A recent survey of bank account owners in Singapore, Hong Kong and Malaysia has highlighted the huge challenge facing start-up banks around the world.
Of the 4,500 people surveyed by PwC, 99 per cent said they would keep their existing bank account upon opening a digital bank account. Of that number, nearly 70 per cent would continue to use that existing account as their primary one.
Virtual banks around the world are coming under pressure from investors to build a profitable business model or prove they are more than tech companies burning money to attract customers.
Singapore is one example. The Lion City opened its banking sector to new players in January, in the biggest shake-up to its financial services industry in decades. A total of 21 applications were received for the coveted five licences on offer — two full bank licences and three wholesale versions — with the winners to be declared mid-year.
Some of the region’s biggest tech companies applied, including ride-hailing company Grab, ecommerce and gaming company Sea Group and Chinese payments giant Ant Financial.
But Singapore is already one of the best-served and heavily banked markets in the region.
Data from Moody’s show that Singapore’s “big three” — DBS, UOB and OCBC — control over 60 per cent of Singapore’s S$660bn ($490bn) deposit base between them. They have also invested heavily in technology. DBS for instance has made strides in overhauling its app and giving customers the ability to open accounts online.
It is a similar story in Hong Kong, which announced eight new virtual bank licences last spring. That’s a huge influx of new banks for the market to swallow when they launch this year — especially given HSBC, Bank of China Hong Kong, Hang Seng Bank and Standard Chartered already account for about two-thirds of all retail banking loans there.
The incumbent banks are already responding to the threat. HSBC for instance scrapped a much-hated minimum balance fee that applied to 3m of its Hong Kong customers.
All of this means that the step between being a secondary bank for basic transactions to becoming a primary bank also used for loans, mortgages and credit cards is becoming more of a challenge. UK challenger banks such as Monzo and Revolut are also grappling with this reality, according to Hoi Tak Leung, a Hong Kong-based counsel for Ashurst, the law firm.
“That is a very big leap and we have not seen that yet,” Mr Leung said.
The virtual banks in Asia have one major difference — many of them are linked to big conglomerates or established companies so fundraising is not as big an issue as it is for independents.
But the wider point remains that challenger banks often start off as retail-facing operations, bringing in customers at whatever cost. How to make that a profitable exercise is the conundrum many now face.
Singapore’s successful applicants will struggle to differentiate themselves just on the basis of being digital given that “incumbents are already quite digital”, Mr Leung said.
But the presence of large tech companies means the Asian challengers have potentially a better shot at carving out a niche.
Sea Group, a $24bn south-east Asian gaming and ecommerce company listed in New York, is applying for a full digital bank licence. It could provide lending services for the many merchants on its ecommerce platform, Shopee.
“This would be taking a leaf out of the Alibaba playbook. Ant Financial did this with its merchants on Taobao,” said Zennon Kapron, managing director of Singapore-based consulting firm Kapronasia.
Grab, which already offers financial services, could also explore lending opportunities with its drivers.
Companies will need tricks up their sleeves. As the experience in Europe has shown, being a pure digital bank is unlikely to be enough to make the leap from being number two to number one.
Quick Fire Q&A
Company name: Policygenius
When founded: 2014
Where based: New York City and Durham, North Carolina
CEO: Jennifer Fitzgerald
What do you sell, and who do you sell it to: Policygenius is an online insurance marketplace where anyone in the US can compare, buy and switch insurance policies.
How did you get started: Policygenius was founded to solve the problem of insurers not knowing how to engage with digital consumers.
Amount of money raised so far: Over $150m
Major shareholders: KKR, Norwest Venture Partners, Revolution Ventures, Susa Ventures, Axa Venture Partners, MassMutual Ventures and Transamerica Ventures
There are lots of fintechs out there — what makes you so special: Policygenius has created a proprietary technology platform that gives people a seamless way to compare, buy and switch insurance.
Further fintech fascination
New frontiers: JPMorgan has hired Clive Adamson, a former regulator, to lead its push to create a digital bank in the UK, reports the Financial Times. The market is already crowded but the US bank hopes to have its venture, which could offer lending as well as savings, up and running this year.
Follow the money: US-based software company Intuit is in talks to buy Credit Karma, a personal finance portal, for about $7bn, according to the Wall Street Journal. The deal would be the largest acquisition in Intuit’s 37-year history. Credit Karma offers its customers access to their credit scores and borrowing history, as well as other data.
Follow the money (2): Online bank Ally Financial is to buy CardWorks, a credit card specialist, for $2.65bn, says Finextra. The deal will give Ally access to a credit card servicing and recovery operation as well as a merchant acquiring business. When the deal is complete, Ally will have 11m customers across the US.
Trendwatch: There may be a fintech M&A boom under way, but start-up fundraising is getting tougher. According to a new report by research firm CB Insights, analysed by TechCrunch, fintech start-ups raised $33.9bn globally last year, down from $40.8bn in 2018. Early stage start-ups found it particularly difficult to raise money.
AOB: Spanish bank BBVA has backed a fundraising at Wollit, an “income smoother” which serves irregular contractors, reports Sifted. LendingClub is paying $185m for Radius Bancorp, an online bank with $1.4bn in assets, says CNBC.
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