Southeast Asia’s Digital Banking Race

Most of us have probably had experience with digital banks. From setting up an account online to allow you to exchange currencies in a seamless way, digital banks, by responding to new customers’ expectations and needs, have attracted a growing number of users in the last few years. But it is only during the pandemic, with local branches closing due to the lockdown measures imposed by governments all around the world, and consumers turning to contactless and cashless transactions that the industry really took off.

But why focusing on Southeast Asia? What makes the region the perfect ground for this banking revolution is a combination of several different factors. First, is the sizeable portion of the population being unbanked or with insufficient access to credit. To better get a sense of the magnitude of financial exclusion in the region, in ASEAN there are about 600 million adults without a bank account, representing 47 percent of the adult population, and just one-third of SMEs with access to credit. This, combined with the region’s expanding economic wealth, accelerating digital adoption, and increasing connectivity, demonstrated by the extensive access to cheap broadband and the high mobile penetration, makes the region’s digital banking industry estimated to grow from the current $11B to $60B in 2025, makes digital banking services in the region a highly attractive opportunity for established institutions and emerging tech companies alike.

From a joined report by Temasek, Bain&Company, and Google in October 2019, it emerges that more than 70% of SME merchants in Southeast Asia accept only cash, with 78% of respondents being interested in using an integrated payment provider that also offers analytics and lendings.

Regulators across Southeast Asia have shown a marked interest in encouraging the growth of digital banks. The approach to digital bank licensing varies across markets, but on the whole financial supervisors have taken the position that digital banks have the potential to promote better outcomes for customers by extending banking services to unserved and underserved populations, spurring innovation and increasing competition.

Malaysia released its virtual banking licensing framework in December 2019 and is expected to accept applications this year. The Philippines has also indicated it will accept applications for online-only banks, while Thailand is reportedly studying the possibility of licenses for digital banks. However, authorities in Indonesia, seeking to encourage consolidation of a fragmented banking sector, are prompting smaller banks to either merge or be acquired by larger institutions or tech companies entering the market, and are not expected to issue any further licenses. At the forefront, Singapore will be issuing up to 5 digital banking licenses to fintech companies.

Of the 5 licenses being issued by Singapore authorities, one has gone to a partnership of Grab, which offers ride-hailing services, food delivery, and also digital payments, and telco conglomerate SingTel. The consortium aims to launch the digital bank in early 2022 focusing on providing transparent and convenient financial services to Young PMETs, gig workers, and micro-SMEs. Even though the consortium is creating a full digital bank from scratch, the two companies have extensive experience in having already built a successful regional fintech ecosystem in highly regulated environments, offering digital financial services across payments, insurance, lending, and investing. As said by Mr. Wong, CEO of the Grab-Singtel digital banking consortium: “We will redefine banking by building a sustainable business focused on out-serving customers with personalized, accessible, and trusted financial products. Customers from multiple segments, including the underserved and underbanked, will be able to have their financial needs met seamlessly, powered by our next-generation cloud technology and data platform.”

Another player to look after in the race that has also received the digital banking license by the Monetary Authority of Singapore is Tencent-backed Sea group, which includes e-commerce platform Shopee, gaming division Garena, and existing fintech division SeaMoney. While not exactly a super app like Grab, Sea can claim to be a leader in digital services such as gaming and e-commerce, that tend to have higher retention rates and also gives the group the opportunity to build an ecosystem encompassing different services, which can be used as a key differentiator to rapidly scale as a digital bank. Last January, the group has also announced the acquisition of Indonesian lender Bank Kesejahteraan Ekonomi (Bank BKE), demonstrating the regional ambition the group has for its digital banking division.

SeaMoney’s offerings already include e-wallet services, payments processing, and microlending, among others. These are available in various markets in Southeast Asia.

Despite new entrants being a real threat to incumbent traditional banks thanks to their lean and fast approach, access to tech talent, and already established activities across the region, reality shows that incumbents established banks, not only can rely on a vast amount of existing users and trust amongst customers, but also boast strong digital capabilities, as demonstrated by Singaporean bank DBS. Currently the market leader in digital banking in the region, DBS, counts over 7,500 engineers in its workforce and has over the past years refocused its effort to tap into this new exploding market, and moving towards a leaner, tech-oriented approach.

We act less like a bank and more like a tech company

Piyush Gupta, CEO DBS Bank

The efforts resulted in the launch of Digibank, DBS’s fully digital product for banking, that gives users access to an artificial intelligence (AI)-powered virtual assistant, a budget optimizer that helps customers do their budgeting, track expenses, and analyze purchasing trends and the payment service - PayLah!. Digibank, by leveraging sophisticated data analytics capabilities, now also allows customers to get loans approved within 60 seconds. DBS is also leveraging partnerships with tech companies to stay ahead of the competition In November 2018, the bank teamed up with super-app Gojek to cooperate in a combined regional expansion effort.

Not surprisingly, the high growth prospects of the market are also appealing to companies overseas. UK’s fully digital bank Revolut entered Southeast Asia in October 2019, with Singapore as its regional headquarters. Like Gojek and Grab, Revolut is looking to team up with incumbents in the industry to boost its growth prospects. In September, Revolut announced a partnership with Visa to support its international expansion efforts, with Southeast Asia as one focus.

“We do see Singapore as a hub for the region. So surrounding Singapore, 6 million people, but of course, surrounding us could be 600 million people [potential Revolut customers in Southeast Asia],” James Shanahan, CEO of Revolut Singapore.

At this point, it is still unclear who will dominate Southeast Asia’s ascendant digital-banking market, but one thing is certain: a regional approach focused on under-served sectors of the market and developing truly innovative products, services, and integrations that are useful and targeted specifically will be key to success.