Recent acquisitions of small banks in Indonesia by technology firms have highlighted the potential for fintech entrants to shake up the competitive landscape for banking in ASEAN over time, says Fitch Ratings. However, such moves are unlikely to pose a material challenge to the biggest incumbent banks in the near term as technology firms are first likely to target underserved segments of the market.
Media reports in January 2021 of a planned acquisition of Bank Kesejahteraan Ekonomi (BKE) by Singapore-based Sea, and moves in December 2020 by Indonesia’s Gojek to increase its stake in Bank Jago, underscore the ambition of tech firms to deepen their involvement in the provision of financial services. Fitch has previously argued that Indonesia and the Philippines provide the largest market potential among ASEAN’s six major economies owing to their large unbanked populations and low levels of household leverage.
The acquisition of existing banks may help to smooth the path for fintech firms wishing to offer financial services in Indonesia, which has moved more slowly than some other ASEAN governments in developing so-called “virtual banking” licence guidelines. Sea secured a virtual banking licence in Singapore in December, but will still need approval from the Indonesian financial service regulator, OJK, to acquire BKE wholly due to limits on foreign ownership. Approval from OJK, if granted, may come with conditions attached.
Aspiring tech entrants could target markets in a swift and scalable manner, without the overheads associated with operating physical branches, by leveraging data analytics on their extensive customer bases across their regional operations. This may pressure incumbent banks’ profitability over the medium term, with smaller banks and those that have sub-par digital offerings at greater risk of losing out.
However, the impact is likely to be manageable in the near term, as we believe that these new entrants will first target niche segments of the market, such as more tech-savvy, younger demographics or the underbanked, where yields are often higher and competition is still developing. Some established banks have also invested heavily in their IT infrastructure in recent years, with the pandemic providing added incentive for incumbents to accelerate their digitalisation, potentially closing off openings for some new entrants.
It remains unclear which companies will ultimately be able to realise benefits from the growing nexus between technology firms and banks. In markets such as Indonesia, there is a risk that aspiring virtual lenders may misprice credit risks when targeting the unbanked, notwithstanding their potentially more advanced data analytics capabilities. In more developed markets with dominant and more tech-savvy incumbents, like Singapore, they may face difficulty out-investing conventional banks in digitalisation to offer distinctive value beyond niche areas.
The growth of fintech in ASEAN is also prompting closer regulatory scrutiny. In markets where digital bank licensing frameworks are already available, regulators have generally opted to introduce viability requirements for new digital banks, designed to minimise the risks to financial stability presented by the growth of new services and market entrants. This will add to execution risks around technology firms’ strategies for expanding into financial services, a sector that generally has high regulatory bars and compliance requirements.
Fitch believes the tech firms that are likely to provide more formidable competition for incumbent banks over the longer term include those that have established platforms and user bases or are backed by deep-pocketed corporates. These are more likely to be able to sustain the heavy financial investment necessary to attain scale, maintain cost competitiveness and survive the initial loss-making stages of a start-up.
Tamma Febrian, Associate Director, Financial Institutions, Fitch Ratings Singapore Pte Ltd & Duncan Innes-Ker, Senior Director, Fitch Wire.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.