How Digital Neobanks Can Win In Southeast Asia – And Eventually Everywhere
On the surface, digital banking may not seem like much of a growth market for startup companies. Big traditional banks rolled out online services years ago. Today their mobile apps reside on untold millions of customers’ screens, probably including yours.
Yet this market is far from being locked up. Digital-only neobanks, a.k.a. challenger banks, have made waves in markets from the EU to Brazil—and the wave now building in Southeast Asia could be the tipping point that defines the future.
Neobanks, by their nature, are able to combine low operating costs with superior services. Over time, that should be a winning combination. A major near-term problem is peeling customers away from existing banks that they trust and usually aren’t unhappy with. In Southeast Asia, these barriers are lower, and there are conditions that actually favor new digital entrants. Here’s an overview from where I sit as head of a Singapore-based VC firm.
Start with target demographics. Neobanks appeal strongly to younger, Gen Y and Millennial customers. These digital natives don’t typically find reassurance in having a physical branch bank nearby—many would prefer not to visit one—and the 10-country ASEAN region, with a total population over 660 million, skews young. Eight of the countries have median ages of 30 or lower, including Indonesia, The Philippines, and Vietnam, the three largest, and Malaysia, one of the most prosperous.
The ASEAN region also has vast numbers of currently unbanked prospects, ranging from about 30% to 80% of the adult population in various countries. Most are lower-income people, such as factory workers or farmers, but increasingly they’re climbing the ladder as their nations’ economies grow. And, like their more affluent neighbors, they tend to be mobile-first or mobile-only: almost two-thirds of unbanked adults in Indonesia own mobile phones.
Now let’s see why neobanks can outstrip traditional banks in both onboarding and serving all of the above.
How Digital Cost-Cutting Pays Off
One sizable U.S. institution is PNC Bank, with operations in 19 states and about 2,400 branch offices. Imagine how much might be saved just in physical plant and personnel costs by cutting the branch count to zero. Digital newcomers can save in other areas, too. By having IT infrastructure built for today’s world, they don’t need to maintain legacy systems or fiddle with synching them to newer add-ons. Figures we’ve studied show that neobanks have operating costs 30% to 40% lower than typical incumbents, a big chunk of which comes from streamlined back-office work.
Now consider how such efficiencies translate to customer benefits. Neobanks can (and do) offer higher interest rates on savings and lower rates on loans. They can reduce or eliminate minimum-balance requirements and service and transaction fees, a big draw for the unbanked—or for any budget-conscious person.
Recently launched neobanks like Malaysia’s BigPay and Octo in The Philippines are starting to attract customers in droves. BigPay was formed in 2018 by AirAsia, as part of the airline’s digital diversification strategy, and with its customer base as a natural target market. AirAsia’s CEO Tony Fernandes tweeted that “One day this product will be worth more than @AirAsia.” By July 2019, BigPay had 750,000 users and may have topped the 1 million mark by the time you read this.
Many Southeast Asians even find that not having physical branches can be a plus. Say you’re working the day shift in a factory. You’d like to open a bank account, but can’t make it to a branch during bank hours for the required sign-up. A neobank will take you aboard over the mobile network at anytime.
How State-of-the-Art Systems Pay Off
Next, suppose you’re a demanding customer: a busy up-and-comer at a tech company. Your phone is your real-time command center. In places where neobanks already have significant footholds, like the EU and parts of the U.S., early adopters are reportedly delighted to see up-to-the-minute tracking of transactions, along with handy features to categorize expenses and manage money on the fly.
Sophisticated back-office systems make this possible. The systems also enable neobanks to do big-data analytics at levels once unreached. From just a few data points on “thin file” customers—those with limited financial records—they can judge credit risks and often issue credit that traditional banks wouldn’t.
This also projects as an edge in serving young or unbanked Southeast Asians, and there’s more. The ASEAN region consists of multiple countries with lots of travel and transactions among them. YouTrip, a Singapore-based startup, offers a multi-currency travel wallet that lets you lock in exchange rates before you go. Other neobanks, using new networks, can offer money transfers faster than the international SWIFT service allows.
The Road Ahead
Neobanks are still far from ubiquitous in Southeast Asia, and most are not yet fully formed. They’re using an entry strategy pioneered by earlier startups like Brazil’s NuBank and London-based Revolut, which is to begin with a beachhead product and then add services gradually. BigPay’s first offering was an e-wallet and companion Mastercard; a cross-border remittance service was added in September.
Newcomers can grow substantially before obtaining official bank charters. The U.S. neobank Simple, for instance, has done so by partnering with traditional banks for the functions it’s not licensed to perform. Moreover, the partnering can be initiated by an existing player. Octo in The Philippines and Beat Banking in Thailand are neobanks launched by a traditional financial firm, Malaysian-based CIMB Group. Other big Southeast Asian banks have likewise put forth neobank ventures. They see where the action will be and want a part of it.
ASEAN neobanks face challenges. The evolving (and fragmented) regulatory landscape across the region could pose hurdles, though regulators generally appear friendly to the new wave. And neobanks everywhere must deal with issues of growing to scale. There are times, for example, when any banking customer will need personal assistance to solve a problem or use a service. This means staffing help centers with enough agents to meet the needs promptly, by chat or voice, which neobanks have sometimes struggled to do.
Altogether, though, I see the Southeast Asian neobank scene as a classic example of a next big thing gathering momentum. Because the majority of the population is currently unbanked, I think neobank adoption and product offerings in Southeast Asia will dwarf more developed markets such as Europe. The tech skills needed to build sound startups are present here. And these startups are being driven to produce innovative, global-worthy banking solutions, by ASEAN markets that are ready and waiting for them.