Research Overview
- This report illustrates the ongoing evolution of the digital banking sector in APAC, the opportunities and challenges facing digital banks in the region, and how they should be thinking about their path towards profitability.
Key Findings
- Within the traditional retail banking system in APAC, there remains large unbanked and underbanked populations who are unable to access any / full banking services, particularly in developing markets. In more developed APAC markets, traditional banks also tend to fail to provide retail customers with a personalised and streamlined digital experience, resulting in considerable customer dissatisfaction.
- MSME customers also face several pain points in their banking journey, including a slow and largely paper-based account onboarding process, lengthy loan application processes with tedious documentation requirements, as well as onerous annual account reviews. Most importantly, many MSMEs in the region struggle to access credit through traditional banking providers.
- To address lingering pain points – and to meet the emerging demands and growing digital preferences – of APAC customers, we have seen a surge in digital-native banks that have launched in the region, with over 40 APAC digital banks having been launched to date.
- Digital banks are utilising a wide variety of cutting-edge technologies to improve the customer experience along the end-to-end value chain.
- In addition, many digital banks in the region are also focusing on building partnership ecosystems in an effort to enhance product development, drive their distribution efforts, and enhance customer loyalty.
- While early entrants in markets like Japan, Mainland China, and South Korea have established a substantial customer base and are generating profits, newer digital banks in the region are facing significant hurdles in breaking even. Taking Hong Kong as an example, since the market entry of all 8 players back in 2020, none have managed to turn a profit, recording sizeable losses to date.
- The cost of customer acquisition (“CAC”) has been a significant challenge for many firms, especially those operating in developed markets like Hong Kong and Singapore, with CACs for retail customers ranging from USD 65-90 (vs. USD 15-50 in emerging Asia and USD 1-5 in frontier Asian markets).
- Substantially lower average deposit levels per customer compared to traditional banks, being 10 times lower on average in markets like Hong Kong, also limits the ability for digital banks to effectively monetise their customer base via lending and investment products.
- Digital banks also face a number of over-arching challenges such as trust issues, data security, talent retention, and stiff competition from both other digital banks, as well as a growing number of traditional banks who are investing heavily in their digital transformation efforts.
The Way Forward
- In crafting the path to profitability, digital banks should look to optimise their strategies and operating models across the customer value chain, particularly around customer acquisition and monetisation, and look to nurture strategic superchargers including partnerships, ecosystem / platform propositions, and geographic expansion.
