Thursday, 9 December 2021

Digital banks attract more capital as regulators open up markets

5 min read

By Foo Boon Ping

In Asia Pacific, South Korea’s Kakao Bank, Alibaba-backed MyBank and Judo Bank in Australia are the top three digital banks that have raised the most capital

  • Financial services will become increasingly digitalised
  • More funds will be raised to launch the new digital banks in the next two years
  • The capital raising outlook for digital banks in Asia Pacific is expected to remain strong in the foreseeable future

Since the advent of financial technology (fintech) companies and incumbent institutions started to digitalise their business, regulators have been on the back foot of supervising the activities of these new players. They worry more about the disruption it will bring to incumbent players and the impact on financial stability and soundness. Few jurisdictions foresaw, much less welcomed the disruption to come that would be a catalyst of positive change – to enable financial inclusion, raise service level and improve overall experience of consumers, among other benefits.  

However, there are a few front runners among them who saw the future and took steps to introduce regulation that facilitated the growth of fintechs – especially the new breed of digital banks. For example, the Financial Conduct Authority in the UK was among the first to introduce regulatory sandboxes and open banking standards that allowed fintechs to experiment and compete with incumbent institutions. The European Union followed with Payment Service Directive (PSD) 2 that further levelled the playing field for new entrants.

In the technologically focused market of the US, fintech players are flourishing as they are embraced by a hungry and receptive investor community. They also face a generally ambivalent regulatory environment comprising a plethora of different, sometimes competing financial regulators who mainly deferred to the Securities and Exchange Commission and the Consumer Financial Protection Bureau to supervise this new generation of digitally-enabled challengers. These were introduced in the US and the UK with the entry of players such as Simple (2012), Moven (2013), Fidor (2015), Monzo (2015), Revolut (2015) and Starling Bank (2017).

In Asia Pacific, the first generation of internet and direct banks were introduced in Australia and Japan where ING Direct and Japan Net Bank were respectively launched in 2000. However, when mobile and API technology came of age, the landscape was transformed by Chinese tech giants such as Alibaba and Tencent. WeBank, the digital banking subsidiary of Tencent started operating in China back in 2015.

As more jurisdictions recognise that financial services will become increasingly digitalised, similar regulations have also been issued in Hong Kong, South Korea, Singapore and Taiwan. It is expected that more regulators in the region will follow suit as the interest in digital financial services grows as reflected in the funding attracted by players from the private sector and venture capitalists.

South Korea’s Kakao Bank has raised the most capital as of 4 March 2020, followed by Alibaba-backed MyBank and Judo Bank in Australia. Kakao Bank increased its paid-in capital to $1.6 billion by issuing new shares worth $467 million, after financial authorities approved its application to become the bank’s largest shareholder with a 34% stake. On the contrary, the other internet-only bank in South Korea, K-Bank, only secured $447 million in funding. KT Corp’s application to raise its stake in the bank was disapproved as it has a history of violating fair trade regulations. Judo Bank in Australia has raised a total of $830 million in funding over four rounds. In July 2019, the bank raised $276 million, which is double the bank’s initial funding target and the biggest single funding round for a startup in Australia.

In aggregate, the four pure online banks in China raised the most capital compared to other markets, with a total funding of $2.72 billion. MyBank was launched in June 2015 on initial capital of $654 million, and it raised $367 million in early 2020, which has enabled the bank to provide better services to small businesses, especially when the operations of small businesses have been seriously affected by the outbreak of COVID-19.

Recently, Hong Kong’s WeLab raised $156 million to launch WeLab Bank and further expand internationally, while Singapore’s Tonik has received $6 million in funding to launch its digital bank in the Philippines. More funds will be raised to launch the new digital banks in the next two years, given that 12 digital bank licences were issued in Hong Kong, South Korea and Taiwan last year and up to 10 digital bank licences will be issued in Singapore and Malaysia. Meanwhile, the Philippines is expected to release the virtual banking regulation this year. Thailand also intends to join other nations in licensing digital-only banks. Consequently, the capital raising outlook for digital banks in the region is expected to remain strong in the foreseeable future, which will help promote financial inclusion, drive greater competition and foster innovation in the sector.

Note: As of 4 March 2020


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