Southeast Asia with its generally young population of more than 655 million is ripe ground for banks and fintech players looking to experiment and engage with users via digital finance methods; and while sizable in nature, the region also has to grapple with a large unbanked population in locations like the Philippines and Indonesia where financial literacy education continues to be an issue.

Nevertheless, a number of institutions in the region have decided to launch digital banks (banks without a physical branch network) aiming to bridge the digital financial divide. Unlike incumbent banks these digital banks make it easier for users to be onboarded through an e-KYC (Know Your Customer) process, where customers can verify their identity only with their smart phones. Moreover, these digital banks hope to create customer stickiness by offering higher savings rates for deposits and give attractive cashbacks for spending.

Already several countries, such as Thailand, the Philippines and Singapore, have looked to regulate such entities, with the Philippines’ central bank, the BSP (Bangko Sentral ng Pilipinas), giving the go-ahead for the issuance of six digital banking licences this summer.   

“Most digital banks in Southeast Asia have only recently started or are about to commence operations,” a Fitch Ratings research note observes. “We expect many of them to be able to grow their customer bases quickly, thanks to the strong reach of their parents' ecosystems and their well-resourced backers, in particular those with large incumbent banks and established regional tech players as supporters. We expect funding competition to intensify as digital banks aggressively build their deposit bases, which will leave incumbents with weaker deposit franchises facing more competition.”

The momentum for digital banking is gaining favour among users in Southeast Asia. Around 66% of consumers in the region are excited about the prospect of digital banking services, according to Visa’s Consumer Payments and Attitudes Study 2021, with those in Thailand, the Philippines and Vietnam voicing the most excitement.

While it’s exciting to see new entrants coming into the banking space in Southeast Asia, the test for these digital banks is whether they are able to cultivate their user base and be profitable over the long-term. While offering basic deposit and transaction services is notable, the next stage would be to offer lending or wealth management products to boost future revenue.

“We believe that many digital banks in the region will adopt an asset-heavy business model, with loans acting as a core recurring revenue generator,” the Fitch note adds. “The retail and SME [small and medium-sized enterprise] segments are likely to be the most vulnerable to heightened competition, but we think that digital banks are likely to first focus on the low-hanging under-served segments. Therefore, the customers that are near the fringes of incumbent banks' credit risk acceptance criteria are most prone to being poached by the new entrants.”