Digital banks are coming to Southeast Asia

In Hong Kong, these so-called ‘challenger banks’ are already a step ahead.

Photo by Simon Zhu on Unsplash

This entry is part of KrASIA’s collaboration with The Frontier of Fintech roadshow, hosted by InvestHK, FinTechHK, KrAsia and powered by StartupX.

Five years ago, the idea of parking your money with a bank that has no physical branch whatsoever would have been considered crazy—but that’s changing as consumers throughout Asia Pacific are becoming familiar with digital banking.

Since 2014, digital banking penetration in Asia’s emerging markets has on average increased 1.5 to 3-fold, coinciding with the region’s growing number of young, affluent, smartphone-first population.

The wave of innovation that’s sweeping through the banking sector is profound. It’s more than just traditional financial institutions launching digital versions of their products. Asia’s banking world is in the midst of a subtle, but impactful, revolution thanks to the emergence of “virtual”, or completely branchless banks, which are becoming not only accepted, but embraced as the next stage of the industry’s evolution.

Expanding the definition

Virtual, or digital banks offer financial services primarily through the internet or other digital channels, without the need for physical touchpoints for their customers. What’s so explosive about this idea is that virtual banking services may even be offered by companies from outside of the traditional financial sector, given that they have been granted a digital banking license.

Several countries across Asia Pacific are currently defining the rules for issuing such licenses, or are in the process of vetting the first batch of applicants for the permit.

In Singapore, for example, the regionally operating on-demand services platform Grab is said to have applied for one of the island state’s first digital banking licenses.

Hong Kong is a step ahead. Hong Kong’s Monetary Authority (HKMA) has been a leading force in the city’s catching up to the pace of fintech and entrance into a new era of smart banking. The Authority has issued eight licenses since March 2019. The surge in activity will continue as more virtual banking licenses are set to follow given that 33 companies have submitted applications to the Authority.

What sets virtual banks apart from traditional banks besides the former having no physical branches goes all the way down to the product level, Ken Lo, head of strategic partnerships at ZhongAn International, told KrASIA in an email interview.

“A virtual bank has the benefit of being built with a digital strategy, we better understand the needs of digital-savvy customers and create products for them with such a mindset,” he said.

Virtual banks — also known as “challenger banks”, or “neobanks” — are already quite popular in the United Kingdom and Europe, where a number of digital-only fintech firms, such as Monzo and Starling Bank, have made significant progress in building their capital and customer bases.

Developing countries in Southeast Asia are more cautious but paying close attention: Malaysia’s central bank has said it aims to come out with virtual bank licensing requirements by the end of this year, while Vietnam already has its first virtual bank, Timo, which was launched in 2016. In the Philippines, CIMB formally launched its first “all-digital” bank in the country’s tough banking market.

Fixing traditional banking’s problems

A large part of the appeal of virtual banks is that they represent the lowering of the stringent barriers to entry common in the financial industry which have, in the past, prevented some consumers, especially those with a high risk, low income profile, from accessing financial services.

Virtual banks are able to offer financial services much faster than traditional institutions hamstrung by complex regulations and bogged down by high infrastructure and staff expenditures. Challenger banks don’t need to charge fees for basic services, and can usually offer better interest rates and cash rebates.

More importantly, without having to rely on physical branches, virtual banks are addressing issues of financial inclusion for consumers in places where banking infrastructure may be poor, such as in rural areas, as well as for smaller businesses who struggle to obtain access to credit lines thanks to strict loan policies.

“One of the clear benefits is that they will contribute towards greater financial inclusion. We see this in particular with small and medium-sized enterprises (SMEs), which are vital to Hong Kong,” said King Leung, the Head of Fintech for InvestHK, a government agency responsible for encouraging foreign direct investment in the city.

“With the virtual banks, there’s no need for a longstanding relationship between customer and bank, while the flexibility of online and ease of account opening can be seen as a bonus, one that accelerates the move towards electronic payments,” Leung told KrASIA in an emailed response.

In Hong Kong, not all the firms which have received licenses are banks in the traditional sense, and in fact many come from a variety of backgrounds which are bringing lots of cross-industry experience to disrupt the market, according to Leung.

For instance, virtual insurance provider ZhongAn is one of the companies that got licensed by the HKMA, as have a number of others involved in retail (Jardines with 7-Eleven, Mannings, and others), property (HongKong Land), telecommunications (HKT), smartphone makers (Xiaomi), and even tourism (Ctrip Hong Kong).

This cross-industry experience is challenging traditional thinking around the importance of user experience, and what products are most in-demand. With the rise of virtual banks, we are also seeing more digital-only financial products being offered such as virtual insurance, more flexible loan schemes, and electronic payment solutions.

Furthermore, as “challenger banks”, virtual banks are bringing some much needed competition to traditional financial institutions, by forcing them to innovate more digital solutions or partner with fintech firms in order to stay relevant.

“The virtual banks will have some impact on more traditional institutions, and most likely it will be for the better. But the extent remains to be seen,” said Leung. “A number of the traditional banks have a stake in the virtual banks and they are all very much involved in nurturing fintech expertise and innovation.”

Ken Lo noted that many traditional institutions are working to partner with more agile, innovative fintechs in a bid to speed up the digitalizaiton of their offerings.

“We see virtual banking as a good complement to the financial services in Hong Kong,” he said. “We look forward to seeing it bring new energy to the traditional financial industry, with more innovative products and services, as well as better user experiences.”