Rising interest rates heighten challenges for digital banks

A softer economy could also affect the banks’ target customers disproportionately

FINANCIAL TECHNOLOGY

Many newly debuted digital banks in the Asia Pacific will find achieving financial viability more challenging now due to increasing interest rates and tightening funding conditions.

It’s a matter of how much risk they’re willing to bet on in order to rake in more profits, according to Fitch Ratings analysts Tamma Febrian, Elaine Xu, and Matt Choi. These banks net interest margins will be influenced by their risk appetite.

“In general, we believe the best opportunities for digital banks in APAC are in markets with larger unbanked populations. However, lending to underserved sectors carries higher risk, with their lower income and limited credit history posing key challenges for digital banks trying to crack the market,” Febrian, Xu, and Choi warned.

The analysts added that they expect credit costs to rise more significantly for these segments in a higherinterest-rate environment.

A softer economy could also affect the banks’ target customers disproportionately, raising asset-quality risks, they added.

APAC countries have recently been engulfed by a digital banking spree. In late 2020, Singapore handed out licenses for virtual-only banks, with the winners just having kicked off operations in mid-2021. These include two wholesale banks, Green Link

Tamma Febrian

The best opportunities for digital banks in APAC are in markets with larger unbanked populations

Digital Bank and ANEXT Bank; and GXS Bank, a retail digital-only bank backed by Grab Holdings and local telecommunications giant Singtel.

In Indonesia, the regulator opted to change banking rules to allow for digital-only banks; whilst Malaysia also recently granted five digital-only bank licenses, with GXS Bank notably obtaining one of the licenses as well.

A path to profitability

Making a profit will also be increasingly challenging for many digital banks in APAC, Febrian, Xu, and Choi said. The viability of digital banks is highly influenced by the size of the market, local industry competitive dynamics, the strength of their franchises, and the banks’ strategy and ability to execute it.

Many leading digital banks in the Asia-Pacific region are sponsored by established corporations or are a part of a consortia, whose existing vast customer base provides critical mass for these banks to quickly and effectively scale their business.

But having a complementary ecosystem and leaner cost structure may not be enough for these disruptors to start making a profit.

“For example, all of Hong Kong’s digital banks remain in the red even after three years of operations, although most are owned by conglomerates or established corporations, in part due to continued investments as well as the industry’s highly competitive market,” the analysts said.

BNPL, DIGITAL WALLETS ACCELERATE GROWTH OF E-COMMERCE FRAUD: STUDY

Growth of e-commerce fraud will be accelerated by the increasing use of alternative payments, notably digital wallets and buy now pay later or BNPL, which are creating new fraud risks, according to England-based market researcher Juniper Research.

The total cost of e-commerce fraud to merchants is expected to exceed $48b globally in 2023, with 22% of this coming from the Asia Pacific region, their study found.

Online payment fraud counts losses across the sales of digital goods, physical goods, money transfer transactions and banking, as well as purchases like airline ticketing. Fraudster attacks can include phishing, business email compromises and socially engineered fraud.

Juniper Research gave particular focus to BNPL, naming it as a major risk going forward.

“Given the delayed nature of BNPL payments, fraudsters can make several illegitimate payments using stolen card details before the fraudulent activity is identified, creating significant risk. In turn, the research recommended that BNPL vendors conduct robust identity verification at the point of onboarding to mitigate these risks,” Juniper Research said in the report.

Vendors are called to build platforms providing AI-powered risk-based scoring as a measure against fraud.

“To combat this fraud, e-commerce merchants must implement simple steps such as address verification, combined with risk-based scoring on transactions, which will allow merchants to best mitigate the massive fraud threats present,” added research author Nick Maynard.