Demographic diversity drives digital developments

BPC - in collaboration with Fincog - recently published a report on the state of digital banking in Asia. In the first in a series of blogs we explore some of the key findings and areas of opportunity identified.

Asia Pacific is the most populous and diverse region on the planet, with its 4.3 billion inhabitants stretched out across more than one fifth of the world’s total land mass.

It also has some unique demographics that make it particularly appealing to digital banks. According to data collected by the United Nations in 2020, the median age of the population of Central Asia is just 27.6 years. This relatively young population has fuelled the region’s economic development.

Widespread financial inclusion remains a considerable challenge - it is estimated that over 1 billion people in the region do not have access to formal financial services. However, high levels of mobile phone usage offer a possible solution.

For example, while less than half of Indonesia’s 263 million citizens have access to banking services the country has in excess of 400 million mobile phone subscriptions, of which 45% are smartphones. Around two thirds of the unbanked population owns a mobile phone and e-money transaction volumes grew by 173% in 2020, indicating an appetite for digital financial services.

Malaysia has also made significant strides in terms of financial inclusion - with internet penetration of approximately 84% and a similar percentage of the population having access to financial services – while two thirds of Thailand’s population now have smartphones, boosting financial inclusion to more than 80%.

Strong potential for neobank growth

Asia Pacific is fertile ground for new technology adoption thanks to increasing income levels, rising rates of urbanisation and investment in infrastructure. A young population with growing levels of expendable income (coupled with rising internet and smartphone penetration in a market where so many people are still unbanked) represents a particularly promising environment for digital banking.

While regulations are often perceived as barriers to conducting business, in the case of fintechs they are key enablers. Much like the demographics of the region, the approach regulatory bodies have taken towards digital banking varies widely.

Singapore, Hong Kong, Australia and China are home to the most established frameworks and also enjoy the highest levels of digital banking innovation.

China was an early adopter, starting its digital licensing process in 2014. It has recently introduced stricter rules around risk management, while also working to finalise legislation to facilitate the entrance of international fintech players into its domestic market.

The Monetary Authority of Singapore has established some of the toughest licensing requirements for digital banking, including high capital requirements and local control. To encourage diversity and digital innovation amongst incumbents, the regulator introduced new digital banking licenses that enable non-financial players (such as technology and e-commerce companies) to offer banking services.

Variety of structures being adopted

Regulations have also shaped the way digital banks are set up in the region, giving rise to a number of consortia and joint ventures - a business model that contrasts with the European & North American approach. South Korea and China expressly require joint ventures or consortia as the stakes non-financial services shareholders can hold in digital banks are capped at 34% and 30% respectively.

In some instances, regulators demand that applicants for digital banking licences collaborate with other entities that have track records in operating a digital business. Even in countries where there is no express provision of this type, regulators have given preference to applicants who meet this criterion.

Australia has taken a different approach to most of the other countries in the region, with the regulatory body choosing to provide digital banking licenses to independent players - in part to increase competition for the ‘big four’ banks that dominate the country’s financial marketplace.

The Australian Prudential Regulation Authority stated that while it was trying to facilitate the launch of new digital banks, it would demand the same threshold levels as incumbent banks in order to provide a sense of security to customers.

Some countries still lack a fully defined regulatory framework for digital banking licences, but the progress made by other Asian nations has spurred activity in this area.

For example, in June 2021 the Monetary Authority of the Philippines issued its first digital banking licence to Tonik, making it the only operational neobank in the country. It is expected that once the fully defined virtual banking regulations have been released, other digital banks will be granted a transitional period to comply with the new regulations in order to get the banking licence.

Elsewhere, Malaysia has issued its draft digital licensing framework and is expected to offer up to five banking licences in early 2022.

In our next blog we will look at the potential of Islamic banking as a niche opportunity in the Asia Pacific digital banking market.