Synpulse on Asia Pacific's evolving digital banking landscape

Asia’s digital banking scene has seen rapid growth in recent years and is set to continue its growth in the months to come. Yves Roesti, Sean Huang, Xuna Shao and Joshua Choy from financial services consulting firm Synpulse reflect on the state of the market, and why digital banks have been successful in challenging the established order.

Digital banks, also known as neobanks, challenger banks or virtual banks, all have in common are they often started with no physical branches and leveraged technology to differentiate their offerings in the banking sphere.

The concept of digital banks was first developed in Europe where it radically challenged and transformed the banking landscape. At present, digital banks have garnered a strong foothold in the United States and Europe, but there is still a long way to go in the Asia Pacific region.

Japan Net Bank was the first digital bank to launch in Asia. Sakura Bank, presently known as Sumitomo Mitsui Banking Corporation, saw the opportunity for a standard payment method for Japan’s growing internet users, created a joint venture in 2000 to form the digital bank and offer small B2C and C2C transaction settlement. Though the digital bank began to offer a larger variety of products, the trend of digital banking only began to take off when China came into the picture.

In 2015, the China Banking Regulatory Commission issued its first virtual banking licenses to Tencent’s WeBank and Alibaba’s MyBank. Tencent was known for their popular messaging app Wechat and Alibaba was famous for their global e-commerce platform. When news broke out that a social media app and an e-commerce site were challenging the traditional banking players by creating digital banks, it was met with excitement from many consumers and corporations.

Shortly after, the Hong Kong Monetary Authority handed out eight virtual bank licences with the intention to catch up with Mainland China and Japan in disrupting bricks-and-mortar banking. This led to a wave of digital banks being set up across Asia Pacific. Examples of these newly formed digital banks include K-bank in South Korea and ZA Bank in Hong Kong.

Singapore

Singapore is not one to be left behind from the digital banking wave. As a nation, Singapore has been radicalised and transformed by technology and recently the Singapore government has taken the initiative to re-position itself as a technological hub through direct investment into technology and subsidies to incentivise innovators. Out of all the initiatives that the Singapore government has put forth, the most recent one is the Digital Banking License by the Monetary Authority of Singapore.

Applications for the Digital Banking Licenses have meanwhile been submitted, with the results due to be released later this year. A first peek at the list of local and international consortiums who applied for the license shows that notably, many potential participants come from outside the traditional banking space. These players are seeking to successfully apply their expertise in technology and consumer knowledge to the banking industry.

Elsewhere in the region, the digital banking trend is also picking up, with countries such as Malaysia and Thailand staring to release their own digital banking licenses as well.

Differentiation?

The key question for all digital banks is: how can they differentiate themselves from the large and financially powerful incumbent banks? According to our analysis of differences in business and operating models, it comes down to three main factors:

Differentiated offerings

Differentiated offerings are a key factor for digital banks to draw customers from the existing market. Digital banks are expected to distinguish themselves from traditional banks by offering better rates and removing minimum deposit requirements given their lower operational costs.

Additionally, digital banks can differentiate themselves by offering technologically advanced products such as robo-advisory funds to investors to increase the attractiveness of their offerings.

Target segments

When it comes to the target segments, digital banks are likely to focus on unique segments which are underserved by the traditional banks. One example is the segment for SMEs. Through the use of technological tools such as AI-based credit scoring models, digital banks can easily underwrite small and medium enterprises or individuals that have insufficient information or assets.

With traditional banks not very focused on the SME sectors, it would be a strategic opportunity for the digital banks to create a niche for themselves.

Customer experience

Developing a seamless and integrated customer experience is nowadays key in attracting customers and retaining market shares. Onboarding new clients is a good example of where customer experience can be significantly ramped up. With today’s technologies such as facial recognition and optional character recognition, it is possible to open an account in less than 5 minute, compared to a process which previously could take up to weeks.