Singapore, for example, need to meet the prescribed minimum paid-up capital requirement at the onset and the minimum capital funds requirement on an ongoing basis. Generally, regulatory requirements for DFBs are the same as existing full banks, while for DWBs, it is the same as existing wholesale banks. However, digital banks are also subject to risk-based capital adequacy requirements, a ~$35M (SGD 50M) aggregate deposit book cap, and a $53K individual depositor cap at the entry point.
In Malaysia, Bank Negara Malaysia’s regulatory requirements view digital banks in two phases: one during the foundational phase and the other after it. The ‘foundation’ phase is a period of a minimum of three years up to a maximum of five years from the date the licenced digital bank or licenced Islamic digital bank commences its business. This comes with the overhead of a ~$634M (RM 3B) cap on asset size for digital banks during the foundational phase and the condition to address their cybersecurity and tech deployments. Such a cautious approach set by the BNM makes it unlikely for digital disruptors to be major competitors to traditional banks. Moreover, already ingrained local banks, thanks to their intimidating market shares, can easily navigate their way in addressing competition. Indonesia, too, has its own share of constraints when it comes to the ownership of a digital bank in the country.
All in all, for successful providers to make value propositions in the market, the following anchors need to be secured:
Building a portfolio that prioritises revenue-generating products,
Accommodating best-in-class platforms that make it easy to access needed resources, and
Focusing on quick scalability while maintaining cost-to-income ratios.
Pooling in the Shares: Ownership in the Digital Banks
As discussed previously, one of the winning strategies that “neo” players in SEA considered was the formation of consortiums, much in distinction to the vertical model adapted by the Western markets. The idea of having various stakeholders certainly presents its own pros and cons. Diverse financial and non-financial service providers combine cutting-edge technological infrastructure, experienced talent, and a well-funded backbone that works on a singular vision. At the same time, it also means ensuring transparent decision-making on a precise, clear goal that aligns with all the participants.
Most of the leading brands in SEA run on the same philosophy, where a cohesive team of shareholders add equal strategic and operational resources to run the endeavour. Around 50% of the SEA digital banks, as listed above, have consortium-based ownership, with diverse shareholders ranging from FinTechs, BigTechs, incumbent banks, and telecommunication service providers, amongst others. Indonesia’s LINE Bank, being backed by incumbent banks (CTBC Bank, Union Bank of Taiwan, Standard Chartered Bank, Taipei Bank), FinTechs (LINE Financials), and even telecom players (Taiwan Mobile Co., Far EasTone Telecommunications Co) is what helps it in the creation of new and revolutionary financial experiences. Here, LINE Financials takes the lead as the main shareholder with a 49.9% stake in the firm. Similarly, Bank Jago gets most of its shares from IT firm PT Metamorfosis Ekosistem Indonesia (37.65%), with supporting contributions from financial services providers PT Dompet Karya Anak Bangsa (22.16%) and Wealth Track Technology Limited (13.35%), and Masyarakat Umum (26.84%).
GXS Bank, the digital banking syndicate of multinational technology company and super-app Grab and Singaporean telecommunications conglomerate Singtel, receives 60% of its shares from the former, while the rest 40% comes from the latter. Along similar lines is the Philippines’ Tonik Bank, where TONIK Financial Pte. Ltd. takes the crown for being its main shareholder with a 60% stake. On the other hand, Singapore’s BigPay, a subsidiary of airasia Digital, happens to have it as its primary shareholder as well (83.3%).
Several digital banks also fly solo, having the majority of their stake coming from a singular source. Both Anext Bank and Indonesia-based Akulaku are prime examples of this, where Ant Global and Ant Finance, respectively, act as individual shareholders running the show for the digital banks.
Forming meaningful synergies between respected market leaders and recognised trailblazers, hence, helps various such digital contenders to exhibit a stable business model and attract regulatory engagement. By embedding financial services into everyday consumer lives through numerous touchpoints, thriving digital ecosystems in SEA present another wave that is growing multifold: the wave of a promising future.
A Dynamic Outlook for Digital Banks in SEA
In the sea of digital banking, where a flux of new players keeps the competition high, only those will stay afloat who focus on differentiating themselves from what is already available in the market. For Southeast Asia, each country provides its own set of demands through which digital banks can customise their offerings to serve the underserved niche segments. Digital payments and digital bank accounts have been key offerings for digital banks to get started. But the wider and larger opportunity remains on the credit side to truly deliver on the discretionary needs of an aspirational population. Indonesia, Vietnam, and the Philippines, in particular, present several tailwinds for the rapid progress of digital banks, as ~30% of the people in these economies are aged 15-35, and over 50% of the population is underbanked/unbanked.
With rapid digital adoption in adjacent sectors such as e-commerce, transport and food, online travel, and online media, the SEA economies also seem ripe for embedded finance propositions. The consortium-owned digital banks would be in a favourable position to rapidly bring embedded finance offerings to market and leverage cross-industry dynamics to unlock cross-sell/up-sell opportunities and build stickiness with the customers.
And finally, the MSME segment presents a lucrative component for digital banks to focus on, with SEA economies being home to ~71 million small businesses. These merchants are critical to the development and digital adoption of the economy and society, as ~40% of SEA’s GDP is driven by MSME activities while employing a massive 67% of the working population. We have looked at the opportunity that MSME Digital Banking presents for the SEA region in another report by teaming up with BANKINGSTACK.
Amidst all these opportunities, there are significant headwinds also in the form of uncertainties concerning rising interest rates, high inflation trends, and a slowdown in startup funding activities. Digital banks that can quickly graduate to a cost-efficient operating model, build sticky relationships with customers, and reach sustainable unit economics are expected to make a beachhead and truly reap the rewards of the dynamics that the SEA economies present.