Fintech players can only succeed as digital banks if they capture big ecosystems

A pre-pandemic report by Google, Temasek, and Bain & Company claimed that Southeast Asia’s internet economy would face six key barriers to growth: internet access, funding, consumer trust, payments, logistics, and talent.

Sending money through Alipay / Photo credit: Markus Winkler

In 2020, the rapid spread of Covid-19 forced hundreds of millions of individuals and businesses in the region to migrate online for survival. Such rapid digitalization marked significant improvements for both payments and consumer trust – the latter being a must-have for fintech players looking to tap into underserved markets.

Almost 200 million people in Southeast Asia remain unbanked and another 98 million are underbanked. Indonesia accounts for almost half of this ocean: 92 million unbanked and 47 million underbanked. Financial inclusion in the country lags behind its peers in Southeast Asia largely due to its archipelago terrain – 17,000 islands that serves as home to roughly 270 million people.

The rise of digital banks

In 2020, the higher risk of defaults puts a damper on lending activity. But aside from lending, digital financial services saw a healthy trajectory, with payments and remittances accelerating significantly due to fewer cash transactions – a clear result of social-distancing norms.

It’s no wonder then that the region’s unicorns are chasing each other to crack the toughest nut in the financial services tree: digital banking. Digital banks have a higher barrier to entry than other segments, mostly due to higher regulatory and risk requirements and the need for huge capital to stay competitive with legacy banks.

In the last few months alone, Indonesia’s big financial inclusion gap has drawn unicorns to set up their own digital banks: super app Gojek now owns a 22% stake in Bank Jago, and Sea has gained full control of Bank BKE.

Both unicorns wisely fulfill banking regulations by commandeering brick-and-mortar banks in Indonesia with a vision of converting them into digital banks.

For Gojek, it means integration with its fintech arm GoPay and giving its users instant access to digital banking services via Jago.

For Sea, the deal with BKE benefits its ecommerce arm Shopee and its payments app ShopeePay. It also builds on the regional strategy of the group, which has already received a full digital banking license in Singapore.

These two unicorns address an emergent need for their large ecosystems of transactions. Both merchants and buyers are comfortable with existing payments apps and thus should be easier to onboard to each brand’s related digital banking affiliates.

Separately, fintech startup Akulaku became Bank Neo Commerce’s biggest investor with a 25% stake in 2020. Akulaku is rooted in consumer finance, particularly in “buy now, pay later” services and unsecured personal loans. With Neo Commerce, Akulaku has a ready pipeline of retail consumers to channel toward more retail banking.

Looking west

Digital banks may be the newest trend in Indonesia, but in more developed markets, digital banking mushroomed in the last decade. Operating in the European Union, digital banks like Revolut, Starling, and N26 typically differentiated themselves through their platforms’ ease of use and lower fees.

Revolut began as a fintech brand focused on money transfers and remittances, helping EU travelers keep multiple currencies in one card while offering interbank foreign exchange rates and instant processing.

Turning east

Playing to strengths