Yves Roesti, Sean Huang, Xuna Shao and Joshua Choy from Synpulse, a financial services consulting company, point out that most digital banks were launched without physical branch locations. What makes neobanks stand out from incumbents is their ability to leverage technology to differentiate their product offerings in the banking industry, according to Roesti and his colleagues.
Roesti, Huang, Shao, and Choy note that the concept of digital or challenger banks originated in Europe where it began to transform the existing banking sector. Neobanks are now establishing a strong presence throughout Europe and the US, however, there’s a long way to go before these digital challengers are able to compete against traditional institutions in the Asia Pacific area.
Japan Net Bank was notably the first digital-only bank to establish operations in Asian markets. Sakura Bank (now called Sumitomo Mitsui Banking Corporation) realized that there was a great opportunity for introducing a payment method for Japan’s internet consumers, and launched a joint initiative in 2000 to establish the neobank, which provided B2C and C2C transaction settlement.
Although the virtual bank was offering a wide range of financial services, the digital banking trend only took off after China came into the picture, Roesti and his colleagues argue.
The China Banking Regulatory Commission began issuing the first digital banking licenses in 2015. They were awarded to Alibaba-owned MyBank and Tencent’s WeBank. Tencent is well-known for its widely-used messaging app Wechat and Alibaba is known throughout the world for its e-commerce portals.
The Hong Kong Monetary Authority issued eight digital banking licenses in order to help China and Japan challenge traditional banking service providers. Following this development, there were many other neobanks that were established across the Asia Pacific region – including South Korea’s K-bank and Hong Kong’s ZA Bank.
Singapore has repositioned itself as a major global financial hub by making substantial direct investments into technology. Recently, the Monetary Authority of Singapore began to offer digital banking licenses.
Applications for digital banking licenses are being accepted, with the results expected to be announced at some point later this year.
Roesti and his colleagues argue:
“The key question for all digital banks is: how can they differentiate themselves from the large and financially powerful incumbent banks?”
According to the Synpulse team:
“Digital banks are expected to distinguish themselves from traditional banks by offering better rates and removing minimum deposit requirements given their lower operational costs.”
“Digital banks can differentiate themselves by offering technologically advanced products such as robo-advisory funds to investors to increase the attractiveness of their offerings.”
They also mentioned:
“With traditional banks not very focused on the SME sectors, it would be a strategic opportunity for the digital banks to create a niche for themselves.”