The Thredd team
November 25, 2024
Rapid innovation across the region will redefine how to build a digital bank in 2024 and beyond.
The Thredd team
A decade-plus into the evolution of the modern neo bank, a wealth of experience and a more developed ecosystem favours APACs next wave of builders.
There’s plenty of room for debate as to when and where the first modern digital bank was born. Was it Rakuten Bank in Japan (2000)? Nubank in Brazil (2013)? Or Starling Bank in the UK (2014)? Regardless of your position, one thing is clear: countries like Thailand and others in the APAC region will lead the way in defining how to build digital banks in 2024 and beyond.
According to some estimates, APACs digital economy will achieve a gross merchant value of approximately $53 billion by 2025 and could double to between $100 and $165 billion by 2030.
The number of middle-class people in the region is booming and is expected to reach two-thirds of the population by 2025. This surge could mean the region's total personal wealth reaches USD 96 trillion, according to some estimates.
Regulators across APAC are actively issuing digital banking licences to promote financial inclusion and competition. Case in point, Thailand where competition for the three digital banking licences is underway and will be issued this year by the central bank.
While estimates vary and adoption appears to be on the climb, the APAC region has a large unbanked and underbanked population (approximately one billion persons) creating a large opportunity for neo-banks to offer accessible and convenient financial services through mobile-first approaches.
According to some estimates, APACs digital economy will achieve a gross merchant value of approximately $53 billion by 2025 and could double to between $100 and $165 billion by 2030.
A closer look at some of the considerations for setting up a new digital banking proposition in Thailand and for being awarded one of its forthcoming licences is illuminating in how the approach and requirements are not just trying to drive healthy competition but also ensure better services and distribution to segments of the population.
The Bank of Thailand’s (BOT) application’s focus on financial inclusion and its awarding of just three licences suggests a strong focus on quality over quantity and the need for strong models to reach underbanked populations including services designed for those with limited financial literacy or no credit history.
Apart from the need for applicants having the requisite strong IT expertise, financial strength and stability, there are also interesting and more nuanced questions around whether or not to have a centralised or decentralised ledger as well as considerations regarding interoperability with other banking infrastructure available in the market.
Also interesting is that these new virtual banks must serve customers principally through digital channels and are apparently prohibited from establishing physical branches or ATMs. They may however offer cash-in and cash-out services through appointed banking agents or partnerships with other providers.
Setting aside these and other factors particular to the Thailand case, there are also some tried and true keys to success based on learnings from successful predecessor digital banks.
Long before an entity seeks to secure a licence or enter the digital banking market by any other means, there are a number of critical factors that need to be considered, and here are just a few.
Building agility and flexibility into the DNA of a bank’s tech stack, is key to enabling the rapid testing, launching and refinement of innovative products that differentiate. The architecture design must orchestrate the secure exchange of data (inbound and outbound with the broader ecosystem), to allow key flows such as enabling underwriting loans from non-traditional data sources or creating hyper-personalised product offerings. Advancements in Open Banking, AI, blockchain and preparing for increasingly sophisticated cyberattacks are all key areas that banks need to be ready for.
A quick scan across many of the successful digital banks around the world shows a high adoption rate for the cloud (e.g. Allica, Monzo, Starling, Trust Bank). The primary cloud providers such as AWS are providing a highly flexible frameworks and cloud native services that enables iterative adjustment and fine tuning of critical systems such as security, in a cost-effective manner that traditional hosting environments cannot match. This allows for rapid and scalable innovation, empowering tech teams to operate with genuine agility.
One factor is the anchor product or the offering an entity will lead its market entry with. Essential in this equation is defining how the product will be differentiated in its value proposition or proposition.
Keeping customer acquisition costs low is crucial because the margins in serving the underserved in particular are typically really low. Fortunately, there are good examples and learnings from predecessors to draw upon. Those players who have launched to a large existing digital user bases (on-tap-distribution), have generally been far more successful (e.g. KakaoBank tapping Kakao Talk in Korea, WeBank promoting to WeChat users in China, Rakuten Bank with Rakuten customers in Japan).
Having a simplified way to validate the compliance of programs for example, via very specific and automated reporting mechanisms is key to success.
This is an important and overarching consideration as it brings together so many phases and components of launching a digital bank. Thankfully, with the help of experienced partners, there are concrete ways of achieving speed.
Speed to market seems to be every would-be partner’s favourite selling point and promise however, there are some fundamentals that need to be in place for any team to deliver on that assurance.
First, the best partners will have done it before. Yes, some people have launched a digital bank before, but some have done it more than others and at greater scale and degrees of success.
Second, there is no replacement for the ability to combine that kind of experience with people on the ground able to help define new digital banking propositions for the market or region.
Speeding market entry today is also aided by having a lot of experience in regulatory compliance across different markets and the ability to tailor requirements at pace.
With so much of the anchor product’s success tied to customer experience, an entity will likely want a partner able to help them champion the user experience and be able to deliver customisation in dynamic fashion.
Unlike the trailblazers of the past who had to iterate and build so much on their own, APACs next wave of digital banks will benefit from a more developed ecosystem of players, a range of ready-to-go white-label solutions and the help of deep domain experts to assist in defining and enabling their vision of best-of-breed digital banking for their market and time.
Edwin Poot is seasoned financial technology executive with over two decades of experience working across the evolution of the fintech, telecom, energy, and e-commerce industries. Prior to joining Thredd as their Global Chief Technology Officer where he leads the evolution and delivery of the company’s product platforms, modern technology stack and international expansion efforts, Edwin served as VP of Product & Technology at Nubank and as Chief Architect at Booking.com where he played a pivotal role in driving technological innovation and growth.
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