FINANCIAL INSIGHT: DIGITAL BANKS

banking services remotely still got what they wanted with their existing service providers.

“There was no reason for them to look at things outside, particularly when something’s so small or so young at that stage of evolution,” Sattanathan noted.

Turning a profit

Since digital banks have raised the bar for customer

Economic moats

The strength of incumbent banks within the market is another important factor that digital banks should consider regarding their chances for success.

“One of the things that enables a digital bank to succeed or not is if they have an economic moat. For a virtual bank to get an economic moat, I think it would need something like a strong internet platform, but also if the incumbent banks themselves have strong moats or not,” Makdad said.

For example, Japan’s incumbent banks, in Morningstar’s view, do not have economic moats.

“There’s already too much competition in Japan; MUFG, SMBC, all these big banks in Japan compete very strongly against each other. None of them has a very strong advantage. In Korea as well, we also think they don’t have economic moats,” Makdad added.

In contrast, Singapore’s big three banks—DBS, OCBC, and UOB—all have narrow moats. This gives the three banks a cost advantage.

“So if any other foreign bank or if somebody gets a banking license in Singapore and starts up a bank, they’re going to have trouble competing against the cost advantage of the incumbent banks in Singapore,” Makdad noted.

No COVID boom

The onset of the pandemic did no unique favors to the digital banks, either, despite the fact that it pushed more people to use digital services. Data from McKinsey & Co. showed that the adoption of digital services accelerated four years in just the first six months of the pandemic, with the share of APAC companies’ digital interactions jumping to 53% in July 2020 from just 32% in December 2019. McKinsey & Co. partner Bharath Sattanathan named two factors as to why digital banks did not benefit from the pandemic’s digital boom.

“If you looked at it more broadly across the region, there were probably two factors to consider in terms of what happened during COVID. One was that a lot of these digital banks were very young during the COVID period, or they had very specific or very niche service offerings for their customers,” Sattanathan told Asian Banking & Finance.

“The second reason is, the [incumbent] banks really upped their game during the COVID period, right, considering all the complications. The banks really came to party when it came to increasing their digitalization, increasing and their service offerings online. In many ways, a lot of the banks moved mountains to be available fully online for their most important products and services,” he said.

Both of these factors meant that customers who needed to access

Factors such as inclusion in an ecosystem and the strength of incumbent banks in the market alongside the right value proposition are key for banks to make a profit.

Partnerships are especially key for neo banks to scale their operations, Gerson said.

“Rethink partnerships. Look very broadly; who are the players in the market? Are there retailers, are their e-commerce platforms, are there messaging apps, what is out there? Who could be your right partner? Think about this very carefully. Every market is going to be different,” Gerson said. “Think about how you can establish a partnership that can benefit your partner, the consumers and yourself. If not, it will not work.” activities by their customers, said KPMG analysts Paul McSheaffrey, senior banking partner, Hong Kong, KPMG China; and Terence Fong, head of Chinese banks, Hong Kong, for KPMG China.

Paul Sommerin, partner and head of digital and technology at Capco, advised banks to look beyond promotions.

“Understand what the customer really wants after the high-interest rate deposit rate promotion ends. I have also noticed that digital banks— once the promotion period ends— tend to focus on acquiring new customers rather than keeping their existing customers satisfied, thus creating churn,” Sommerin said.

Loan activity–both in Hong Kong and cross-border transactions with China–will be constrained until the economy begins growing once more, McSheaffrey and Fong warned.

The recently announced easing of travel restrictions will be an important factor that will help the city recover, and in turn, benefit banks. “Cross-border travel boosts the Hong Kong economy significantly and this will certainly help banks,” said Scott. “There are also knock-on effects from a number of stimulus measures in mainland China and hopefully continued growth of the GBA and connected initiatives as the reopening continues.”

Chan noted speculations that regulatory measures around certain sectors including tech might be relaxed to support economic growth.