Just 10 years ago, the idea of keeping your money in a bank that existed only online would have been ridiculous or scary. Probably both. A bank with no physical address, no counters, no tellers, no cash you could touch? The average consumer would have baulked.
Today, it’s not as crazy. In fact, it’s happening, and early adopters are making the shift.
According to a 2018 McKinsey report, 52% of urban banking customers in emerging Asia Pacific nations used digital banking in 2017. That was up from 33% in 2014.
These emerging markets include China, Indonesia, Malaysia, Myanmar, the Philippines, Thailand and Vietnam. In developed markets such as Hong Kong, Japan, Singapore, South Korea and Taiwan, digital-banking penetration rose to 97%, up from 92% over the same three-year period.
What’s behind the digital drive?
There’s a variety of factors driving banking customers online. First and foremost is convenience. Why risk missing out on notoriously short banker’s hours, and why wait in line, when you can get your financial errands done in the palm of your hand?
There’s also a comfort factor. As McKinsey notes, consumers are increasingly adept at and secure in doing digital business in sectors like e-commerce and travel. These online natives have been instrumental in allowing e-banks to capture revenue with their digital products and services.
Third, digital banks and other fintech firms have distinct competitive advantages. They can meet gaps in the finance industry that conventional banks have so far failed to fill.
Better exchange rates, lower fees
In the remittance industry, banks have for years been able to get away with lousy currency-conversion rates and high service charges. And while the term “remittance” tends to be associated with cross-border transfers between individuals – a market that collects US$400 billion a year – the real money is in business-to-business transfers, which amount to US$124 trillion annually, according to McKinsey.
This challenge is especially pronounced in Asia, where money-transfer costs are three-fifths more expensive than in the United States or Europe. For the longest time, banks and traditional financial-services companies like Western Union have not had a reason to change this status quo. Until now.
The rise of fintech companies, which includes digital banks, has disrupted the market and brought better conversion rates and lower remittance fees to Asia, much to the relief of small- and medium-size businesses. Many are operating in an export-led region with revenue streams fastened firmly to global supply chains. Lower rates also translate to greater savings for ordinary people such as Filipino and Indian overseas workers, who have in the past seen part of their paycheck eaten up by wire transfers to send money to their families back home.
This disruption is being led by fintech firms like TransferWise, the eight-year-old unicorn startup operating out of London. The company, which claims to be 9 times cheaper than high-street U.K. banks, offers real mid-market exchange rates by leveraging technology to move money locally instead of across borders.
The unbanked masses
There’s a flood of people driving liquidity into digital banks in Asia: tech-savvy young citizens who grew up using the Internet on their mobile phones. Southeast Asia is a perfect example.
CIOmagazine notes that the region has a remarkably high mobile-penetration rate of 133%. In other words, some individuals have more than two phones or SIM cards, meaning there are more mobile accounts than people. Yet only 27% of people have a bank account.
Cambodia is a great case study. The country has the highest mobile penetration in Asia, at 173% – most people have more than one phone! But only 13% head to the bank. The World Bank estimates that 80% of the population is “unbanked” in Indonesia, the Philippines and Vietnam, and even in more-developed Malaysia and Thailand, almost one-third of people, 30%, don’t have an account.
Digital banking offers a way for these individuals, currently out of the financial system altogether, to move beyond a cash and barter economy.
This is the thrust of companies like LaLa World, a Singapore-based fintech startup. It uses blockchain to offer a global e-wallet that lets users transfer money, shop online, and pay bills across 180 countries through their mobile phones. Validus Capital, another Singapore-based fintech company, offers peer-to-peer lending by connecting small businesses and micro-entrepreneurs with lenders.
Both companies offer a low-cost way to make payments, transfer money, and even apply for loans, all without the strict rules, long processes and paperwork common to traditional banks.
Banks in Asia now have to play catch up
The regional banking powerhouses of Singapore and Hong Kong are trying to remodel themselves as attractive hubs for fintech companies, often offering a regulatory “sandbox” in which startups can test ideas outside the traditional regulatory regime. As those startups play with ideas and format, digital banking is poised to become more accepted and relevant in Asia.
Online banks have low operating costs and the freedom from physical branches. This new breed of digital banks can therefore serve small businesses, which have struggled to secure finance and credit from traditional banks. Online banking can also bring unbanked populations from the black or grey market of cash transactions into the above-board financial system.
Singapore is especially optimistic about the future of digital banking, with the Monetary Authority of Singapore announcing that it would issue up to five new digital banking licenses. Hong Kong’s Monetary Authority has issued eight licenses to virtual banks, including to groups led by Standard Chartered and the Bank of China. This indicates that forward-thinking traditional banks realize they must adapt to the digitalisation of banking if they don’t want to lose market share; digital Luddites will be left behind.