Are digital-first banks in Asia positioned to spearhead a disruptive movement against well-established commercial banks?
In the realm of traditional banking worldwide, particularly in Asia, a significant portion of the population remains unbanked or underbanked, lacking complete or any access to banking services. This issue is especially prevalent in developing markets. Moreover, even in more developed markets, commercial banks often struggle to provide a personalized and streamlined digital experience to their customers, resulting in customer dissatisfaction.
Furthermore, small and medium enterprises (SMEs), which constitute the majority of businesses in the region, encounter various obstacles in their banking endeavors. These challenges include a slow and paperwork-intensive account setup process, lengthy loan application procedures with extensive documentation requirements, and burdensome annual account reviews. Most notably, the majority of individuals believe that micro, small, and medium enterprises (MSMEs) in the region face difficulties in obtaining credit through the traditional banking system.
To address these customer pain points and meet the evolving needs and growing digital preferences of customers, there has been a noticeable increase in the number of digital-first banks emerging in major Asian markets, with over 40 such banks launched to date. However, not all digital banks in Asia are created equal. For instance, in many Southeast Asian countries that are considered frontier digital bank markets, central banks have taken steps to issue digital-specific bank licenses separate from those granted to commercial banks.
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For example, Malaysia issued five digital banking licenses in early 2022 after receiving 29 applications, including two licenses for Syariah-compliant digital banks. Singapore issued four licenses in 2020 (two for digital wholesale banks and two for retail digital banks), in addition to permitting Standard Chartered and FairPrice Group's Trust Bank to operate in the country. Hong Kong also distributed eight licenses during its digital banking push in 2019.
However, in Indonesia, which represents one of the most significant opportunities for pure digital banks in Asia, with 66% of its 270 million population being unbanked but with a high internet penetration rate of over 70%, the Indonesian Financial Services Authority (OJK) imposes regulations that subject a digital bank to the same capital and licensing requirements as a conventional bank, without any dedicated digital banking license.
In Indonesia, a digital bank is required to maintain a minimum paid-up capital of IDR10 trillion (US$670.8 million), a considerably higher amount compared to the requirement in Malaysia. In Malaysia, a digital bank is obligated to maintain a minimum capital fund of only RM100 million (US$21 million), excluding losses, during the initial three to five years. After that period, this amount will increase to RM300 million.
Encouragingly, foreign shareholders are allowed to own up to 99% of the bank's ownership, pending OJK's approval. Unlike certain other parts of Asia, digital banks in Indonesia can be established either from scratch or through the transformation of an existing traditional bank into a digital entity.
Therefore, for the purposes of this list, apart from Indonesia, only native digital banks in Asia that have obtained licenses from their respective central banks are being considered. Traditional incumbent banks in Asia that have established separate digital banks, independent of their virtual banking platforms, and are registered to operate as digibanks in their jurisdictions, are also included.
