Dawn of the Neobanks in Southeast Asia – And Gradually Everywhere

By: Sameer Shaikh

On the surface, digital banking might not appear to be much of a growing marketplace for startup companies. However, big traditional banks unrolled online services years ago. Today their mobile apps reside on untold many customers’ screens, probably including yours. Yet this market is way from being locked up. Digital-only Neobanks, also referred to as challenger banks, have made waves in markets from the EU to Brazil—and the wave now building in Southeast Asia might be the tipping point that defines the longer term.

Neobanks, by their very nature, are ready to amalgamate low operating costs with superior services. Over time, that ought to be a winning combination. A serious near-term problem is peeling customers faraway from existing banks that they trust and typically aren’t unhappy with. In Southeast Asia, these barriers are lower, and there are conditions that really favor new digital entrants.

Begin with target demographics. Neobanks robustly attract Younger, Gen Y and Millennial customers. These digital natives don’t typically find reassurance in having a physical branch bank nearby—many would prefer not to visit one—and the 10-country ASEAN region, with a total population over 660 million, skews young. Eight of the countries have median ages of 30 or lower, including Indonesia, The Philippines, and Vietnam, the three largest, and Malaysia, one of the most prosperous.

The ASEAN region also has vast numbers of currently unbanked prospects, starting from about 30% to 80% of the adult population in various countries. Most are lower-income people, like factory workers or farmers, but increasingly they’re climbing the ladder as their nations’ economies grow. And, like their more affluent neighbors, they have a tendency to be mobile-first or mobile-only: almost two-thirds of unbanked adults in Indonesia own mobile phones.
Now let’s see why Neobanks can outperform traditional banks in both onboarding and serving all of the above.

How Digital Cost-Cutting Pays Off

One sizable U.S. institution is PNC Bank functioning in 19 states and about 2,400 branch offices. Imagine what proportion could be saved just in physical plant and personnel costs by cutting the branch count to zero. Digital newcomers can save in other areas, too. By having IT infrastructure
built for today’s world, they don’t have to maintain legacy systems or twiddle synching them to newer add-ons. Figures show that Neobanks have operating costs 30% to 40% less than typical incumbents, an enormous chunk of which comes from streamlined back-office work.

Now consider how such efficiencies add to customer benefits. Neobanks can offer higher interest rates on savings and lower rates on loans. They will be able to reduce or eliminate minimum- balance requirements and repair and transaction fees, an enormous draw for the unbanked—or for any budget-conscious person.
Recently launched neobanks such as Malaysia’s BigPay and Octo in the Philippines are powerfully appealing to customers. BigPay was launched in 2018 by AirAsia, as a part of the airline’s digital diversification strategy, and with its customer base as a natural target market. AirAsia’s CEO, Tony Fernandes, tweeted that “One day this product will be worth more than AirAsia.” By July 2019, BigPay had 750,000 users and may have topped the 1 million mark by now.

Many Southeast Asians even find that not having physical branches are often a plus point. Say you’re working the day shift during a factory. You’d wish to open a checking account, but can’t make it to a branch during bank hours for the specified sign-up. At anytime, A Neobank will take you aboard over the mobile network.

How State-of-the-Art Systems Pay Off

Next, suppose if you’re a demanding customer: a busy up-and-comer at a tech company. Your phone is your real-time command center. In places where neobanks have already got significant footholds, just like the EU and parts of the U.S., early adopters are reportedly delighted to ascertain up-to-the-minute tracking of transactions and also handy features to categorize expenses and monitor money on the fly.
Sophisticated back-office systems make this achievable. The systems also allow neobanks to run big-data analytics at levels once unreached. From just a couple of data points on customers— those with limited financial records—they can calculate credit risks and sometimes issue credit that traditional banks wouldn’t.
This also projects as a foothold in serving young or unbanked Southeast Asians, and there’s more. The ASEAN region comprises multiple countries with lots of travel and transactions among them. YouTrip, a Singapore-based startup, provides a multi-currency travel wallet that allows you to lock in exchange rates before you go.

The Road Ahead

Neobanks are still far from being ubiquitous in Southeast Asia, and most aren’t yet fully formed. They’re using an entry strategy, pioneered by earlier startups like Brazil’s NuBank and London-based Revolut, which is to start with a beachhead product and then add services eventually.

Newcomers can grow considerably before obtaining official bank charters. The U.S. neobank Simple, as an example, has done so by partnering with traditional banks for the functions it’s not licensed to perform. Moreover, the partnering can often be initiated by an existing player. Octo in the Philippines and Beat Banking in Thailand are neobanks started by a standard financial firm, Malaysian-based CIMB Group. Likewise, other big Southeast Asian banks have also put forth neobank ventures. They see where the action is going to be and desire a part of it. ASEAN neobanks face barriers. The evolving and fragmented regulatory landscape across the region could pose challenges, though regulators generally seem friendly to the new wave. And neobanks everywhere must deal with problems of growing to scale. There are instances, for example, when any banking customer will need personal assistance to solve a problem or use a service. This means staffing help centers with enough human resource to meet the needs swiftly, by chat or voice, which neobanks have sometimes struggled to execute. Altogether, though, I see the Southeast Asian Neobank scene as a classic example of a next big thing gathering huge momentum. As the bulk of the population is currently unbanked, I feel neobank adoption and merchandise offerings in Southeast Asia will dwarf more developed markets like Europe. The tech skills needed to create sound startups are present here. And these startups are being driven to supply innovative, global-worthy banking solutions, by ASEAN markets that are ready and expecting them.