ASEAN’s neobanks need viable models

Southeast’s digital-first banking entities may need a long-term vision.

For the 440 million Southeast Asians who are online, going digital has made banking simpler. Traditional banks didn’t cater to the needs of the new class of spenders and savers. And that’s where neobanks stepped in. With a mobile-first, digital-only approach, neobanks are more accessible and cheaper.

The regulatory regime in ASEAN has also been conducive to the growth of neobanks. The 290 million unbanked population now has payment solutions at their doorsteps. However, profitability for the standalone entities looks elusive.

Funding for ventures is drying up in most of Asia. Neobanks will need to diversify to handle temporary blips of falling disposable income.

Making steady headway

In markets such as Indonesia, the Philippines, Singapore, and Vietnam, there is a rapid growth in neobanks. With more than a dozen neobanks in the region, there was about 50% growth on a year-on-year basis in 2021.

Conducive regulations have helped the proliferation of neo banks. Indonesia, for instance, has seen the entry of Bank Neo Commerce. Regulations allow these new-age banks to be fully online and branchless, just with the requirement to have regional headquarters within the country. Traditional banks can also convert to digital. Apart from retail, SME-focussed neobanks such as KoinWorks have also raised funds for expansion. Thailand, too, has allowed digital banking, as long as customer data is protected.

In Vietnam, early movers such as Timo have attracted funding to expand services to the unbanked. However, neobanks need to partner with traditional banks and insurers to offer their services.

With neobanks emerging as the alternative, mainstream banks are also eager to partner with these entities. In the Philippines, for example, the first licensed digital-only neobank called Tonik has received funding from Mizuho Bank.

Do the numbers add up?

A majority of the existing neobanks in ASEAN are between two to three years old. With Covid eating away a lot of potential revenue, none of the neobank entities in the region have declared profits yet.

Meanwhile, experts believe that diversifying the offerings to become super-apps could enable a profitable business model. For instance, Gojek has taken a neobank-like avatar by integrating Indonesia-based Bank Jago’s services on its mobile application. Similarly, Thai startup Salary Hero is adding neobanking to its list of services.

However, sustainability is not a concern unique to Southeast Asia’s neobanks alone. Globally, less than 5% of the 400 neobanks are profitable. Ventures such as Octo in the Philippines and Beat Banking in Thailand are relatively safer because traditional financial institutions back them.

For the rest of the industry, achieving a break-even could be a challenge. With low ticket sizes and close to meagre fee income, scaling neobanks could eventually become a constraint. Neobanks that can quickly move on from just banking are likely to be the winners.

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