Digital banks are on the rise, but are they profitable?

SINGAPORE, Malaysia, Thailand, and many other countries in Southeast Asia are thinking about issuing bank licenses to boost financial inclusion, increase competition, and improve the state of the industry overall.

Efforts made by regulators in the country have been met with plenty of enthusiasm, with applications pouring in from all sorts of companies.

However, the real question is whether or not these new-age digital banks will ever be .

Tech Wire Asia interviewed Tonik CEO Greg Krasnov — who just received a digital bank license from regulators in the Philippines — to find out.

“There are two basic models […]. One is where the bank offers a simplified, accessible, and convenient current account used for day-to-day transactions by the consumer. The other model is where the bank focuses on attracting longer-term consumer deposits and lending them out as consumer loans.”

According to Krasnov, the first model is difficult to monetize because, to attract customers, such banks typically charge very low or zero account fees, and only earn money on interchange – the 1 percent to 2 percent fee that merchants pay on every debit/credit card transaction.

Other the other hand, the second model, which is what Tonik has chosen, is much more profitable.

Good examples of the second model are NuBank in Brazil or Tinkoff Bank in Russia. Tinkoff achieved a Return on Equity (RoE) of more than 70 percent last year, outperforming the larger Russian banking sector whose average stands at below 10 percent.

Of course, in countries like Malaysia, Thailand, and the Philippines, the focus of regulators rooting for digital banks is the fact that these entities are usually in a better position to help reach financial inclusion goals as compared to traditional banking and financial organizations.

“Southeast Asia has a significant unbanked population, with over 50 percent of consumers across the largest markets – Indonesia, Philippines, Vietnam – still lacking in access to financial services.”

Tonik CEO Krasnov, whose fintech company is registered in Singapore, decided to start its first digital bank in the Philippines because the regulators there have already made considerable efforts to develop the infrastructure that can support digital banks in the financial inclusion efforts.

“The Filipino regulator has been at the forefront of digital innovation in the region for many years, for example, introducing the first liberalized e-KYC regime for easy all-digital customer onboarding, and many other innovations. We see this as a very promising case study, and hope other regulators in the region follow suit.”

However, just having a digital proposition and providing access to financial services isn’t enough to succeed. To succeed in the digital world, Krasnov believes that focusing on providing a great customer experience is key.

“It’s simply about putting the customer first and ensuring we’re in the right company to deliver on our digital-first mission.

“Continuing to invest in the right technology partnerships is key to ensuring our services are underpinned by the most reliable and robust systems available, to deliver on our mission to improve people’s financial lives through the use of technology.”

In the coming months, following Tonik’s launch in the Philippines and the launch of other digital banks in Southeast Asia, the realities of the market will become more apparent — although there’s no arguing that the opportunities do exist for those that can engineer a great proposition that benefits all stakeholders equally.

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