Southeast Asia’s banking industry may be opening up to non-traditional players, but there is still a long way to go before the so-called neobanks can usher in a regional banking revolution.
The region’s financial regulators have started to welcome all-digital banks, or neobanks as some would call them. The Philippines kicked off the party in December when the local subsidiary of Singapore-based Tonik Financial received approval to provide digital banking services from the Bangko Sentral ng Pilipinas (BSP). Tonik is expected to be the first fully licensed neobank in the region when it starts offering retail banking services in June.
Also in December, the Monetary Authority of Singapore (MAS) received 21 applications for five digital banking licences. Bank Negara Malaysia (BNM) will take applications for five licences later this year.
Thailand could be the fourth market to open access. A senior Bank of Thailand officer told the Bangkok Post in January that the central bank is studying neobank licensing to keep pace with evolving consumer preferences.
The theory goes that cloud-native neobanks should be more efficient and effective than traditional banks since they are free from legacy systems and human resource redundancy, and can harness technologies like machine learning and artificial intelligence.
But whether the neobanks can fully realise that potential is a very different matter, and a number of significant hurdles lay before them.
High price to play
Capital requirements imposed on neobanks can ironically stifle innovation.
In Singapore, where most neobanks in the region are hoping to establish headquarters, MAS has set a minimum paid-up capital of S$15 million ($11 million) for the foundational phase for would-be digital banks. The requirement will escalate to S$1.5 billion as startups transition to full digital bank operations, which is not a trivial amount by any measure.
Apart from setting a high barrier for entry, the capital requirement could also potentially prolong the transition from the foundation period to full digital banking operations. Even MAS expects the transition to take three to five years.
Zennon Kapron, founder and director of fintech market research and consulting firm KapronAsia, described the high operating requirements as “quite a significant hurdle” to the rise of neobanks in Singapore. “Once the digital banks are up and running, customer acquisition costs will likely be high as well as they compete with traditional providers,” he added.
Malaysia with its larger population – 32 million to Singapore’s 5.2 million – has a less burdensome capital requirement of at least 300 million ringgit ($74 million). Although it is only a fraction of the minimum in Singapore, it is still much higher than the €5 million ($5.5 million) required in Lithuania, which practically grants access to nearly 500 million consumers within the European Union.
However, these are early days yet. The capital requirement in the Philippines is still unclear, with Tonik’s licence limited to being a rural bank with plans for a formal framework in the future. Other Southeast Asian countries have not even developed guidelines.
One reason for Singapore’s popularity is the notion that the country, with its robust regulatory framework and developed financial and fintech ecosystem, can serve as a springboard to penetrate the region.
Southeast Asia is an amalgamation of heterogeneous markets, and cross-border scaling is not as straightforward as in Europe, for instance, where players benefit from the European Economic Area (EEA).
Revolut, which is based in London, managed to roughly double its customer base to more than 7 million only a year after it received approval to provide full banking services from the European Central Bank (ECB) in December 2018. Berlin-based N26 and another London-based firm, Monzo, have recorded more than 4 million customers so far.
The economic integration in Southeast Asia under the ASEAN Economic Community (AEC) does not include a streamlining of investment regulations and procedures across member countries. Without a single institution to set regional banking guidelines such as the ECB, Southeast Asia’s regulatory environment is fragmented, making regional expansion a complex, costly and time-consuming affair.
Claude Spiese, co-founder and former CEO of Timo, a digital bank services provider under Vietnam’s VPBank, said Singapore was a great hub for a Southeast Asia-wide bank said he was a “believer in localisation of the offering, management, and especially, market entry strategy” for each country.
“It is not only the regulations that differ in each country, but also the market environment, infrastructure, and customer preferences,” he added.
Time may also be running out for newcomers to effect meaningful change in the industry.
Except for Malaysia, the Philippines, Singapore and Thailand, it remains unclear when the rest of Southeast Asia will open access to neobanks. Regulators in the large markets of Indonesia and Vietnam appear to be content with focusing on advancing the digital services of incumbent banks, at least for now.
Those circumstances make it easier for the incumbents to strengthen their grip. They have more time to upgrade legacy systems and improve their digital banking offerings. Some might set up separate brands to gain digital banking market share — emulating the success of Jenius by Indonesia’s BTPN and Timo by Vietnam’s VPBank.
Others might acquire control of small banks and refocus them as digital banks, finding it cheaper than obtaining a neobank licence from either MAS in Singapore or Malaysia’s BNM. Consider that Bank BCA, Indonesia’s largest bank by market capitalisation, only had to shell out $70 million to fully acquire small-sized lender Bank Royal in October.
In December, a group of investors acquired a 51 per cent stake in Bank Artos for a modest $17.5 million. That group included Patrick Sugito Walujo, co-founder of private equity firm Northstar Group, which is a backer of Indonesian super app Gojek. Walujo has since had to deny speculation that Bank Artos is intended to be Gojek’s digital banking arm.
Anand Subbaraman, who oversees the retail banking portfolio at Finastra, the world’s third-largest fintech solution provider, estimates that neobanks “have a three-year window to gain market share, create a very differentiated product and grab it.”
As a technology partner to Southeast Asia’s top banks, Finastra has a direct view of the development of banking infrastructure in the region.
Subbaraman believes that in the short term neobanks offer much better cost-to-income ratio, but in the medium to long run, “smart and bigger banks would do very well,” thanks to their entrenched customer base.
Super app hype
Well-funded unicorns such as super-app players Grab and Gojek are naturally expected to have what it takes to challenge the traditional banks.
Size, however, may hinder disruption, say the founders of some fintech companies.
“The super-apps have a massive installed base, which is their advantage. And they have been making very significant progress in the payments space. However, leveraging this presence and their brands into more value-added retail banking services such as lending and especially, savings will be a big challenge for them,” said Tonik founder and CEO Greg Krasnov.
Krasnov argued that the super apps are still far from being household names or meaningful players in the consumer lending space after trying for three years.
“I think the challenge for them to enter savings and asset management space will be even higher since their typical demographic is not a natural one for these segments,” he said.
Caecilia Chu, co-founder and CEO of multi-currency wallet YouTrip, says a universal banking model will not work for neobanks in Southeast Asia. She reasons that as consumers become more discerning, they will start to demand more personalised financial services. This is why YouTrip decided to provide tailored solutions that focused on solving the travel payment pains of travellers, she added.
“There are enough opportunities in the Southeast Asia markets to go around various players and I would expect a rise of specialised players serving the different segments of the consumer market,” she said.
Aspire co-founder and CEO Andrea Baronchelli said that in an age where consumers are spoiled by a long list of different services and software applications, businesses will lose customers if they treat everyone the same.
“[The super-apps] could potentially run into the same problem as banks given the size they have reached. The need for big revenues in order to justify project prioritisation leaves lots of niche markets that are smaller by nature and unserved,” he said.
We reached to Grab for comment but the company said it was unable to respond to queries by press time.
Southeast Asia could use a shakeup in banking.
A recent study by Bain & Company, Google and Temasek found that only 14 per cent of industry experts believed that established financial institutions were well prepared for digital innovation and only 44 per cent believed regulators would support financial services innovation. These findings are rather bleak when 70 per cent of consumers in the region are still unbanked or underbanked.
Regulatory frameworks that overly favour incumbents and a handful of large players may not bring the change that the region needs.