Uncovering Why APAC Digital Banks Aren’t Making Moneyby Johanan Devanesan June 8, 2023
In response to the evolving demands of customers and the need to address the limitations of traditional retail banking, there has been a significant rise in the number of digital-first banks operating in the Asia Pacific (APAC) territories.
With over 40 launched across the region so far, these banks aim to leverage digital technologies and meet customers’ growing preferences for personalised banking experiences. The Quinlan & Associates report APAC Digital Bank Landscape explores the challenges faced by digital banks in the region, and the strategies they can adopt to achieve profitability.
While the digital banking landscape in APAC is flourishing, profitability remains a significant challenge. Out of the 453 challenger banks globally, only 20 were profitable in 2022, and 11 of them were located in APAC. Established digital banks in markets like Japan, Mainland China, and South Korea have managed to generate profits and establish a sizable customer base. However, recent data suggests that newer digital banks in the region are struggling to break even.
Even in developed markets like Hong Kong and Singapore, newer digital banks focusing on the retail segment are facing obstacles in achieving profitability. For example, since their entry into the market in 2020, none of the eight digibanks in Hong Kong have managed to turn a profit.
Cumulative losses there over the past three years range from US$70 million for PAObank to US$232 million for livi, according to the report. While some Hong Kong digital banks have reduced their losses slightly in 2022, observers predict that it will still take a few more years for them to establish a profitable business model.
Challenges abound throughout the region, in developed and developing markets alike.
High Customer Acquisition Costs
One of the significant challenges faced by challenger banks in APAC is the high customer acquisition costs (CAC). According to estimates, the average CAC in Hong Kong ranges from US$65 to US$90, significantly higher than the CAC in emerging markets (US$15-50) and frontier Asian markets (US$1-5).
Quinlan & Associates highlighted the presence of hidden costs, including indirect fees and expenses incurred to acquire customers. Additionally, high rates of dormant bank accounts among digital banks’ customer base in Hong Kong led to an effective cost of acquisition nearly twice the visible cost, on average.
Lower Average Deposit Level per Customer
Digital banks in APAC also face the challenge of lower average deposit levels per customer compared to traditional banks. In developed markets like Hong Kong, Japan, and South Korea, traditional banks have an average deposit level per customer of over US$29,000, whereas digital banks have only US$2,100.
This limitation restricts their lending capacity and ability to monetise idle deposits through fee-based income, such as the sale of investment or insurance products.
Loyalty and Competition
Gaining the trust of retail customers and demonstrating the value-addition over traditional banks is a key hurdle for digital banks. Building cybersecurity measures to protect user data, maintain their credibility, and complying with regulatory requirements are crucial in establishing trust.
Furthermore, digital banks face fierce competition not only from other digital banks, but also from traditional banks in APAC that are heavily investing in their digital capabilities. This intensifies the need for digital banks to provide a superior customer experience and differentiate themselves from their traditional counterparts.
Strategies for Profitability
Customer Experience and Cost Management
To achieve profitability, digital banks in APAC must focus on providing a superior customer experience while managing costs. By leveraging cutting-edge technologies and personalised services, they can offer unique value propositions that attract and retain customers.
At the same time, optimising customer acquisition costs and minimising hidden expenses associated with customer acquisition can contribute to a more efficient and cost-effective business model.
Diversification of Revenue Streams
Digital banks should aim to diversify their revenue streams beyond core lending activities to ensure long-term sustainability. In addition to interest income generated from lending products, exploring fee-based income opportunities, such as offering investment or insurance products, can enhance their financial performance and expand their revenue sources.
Partnerships and Ecosystem Development
Actively cultivating partnerships is crucial for digital banks to rapidly scale their customer base, enhance their product and service offerings, and strengthen their technological capabilities. By collaborating with relevant partners, digital banks can accelerate their proficiencies and gain expertise to eventually establish a self-sustaining ecosystem that bridges customers and business partners. Such partnerships can also provide access to new markets and customer segments, enabling organic or inorganic expansion.
Talent Strategy and Competitiveness
Competition for talent among digital banks in APAC is intense, leading to hiring bottlenecks and high staff turnover rates. To overcome this challenge, digital banks should establish a comprehensive talent strategy that includes proactive learning and development initiatives, robust remuneration practices, and a focus on building a future talent pipeline. By investing in their workforce, digital banks can attract and retain top talent, enhancing their competitiveness in the market.
While the APAC region has witnessed a surge in the number of digital banks, profitability remains a significant challenge. Overcoming obstacles such as high customer acquisition costs, lower average deposit levels, intense competition, and establishing customer trust requires strategic approaches.
By prioritising superior customer experiences, managing costs, diversifying revenue streams, fostering partnerships, and investing in talent, digital banks in APAC can navigate these challenges and position themselves for profitability. Once a digital bank achieves profitability, it can leverage its existing capabilities and established track record to expand its footprint and capture new opportunities.