In 2020, I wrote a column titled “Singapore’s Digital Banking Race Is On,” which detailed how the Monetary Authority of Singapore was awarding several full digital banking licenses. Neighboring countries, like Malaysia and Indonesia, were also moving fast to get their own digital banks up and running it seemed like the rapid growth of online financial institutions might be a big story in the region. Several years later, the race has gotten off to a slow start.
A fully digital bank is a financial institution that conducts all or most of its operations, such as lending and accepting deposits online. Compared to a traditional brick-and-mortar bank, digital banks don’t maintain a network of physical branches. That means they can reach customers who might not have regular access to a physical bank branch, but it also means they have to compete with large and well-established conventional banks. We saw a lot of activity in the digital banking scene a few years back, when venture capital was flowing into Southeast Asia’s red hot tech sector and digital finance was seen as a new and potentially lucrative frontier.
Singapore ended up issuing two full digital bank licenses. One led to the creation of GXS Bank, which is backed by Grab and Singaporean telecom giant Singtel. The other went to MariBank, which is owned by Sea, the parent company of the e-commerce platform Shopee. The basic idea is that tens of millions of people already use their phones to access services provided by Grab, Singtel, and Shopee, so adding digital banking as another service would be the logical next step.
But Singapore has been very methodical and deliberate in allowing its digital banks to grow. For the first two years of operation, both digital banks were only allowed to accept a maximum of S$50 million in retail customer deposits, which means they had to be very selective in onboarding customers and imposed caps on the amount a single account holder could keep in the bank.
This obviously limited their ability to scale quickly, especially compared to conventional banks like DBS, which hold hundreds of billions of dollars in deposits. Gradually, the digital banks are beginning to accept larger deposits but this shows that the Monetary Authority of Singapore is exercising a high degree of caution when it comes to growing this particular slice of the financial sector.
A similar story is playing out in Malaysia, where Bank Negara granted several digital banking licenses in 2022. The licenses were awarded to many of the same players as in Singapore, including Grab, Singtel and Sea. But by the end of 2023, only Grab and Singtel’s GXBank had actually begun operating.
It was always likely that digital banks would face a steep uphill climb in markets like Malaysia and Singapore, which have well-developed financial systems and established incumbents. Perhaps a more interesting test case for digital banking would be Indonesia, where a larger proportion of the population does not have regular access to banks or financial services. And in recent years we saw rapid growth of Indonesian digital banks, including several that listed on the local stock exchange with very high valuations and deep-pocketed, well-connected backers.
But even in Indonesia, the growth of digital banks slowed a lot in 2023. Take Bank Neo Commerce, which is majority-owned by fintech firm Akulaku. At current exchange rates, Neo Bank posted a net loss of about $36 million in 2023 while the gross loan portfolio grew only 5 percent, a huge drop compared to the 140 percent leap it experienced from 2021 to 2022. At Allo Bank, a digital bank that includes amongst its major shareholders Indonesian e-commerce platform Bukalapak, the loan portfolio grew just 2.5 percent in 2023.
Bank Jago, just under a quarter of which is owned by Go-Jek, has fared better with deposits growing 31 percent and loans 38 percent year over year. Despite that, Bank Jago is not yet a big profit generator, reporting a net income of just $4.5 million in 2023. The share price and market valuation of all three banks have shrunk considerably since 2022.
Despite being backed by some of the biggest tech companies in the region, digital banks face stiff competition from much larger and more established incumbents, as well as regulatory barriers. What all of this means is that while there is still a lot of upside, digital banks in Southeast Asia are not yet revolutionizing the financial industry at quite the speed or scale we might have expected when the licenses first started being issued.