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Digital banks will make life difficult for small banks

Digital banks will make life difficult for small banks

Singapore, March 01, 2022 — The rise of digital banks across Southeast Asia will spur innovation and increase financial inclusion among the region’s unbanked and underserved.

But the business model of digital banks remains untested over credit cycles, while the impact of digital disruption will likely be uneven between leading incumbent and small banks, according to a new report by Moody’s Investors Service.

“The entry of digital banks will promote growth in banking systems by enhancing the public’s access to banking services – in a region where financial inclusion remains modest,” says Tengfu Li, a Moody’s Assistant Vice President and Analyst.

“Many of these banks are affiliates of large consumer technology companies and can leverage their parents’ technologies and customer base to reach the mass market.

Digital banks & e-wallets

Digital banks affiliated with popular e-wallets and online platforms will have the advantages of brand familiarity and data capability to underwrite loans that incumbent banks traditionally avoid,” adds Li.

However, the success of digital banks will depend on their ability to underwrite the unbanked and underserved profitably. They will likely take considerable time to develop underwriting models that are sustainable across credit cycles. The potential volatility in financial support from technology companies is another concern.

Among incumbent banks, the proliferation of digital banks will widen franchise differentiation. Large leading incumbents are in a strong position to deepen their digitalization and defend their franchises, but their smaller peers, especially standalone banks, lack the resources to do the same and will face increasing competition from both digital banks and incumbents.

Access the report here.

  • The region’s new licensing rules are prompting the entry of digital banks, which will drive innovation and improve access to financial services among the unbanked and underserved
  • Large incumbent banks will be able to digitalize, but smaller banks that lack the resources will face competition from both incumbents and digital banks