Southeast Asian banks’ well-placed to ride fintech’s digital disruption: Moody’s

Supportive regulation, digital investments, and fintechs slowing growth will play to banks’ favor.

Incumbent banks in Southeast Asia are well-placed to ride along the fintech disruptors in the digital finance space, according to Moody’s.

Banks have established strong digital presences thanks to successfully transitioning customers to using digital channels, the ratings agency noted. “Customer transactions at the region’s leading banks are now largely processed through internet and mobile channels,” it said in a report.

For example, Indonesia’s PT Bank Central Asia Tbk and Thailand’s Kasikornbank both reported that 90% of their transaction volumes were done digitally.

The expected moderation of fintech growth will also play to incumbent banks’ advantage when it comes to maintaining and growing their digital presence.

Although many fintechs have built up huge customer bases, their service offerings are largely limited to digital payments. Expansion into other financial services remains modest.

Many fintechs also remain at loss-making, and tight funding conditions will curb their near-term growth, Moody’s said.

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These developments are forcing tech firms to implement cost-cutting measures and delay initial public offerings, which in turn will curb their expansion. For instance, Moody’s noted that Grab Holdings has reportedly been reducing incentives for its drivers and implemented salary freezes and budget cuts.

Local regulations also curb the formation of closed loop ecosystems.

“Regulators encourage financial innovation and do not intend to shield banks from new entrants. At the same time, they seek to prevent the new entrants from using their captive customer bases to develop closed loop ecosystems,” the report said.

The emergence of national retail payment systems further tilts the competitive landscape in favor of incumbents.

“It changed the competitive landscape, especially for banks as the payment services they provide are now settled real-time and cost little to nothing for both consumers and merchants. Bank transfers are more convenient now that deposit accounts can be tagged to mobile, personal identification and business registration numbers,” Moody’s said.

The introduction of interoperable QR codes, which have seen widespread adoption in most SEA countries, also plays the same role: boosting payment efficiency, and preventing customers from being locked into a single service provider.

Further, regulatory initiatives have removed some arbitrage in rules and regulations that worked in favor of fintechs. 

For instance, banks, which are subject to more stringent know-your-customer (KYC) rules, benefited from the introduction of electronic KYC regulations as they were able to offer remote deposit account opening, according to Moody’s.