Thailand's new virtual banks will pose limited competitive threat to incumbent banks, according to Moody’s Ratings.

The Ministry of Finance (MoF) approved three applicants' licences on 19 June to establish virtual banks in Thailand, following a joint review of applications by the MoF and the Bank of Thailand (BOT).

While the introduction of virtual banks in Thailand will increase competition in the banking sector, we do not expect the new banks to disrupt most incumbent banks over the next three to five years because they will operate under regulatory restrictions during the initial period. Furthermore, virtual banks will be focused on lending to customer segments that incumbent banks typically avoid.

Meanwhile, incumbents have made significant inroads in upgrading their digital infrastructure. The new entrants will also face a more challenging macroeconomic environment compared with virtual banks in other parts of Southeast Asia because of Thailand's high household debt and modest economic growth.

The three successful applicants are consortiums led by:

• ACM Holding Company (ACM), a part of Thailand's largest conglomerate, Charoen Pokphand Group (CP group);
• Krung Thai Bank Public Company (KTB, Baa1 negative, baa31), Advanced Info Service Public Company (AIS) and PTT Oil and Retail Business Public Company Limited (PTTOR); and
• SCB X Public Company (Baa2 negative), KakaoBank Corp. (KakaoBank) and WeTechnology, backed by WeBank.

Without physical branches and legacy infrastructure, the new entrants could operate more efficiently and offer innovative financial services by adopting the latest technologies and leveraging on the complimentary strengths of their consortium partners. For instance, we expect the SCBX consortium to benefit from KakaoBank's and WeBank's years of operational experience and established track record in operating digital banks in South Korea and China, respectively.

The KTB consortium can also capitalise on AIS' and PTTOR's positions as the respective leading mobile telecom and oil marketing companies in the country by leveraging on their large, domestic customer base. Similarly, ACM can tap into its shareholders' expertise in operating TrueMoney, a payment application that is widely used in Thailand.

In addition, the CP group has an extensive physical presence across Thailand through its convenience stores and supermarkets, providing them with a large captive client base and distribution platform.

However, the BOT has imposed regulatory restrictions for the next three to five years that will prevent virtual banks from growing too quickly, limiting risk to the financial system and depositors. During this period, virtual banks will be closely monitored by the central bank and required to operate according to the pre-approved plan. According to BOT's licensing framework, virtual banks will need to gradually increase their capital to at least THB 10 billion ($306 million) from THB 5 billion ($153 million) during the restricted phase. In case of non-compliance, virtual banks may be asked to wind down.

Moreover, virtual banks will be focused on lending to underserved and unserved segments, such as lower-income retail customers, self-employed customers and small businesses. Incumbent banks typically avoid lending to these segments because of high credit risks.

As such, lending to these segments will expose virtual banks to higher asset quality risks and credit costs, especially as the operating environment in Thailand remains challenging – Thailand faces structural issues, such as high household debt and modest economic growth compared to peers in the region, which could hamper customers' income growth and debt repayment capacities.

Incumbent banks in Thailand have also been investing heavily in the digitalisation of their banking operations. Some banks have expanded their digital product offerings beyond traditional banking services to include micro financing and wealth management services, while others have partnered with third-party platforms to expand their digital presence, although income contribution from such segments remains small. Additionally, the launch of a national real-time retail payment system, PromptPay, has made transfer of funds and payments faster, cheaper and more convenient than before. New virtual banks will therefore need to find innovative ways to differentiate their product and service offerings from the incumbent banks.

As part of the winning consortiums, SCB X and KTB will need to contribute capital. However, we do not expect any material impact on their capital ratios because their capital infusion will likely be very small and shared among consortium partners.

Thailand now joins other Southeast Asian countries – Singapore, Malaysia, the Philippines and Indonesia – that have introduced digital banks into their banking systems.

Moody's Ratings report redisseminated by The Asian Banker