A TREND is fast gaining traction in the Asean banking space where small banks are being snapped up by technology companies for entry into an otherwise highly regulated market.
This week, Fitch Ratings wrote and posted an article on its website stating that recent acquisitions of small banks in Indonesia by tech firms have highlighted the potential for fintech entrants to shake up the competitive landscape for banking in Asean in time to come.
It cites the recent acquisition of Indonesia’s Bank Kesejahteraan Ekonomi (BKE) by Singapore tech startup Sea Ltd as well as Indonesian ride-hailing and food delivery company Gojek increasing its stake in Indonesian Bank Jago last month, as strategies of tech firms which want a slice of the Asean financial services market.
“Fitch has previously argued that Indonesia and the Philippines provide the largest market potential among Asean’s six major economies, owing to their large unbanked populations and low levels of household leverage, ” the global ratings firm writes.
In the same vein, it notes that the current moves by tech companies are unlikely to pose a significant challenge to the larger incumbent banks, as these tech firms’ target markets are more inclined towards the underserved segments.
“The impact is likely to be manageable in the near term, as we believe that these new entrants will first target niche segments of the market, such as more tech-savvy, younger demographics or the underbanked, where yields are often higher and competition is still developing.
“Some established banks have also invested heavily in their IT infrastructure in recent years, with the (Covid-19) pandemic providing added incentive for incumbents to accelerate their digitalisation, potentially closing off openings for some new entrants, ” the ratings group notes.
In terms of speed, Fitch believes that Indonesia has “moved more slowly than some other Asean governments in developing so-called ‘virtual banking’ licence guidelines”.
Notably, Singapore has been one of the earliest players in this region where last December, the Monetary Authority of Singapore (MAS) announced that four entities had been awarded digital banking licences.
These are Sea, Ant Financial, a consortium made up of Singapore Telecommunications Ltd and Grab Holding Inc as well as another consortium comprising Greenland Financial Holdings Group Co Ltd, Linklogis Hong Kong Ltd, and Beijing Co-operative Equity Investment Fund Management Co Ltd.
In Malaysia, Bank Negara released its licencing framework for digital banks on Dec 31 last year and will award up to five of such licences. It plans to announce the names of the successful licence owners by the first quarter of 2022.
Not quite the same
It is worth noting at this point that although Asean remains one region, all countries differ, especially when it comes to their banking systems.
In Malaysia, for instance, industry observers opine that the trend of tech firms buying up banks is not likely to take off because of the lack of choices when it comes to banks to buy compared to countries like Indonesia.
“There are simply no small banks in Malaysia to buy.
“In Malaysia, it is more likely that the tech companies have to apply for the digital licence themselves or team up with banks if they want to enter the fray, ” says one head of research who tracks the banking sector.
Another banking analyst says applying for a digital banking licence on its own will be a “cheaper alternative” to buying a bank.
“There is also always the issue of baggage from legacy banks as well to consider when deciding on the actual purchase of a bank, ” he adds.
Interestingly, tech firms here are also planning to enter the Indonesian banking industry.
One CEO of a Bursa Malaysia-listed tech firm which already dabbles in the finance industry tells StarBizWeek that it is “looking at similar opportunities in Indonesia as well as there are many small bank licences there”.
“Definitely the financial services industry is one of the most regulated industries that indirectly slows down innovation within the industry.
“Fintech players can disrupt this segment, not immediately, but over the longer term, it is possible, ” he adds.
In its article, Fitch says that “it remains unclear which companies will ultimately be able to realise benefits from the growing nexus between tech firms and banks”.
“In markets such as Indonesia, there is a risk that aspiring virtual lenders may misprice credit risks when targeting the unbanked, notwithstanding their potentially more advanced data analytics capabilities, ” it says.
“In more developed markets with dominant and more tech-savvy incumbents, like Singapore, they may face difficulty out-investing conventional banks in digitalisation to offer distinctive value beyond niche areas, ” the ratings house adds.
It also highlights the issue of higher regulatory scrutiny in view of the growth of fintech.
“In markets where digital bank licencing frameworks are already available, regulators have generally opted to introduce viability requirements for new digital banks, designed to minimise the risks to financial stability presented by the growth of new services and market entrants.
“This will add to execution risks around technology firms’ strategies for expanding into financial services, a sector that generally has high regulatory bars and compliance requirements, ” Fitch adds.
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