Banks in Southeast Asia have made great strides in their digital transformation journey, and incumbent banks willing to invest in technology are well-positioned to compete with fintechs, Moody’s said Thursday. Banks in Southeast Asia are investing heavily in digital transformation to compete with fintech disruptors, the rating agency said in a note. As a result, the company says it has seen progress in multiple areas, including customer adoption of digital channels and improved product quality.
“The competitive space for digital financial products will continue to evolve, but given the performance of the past few years, Southeast Asian banks are well positioned to compete and for large banks with the scale to make the necessary investments. Even more so,” he said. According to Moody’s, banks are successfully migrating customers to digital channels. It noted that customer transactions of major banks in the region are now mainly processed through internet and mobile channels.
Note that new customer acquisition across retail and small and medium-sized enterprise (SME) offerings, as well as the payments sector, where digital adoption is booming, is increasingly happening online. Most banks now say they offer a comprehensive range of banking products digitally across liabilities and assets to both retail and small business customers.
The bank also said it has made significant improvements to its mobile user interface, closing the gap with fintechs and digital banks. According to Moody’s, consumer mobile apps for large banks are rated 4 or more out of 5. A high-quality user interface is now prevalent among major incumbents and is no longer a competitive advantage for new entrants, the company said.
In addition, banks are willing to partner with companies with a digital footprint both inside and outside of financial services and enable customers of these companies to access financial services through application programming interfaces (APIs).
For example, in Thailand, KBank has incorporated financial services into its popular messaging app Line, and Singapore’s DBS Group Holdings Ltd has incorporated Gojek’s ride-hailing service into its digital wallet PayLah! and vice versa. These integrations will provide a seamless user experience and expand the bank’s online presence, Moody’s said. Banks see digitization as core to their overall strategy, according to Moody’s. This is reflected in the significant investments made over the last few years, and we expect this trend to continue.
On the other hand, in most markets in emerging Southeast Asia, the deposit share of large banks is increasing. One of the reasons is the strengthening of our digital franchise. Southeast Asia has many high-profile fintechs that have been able to build large customer bases through digital payments, but financial services expansion is still modest in most countries, Moody’s notes. increase.
These companies, too, will remain in the red, according to Moody’s, and tighter funding conditions will limit their expansion.
According to Moody’s, fintech companies were among the first to introduce digital payments via e-wallets and quick response (QR) codes in their respective markets. Before the rollout of nationwide retail payment systems, fintech offered faster payments than card payments or bank transfers.
For merchants, QR code payments are cheaper than credit card payments. Additionally, new entrants say they have pioneered “super” apps that combine many lifestyle and financial services into one mobile app.
Fintech firms in Southeast Asia typically said they offer financial services as part of a broader product offering, such as e-commerce or transportation services. It also said they are now expanding beyond payments into other financial services such as lending, and are also entering the banking space.
“Some have secured digital banking licenses, and in the case of Indonesian fintech companies, they have taken ownership of existing banks,” Moody’s said.
Moody’s also says the push for regulation against open architectures and the emergence of nationwide retail payment systems are reducing the dominance of fintech first movers in digital payments. Lending, which is a major focus, is still small. In particular, the penetration rate of Buy Now, Pay Later (BNPL) transactions remains low.
Similarly, Sea Limited (Sea), one of Southeast Asia’s largest consumer technology companies, said it reported $2.2 billion worth of net lending as of September 30, 2022. Moody’s also noted that while the fintech disruptor’s business model is yet to be proven, a difficult funding environment will limit the pace of expansion.
“Like other start-ups, fintech is still in the red. The financial services divisions of Grab and Sea, some of the region’s most prominent tech companies, are still in the red despite years of operations. We are losing money,” Moody’s said. For many fintech companies, the payments business alone is not profitable, and cross-selling with other financial services has limited success.
“While we do expect a growing interest in lending to support revenue generation, there is a growing segment of the market that is typically unbanked and underserved, a traditionally riskier segment.”, Moody’s said. The highly conducive funding environment prior to 2022 has allowed these companies to suffer heavy losses while pursuing aggressive growth. However, the funding environment has since tightened significantly, pointing to a sharp decline in fintech funding in Southeast Asia in the third quarter of 2022.
These developments are forcing tech companies to implement cost-cutting measures and delay initial public offerings, which they say will constrain corporate expansion. Grab Holdings Inc, for example, has cut driver incentives and recently implemented a salary freeze and budget cuts. Meanwhile, Moody’s said regulation will continue to play an important role in the evolution of market structures. He said the regulator is trying to encourage financial innovation and does not intend to protect banks from new entrants.
At the same time, they say they are trying to incentivize open architecture systems, making it difficult for new entrants to develop closed-loop ecosystems using their captive customer base.
To spur innovation, regulators say they have or are in the process of implementing a number of initiatives to support fintech growth without compromising financial stability.
This includes regulatory sandboxes, rules for digital wallets, peer-to-peer (P2P) lending and APIs, and licensing frameworks for digital banks. Also, new licensing rules for digital banks have seen a surge in new entrants across Southeast Asia.
Monetary authorities in Singapore, Malaysia and the Philippines have issued new licenses under less stringent regulatory requirements than commercial banks, while their Indonesian counterparts have sought to bolster existing banks through higher minimum core capital and equivalent regulatory treatment. He pointed out that it encourages the acquisition and digitization of banks.
Thai authorities have also drafted digital banking licensing rules in January 2023 and said they expect to receive applications in the second quarter of 2023. “All of these initiatives promote competition and provide a level playing field for new entrants,” Moody’s said.
Also, regulators are looking to incentivize open architecture systems, making it harder for new entrants to develop closed-loop ecosystems with a captive customer base. The emergence of national retail payment systems in key markets in Southeast Asia is a good example. The trend, he said, has changed the competitive landscape, especially for banks, as the payment services they offer are settled in real-time and cost little or nothing to both consumers and merchants.
Bank transfers have become more convenient as deposit accounts can now be tagged with mobile phone numbers, personal identification numbers and business registration numbers, the company said. Regulators have also introduced interoperable QR codes, which have been widely adopted by most countries in the region.
The use of interoperable QR codes will improve payment efficiency by preventing market fragmentation, while preventing customers from being locked into specific service providers, the company added. According to Moody’s, the region is going a step further by interconnecting these payment systems under the Association of Southeast Asian Nations Economic Community Blueprint 2025, which will allow for cheaper and faster cross-border transactions. is promoted. Regulatory initiatives have removed some of the rules and regulatory arbitrage that favored fintechs. For example, banks subject to stricter know-your-customer (KYC) rules have benefited from the introduction of electronic KYC regulations by being able to offer remote deposit account opening.
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