anking is an industry that’s ripe for disruption. These days, people are used to doing a lot online, but for most of us digital banking is limited to checking our balance and moving funds around. By 2027, that will have changed dramatically.
The idea of the direct or branchless bank has been around for a while – First Direct was launched as a branchless telephone bank by the UK’S Midland Bank in 1989 – but in the past few years, a large number of all-digital or internet-only banks have sprung up around the world. Several are in Asia, including Tencent’s Webank; Baidu and China Citic Bank’s Biaxin Bank in mainland China; Timo in Vietnam; K-bank and Kakao Bank in South Korea; DBS’S Digibank in India and Indonesia and Alibaba’s Mybank ( Thesouthchinamorningpost is a subsidiary of Alibaba Group). As well as the added convenience of doing everything quickly through a phone or computer, digital banks’ lack of branches drives their costs down, potentially allowing them to offer financial products at better rates.
Digital banks largely fall into three categories: entirely new operations set up by new companies that offer a full range of banking services, including savings and current accounts; incumbent banks giving it a go in the digital realm; and services with apps featuring a savings and payment wallet but not proper accounts, mostly aimed at people who have not previously held bank accounts.
“By 2027, the first two will be catering to people who have a decent amount of money; the third one’s not even interested in people with money, although it may be that people with money will use it,” says Chris Skinner, an independent fintech commentator and author of the book Digital Bank.
Adds Joe Ngai, managing partner of Mckinsey Greater China: “Customers don’t think about whether it’s a digital-only bank. People borrow, invest and save, and there are a bunch of players trying to fulfil those needs, from traditional banks to start-ups to technology companies.”
Vietnam’s Timo bank is among those start-ups, although it has partnered with an incumbent, Vietnam Prosperity ( VP) Bank, to get a banking licence – something that would otherwise cost about US$30 million in the unlikely event one became available. VP, which doesn’t have an equity investment in Timo, handles back-end costs, while Timo handles front-end costs, and the two split revenues on a product-by-product basis.
Vietnamese banking regulations require accounts to be set up in person, with a physical signature and ID validation; Timo’s answer was to launch two Timo Hangout coffee shops in major cities where people can open accounts.
“The main differentiator that we went to market with was that we’re a lifestyle bank,” says Timo CEO Cameron Warden. “Everything we do is focused on the customer experience, on making your life easier. We’re also transparent; all the banks here [in Vietnam] have hidden fees.
“We don’t go after the underbanked or unbanked rural markets. We’re not teaching people how to bank.”
At the other end of the scale are the digital banks of mainland China, who most certainly do go after the many people untouched by the country’s existing banking system. “In China the big internet companies are so large and pervasive that people trust them,” says Ngai. “A lot of people grew up using Alibaba as their main place to shop and Wechat every day. They’re the biggest guys going after the market, and the innovation they bring to the sector is such that the authorities help. They create demand; if you’re an SME or an individual, the banks won’t really give you credit.”
James Lloyd, Asia-pacific fintech leader for EY, classifies the companies mainly as technology players. “My view is that Mybank and Webank are more designed to help other banks by providing them with tools,” he says. “In Asia, not many digital banks are looking to compete head-on with incumbent banks. It’s not like, for example, the UK, where they have ambitions to be full banks.
“In retail banking, I think the competition is around who owns the customer and who’s providing services to them. Whoever manages customer relationships can offer services to them. Wechat in China can offer people anything. Tencent doesn’t need to be the manufacturer; it just needs to provide the service. Profit tends to accrue to whoever owns the customer. If banks just produce products but don’t own the customer, it will really hurt their margins.”
He highlights the threat posed by Kakao Bank in South Korea, an offshoot of the country’s most popular messaging service Kakaotalk. “I’m sure there are a lot of banks looking at Kakao and saying: ‘This is worrying’. They have capital, brand recognition, and customer relationships through the messaging service; they’ve launched a traditional retail bank offering but they’re not a bank.”
Most old-school banks have struggled to keep up, tending to automate customer-facing processes but not back-office systems.
“Most banks are converting themselves into a marketplace of apps and providing that as a platform for customers,” says Skinner. “They recognise longterm that they have to do that, but it’s hard to do it. They’ve never had to open themselves up before; they’re used to controlling everything. They’re failing to convert their core banks to digital because of legacy and leadership; there’s no understanding of technology in the boardroom.”
However, as Ngai notes: “Traditional banks have the most to lose but they also have the deepest pockets. Over the next few years banks will invest a tonne of money in the technology it takes to go digital, and they’ll buy fintech companies; they’ll survive because they’ll adapt. Meeting banks’ CEOS at the moment, this is the topic that comes up most. The banks with the technology will be the banks of the future.”
“Only a tiny number of start-ups will survive. Banking is still a capitalheavy, regulation-heavy market.”
“We under-appreciate the challenge for new banks,” adds Lloyd. “You can build or leverage the newest technologies and business models, and potentially acquiring the first batch of customers might be easy. But the cost of customer acquisition is likely to rise because those early adopters are self-selecting. You don’t have the brand. Unless you’re 10 times better than existing banks, it’s hard to change people’s behaviour.
“There’s great scope for digital banks in Asia, but it won’t be three guys in a basement doing it. It’ll be people in adjacent industries moving into it, like Tencent and Alibaba.”
The traditional bank might not be so moribund after all, then. “In 1997, at all the banking conferences people were predicting that traditional banks would be out of business by 2017,” says Skinner. “It didn’t happen.”