Digital Banks in Asia Having a Hard Time Trying to Thrive
Those who seek to enter the digital banking space in Asia might find it harder to do so now. This is because a few opportunities might have been lost in the coronavirus pandemic.
The crisis impacted the global economy hard and disproportionately affected people and businesses with a weaker borrower profile. According to Tamma Febrian, associate director for financial institutions at the ratings agency, this is the customer segment a lot of aspiring digital banks aim for.
Febrian stated on Friday, “A lot of them are citing the unbanked and the underserved segment as their main target segment, and we think that the crisis currently will disproportionately affect them.”
Then, he explained that this might mean that there are potentially smaller opportunities for profitable trading.
Also, social distancing measures and lockdown all over the world to control the virus’ spread left many incumbent banks enhancing their digital offerings. As a result, that might possibly close off openings for new entrants into the market.
The Jury for Banks
Earlier this week, Fitch noted that these kinds of challenges would be felt more in Asia’s developed markets. This is where competition from incumbent banks is already fierce. The said markets include Australia, Hong Kong, Japan, and Singapore, where there are dominant incumbents.
However, emerging markets like India, Indonesia, and the Philippines still offer the greatest opportunities for digital banks. The said countries have low banking service penetration, providing aspiring digital lenders an easier route to critical mass.
In a report, the mentioned countries became part of those worst affected by the pandemic in the region. Therefore, even in the longer term, the lagging digital infrastructure could hamper their potential.
Moreover, Febrian said that a lot of aspiring digital banks designed their models during a benign economic environment. Thus, it is not clear if those models can survive this economic cycle, notwithstanding their potentially more advanced technological capabilities.
He also explained that the current crisis is a perfect time for digital banks to evaluate their business models. That includes studying whether the risk they are going through is within their risk appetite and making sure that the margins they get could bounce back potential future losses.
Febrian said, “The jury’s still out.”
According to him, we’re not at a time where the digital banks can’t profit from these trends. But still, this is a tougher market for investors to navigate, and they need to further refine their strategy.
