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Can Southeast Asia’s digital banks challenge the status quo?

The fact that Southeast Asia is underbanked is no secret. 

Seven out of every ten people lack access to basic banking services, according to EY. Credit bureau coverage ranges anywhere from 20-40%. Traditional banks have not been able to solve this problem, given their traditional risk-averse nature. 

However, the new upstarts, known as digital banks, have the potential to change that.  

Why being digital-native makes sense

Digital banks offer the same traditional banking services, just without the physical infrastructure surrounding them. They instead rely on providing these services entirely through mobile and web. 

The idea and logic behind this are simple. Cut down on the unnecessary physical costs, and pass down these savings to customers.

However, there are several factors native to Southeast Asia that make it particularly compelling for these players to adopt a digital-first approach. 

For one, the digitization journey of Southeast Asia has mirrored that of China’s mobile-first approach. Payments went from cash to digital wallets, skipping the debit and credit cards penetration seen in the likes of the States. 

With smartphone penetration increasing year by year and a population that is increasingly transacting on mobile, the opportunity was ripe for banking to be provided digitally. 

Secondly, a major factor why Southeast Asia remains underbanked is the friction associated with the high fees that traditional banks charge. The more these keep piling up, the more they become inaccessible for a price-sensitive Southeast Asian consumer base. 

Digital banks can help offset this with the low-frills cost approach that makes onboarding more frictionless.

Some of these players can just afford to customers that traditional legacy players just will not cater to. These customers are not necessarily “high risk”, but just fall outside the traditional customer profile of banks. There have been successful companies in other markets that have succeeded by starting off catering to folks banks just won’t touch. 

A great case study? Don’t need to look further than India

Bajaj Finance initially focused on doctors and medical professionals that had their own practice. These professionals were considered “self-employed” and prone to unstable cash flows as they did not draw a regular salary each month. Banks did not touch them. Bajaj Finance saw an opportunity and did. This created an initial flywheel and the company has not looked back since. 

Focusing on the underbanked can be immensely lucrative if done right.


Part of a bigger picture    

What has been particularly interesting is who has been entering the space, and in what capacity. Broadly, they can be divided into three buckets, as summarized by Tech in Asia below. 

One, is the pure neobanks. They are independent digital banks with the sole purpose of being the banking partner for retail customers. These are the likes of Aspire and Tonik. 

Second, are the ones that started off as non-bank players but then acquired smaller banks for their digital banking ambitions. One would think, why would these digital upstarts even think about acquiring smaller legacy players that provide few “synergies.” 

The answer is simple. Licenses. 

Full service banking licenses are notoriously hard to come by nowadays, be it in the US or Southeast Asia. As a result, the most attractive asset for these players to acquire these banks is to get access to these licenses. This then allows them to supercharge their broader ambitions. Non-bank players such as Akulaku and Kredivo have gone down this 

Lastly, there have also been a number of adjacent players with “super app” ambitions that have made their foray into this space. 

Gojek now has Bank Jago, Sea has Seabank, and Grab has acquired a digital bank license. Be it in ride hailing, e-commerce or otherwise, fintech remains a key component for all players. This has led them to do much of what the other players have, either acquire a bank like Gojek or Sea, or get a license like Grab. 

Challenger or challenged banks?

While the benefits of digital banks are obvious, they are not without their challenges. The number has to be the trust factor. 

Keeping your money with a third party requires trust. Say what you will about the long wait times at physical bank branches, but their presence alone gives some comfort that their money is secure. 

Especially when some of these banks have been around for several decades. Trust is important, and it takes time to build this up. 

As a result, creating market awareness and instilling this trust amongst consumers is a huge factor for these new players going the digital route. And we know what that translates to. 

Marketing dollars. 

A number of these players have had to spend several million dollars on awareness and customer acquisition. 

And that is not all. In order to attract customers, these banks typically have to offer higher deposit rates far higher than traditional players to lure customers over. 

Given their smaller scale and higher cost of funds (they are typically VC equity funded), that translates to even higher losses in the beginning. 

The end result? Profitability remains a question mark for many of these players. 

The future of banking 

However, like many nascent players, it is unfair to look at a point in time metrics like this in a vacuum. Many of these players have shown positive growth over time even after reducing their burn. While hard to guarantee success for all, it is clear that there is an opportunity for long term viable success in this space. 

While for some in Southeast Asia it is hard to imagine a world where they will never have to visit a bank branch, for others that have become the norm. And as that pie keeps on increasing, the opportunity for these digital banks keeps expanding.  

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