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The Appeal of Unbanked Customers: Why Digital Bank Licenses Are in High Demand

Fitch Ratings estimates more than 290 million unbanked individuals in Southeast Asia (SEA). This is larger than the population of Indonesia, the fourth-largest country in the world.

The term ‘unbanked’ or ‘underbanked’ refers to those who do not use banks or banking institutions in any capacity. These individuals would also likely not subscribe to insurance, pensions, or any other types of professional money-related services. 

The more straightforward banking solution for all

This is where digital banks (or neobanks) come into the picture. They seek to improve digital literacy and lessen financial inequality amongst the underbanked population.

The unbanked problem has long been a critical issue for which economists, organisations, and governments have yet to find a viable solution. That said, while fintech players have prioritised financial inclusion, interest in digital banking is predominantly focused on middle-income families and youths under 30. 

Apart from improved access to financial services and more personalised services for specific needs, this segment of society will also access cheaper and safer transactions. This can then help boost economic participation and empowerment among the masses. 

In Malaysia, only 29 per cent of low-income families expressed an interest in virtual and digital banking, according to a report by PwC.

Conversely, only those earning more than MYR10,000 a month would seriously consider opening a virtual bank account. This contrast is mirrored in other countries worldwide, including Singapore and Hong Kong.

Digital banks have flourished, and intense competition within the space has been heating up with mergers, acquisitions, and partnerships springing up across the region.

Also Read: E-commerce for the future: How open banking enables greater security and trust

For example, Indonesia’s Bank Jago sought to integrate cashless payment systems on its app and got Gojek to invest. Meanwhile, in Singapore, the Singtel-Grab consortium nabbed one of the four digital banking licences on offer late last year.

The tale of caution

That said, digital banks face a set of challenges specific to their own. For one, there are significant cybersecurity and data protection issues associated with running an online-only bank.

According to a PwC commissioned survey, 36 per cent of Malaysians and 34 per cent of Singaporeans did not trust digital banks to store their information safely. This distrust runs deeper in neighbouring Indonesia, which has yet to introduce data protection legislation for consumers.

The nation’s less than impressive track record is also of little consolation, having had several large tech companies compromised in recent years. 

Tokopedia and Bukalapak were big names involved and saw over 100 million users’ personal information illegally accessed last year. Distrust and suspicion pose significant hurdles for fintech players to overcome with such incidents. 

While this space holds a lot of potential, the issue of profitability is pertinent to how this industry moves forward. To date, only three digital banks have achieved profitability, namely KakaoBank, WeBank, and MyBank.

It takes an average of between seven and ten years for a digital bank to return to the black, a significant investment in terms of both time and cost. Thus, for the digital banking sector to truly take off, a re-evaluation of the company’s current business model and finding ways to crack the code to profitability will become key. 

The future is bright

Nevertheless, the future of digital banks remains bright. There has been positive government and regulatory support, underscored by public interest and an eagerness to experiment with digital bank offerings.

Malaysia and Singapore lead the pack offering digital banking licences to non-financial entities. Meanwhile, whilst boasting a bustling fintech bubble, Indonesia has yet to grant licences to digital-only banks. Licencing is reserved for those with a physical presence.

In the Philippines, regulators have announced that it will stop accepting applications after issuing six digital banking licences. 

Digital banks are likely to stay as it offers innovative new services that appeal to their target demographic. While incumbents largely adhered to their product-focused, hard-selling mindset, fintech companies utilise new technology to tackle customers’ specific pain points.

Also Read: Deconstructing digital banking: How it can cater to the underserved in Malaysia

Grab-Singtel, for instance, focuses its lending services on SMEs and MSMEs who lack access to credit. Similarly, Filipino fintech company Tonik has emerged as a solution to the country’s underbanked and unbanked population offering a more extensive reach to those previously ignored. 

Due to a lack of physical branches, digital banks can offer services at a much more competitive rate. Gojek-backed Bank Jago allows users 25 free transactions before charging a fee of IDR3,000 (US$0.21) per transfer, a significantly lower amount when compared to traditional banks’ fees of IDR6,500 rupiahs (US$0.45). There are also no administrative or hidden fees for the opening or closing of accounts. 

Accelerated digitalisation prompted by the pandemic has also prompted an increased public usage of digital banking offerings. Singapore’s DBS Bank reported a 15 per cent year-on-year increase in sign-ups between February and March last year. 

Lower costs, improved customer service, and innovative technology on offer have seen customers move away from traditional banks in favour of their digital counterparts. These are likely reasons for the rise and development of digital banks. 

This article was first published on March 23, 2022. 

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Image Credit: ipopba

The post Digital bank licences: Why does everyone want a slice of the unbanked? appeared first on e27.


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