Fitch Rtgs: Fintech Acquisitions May Affect Competition Among ASEAN Banks

Fitch Rtgs: Fintech Acquisitions May Affect Competition Among ASEAN Banks

Reuters  | Jan 19, 2021 09:20

Fitch Rtgs: Fintech Acquisitions May Affect Competition Among ASEAN Banks


(The following statement was released by the rating agency)
Fitch Ratings-Hong Kong/Jakarta/Singapore-18 January 2021: Recent acquisitions
of small banks in Indonesia by technology firms have highlighted the potential
for fintech entrants to shake up the competitive landscape for banking in
ASEAN over time, says Fitch Ratings. However, such moves are unlikely to pose
a material challenge to the biggest incumbent banks in the near term as
technology firms are first likely to target underserved segments of the
market. Media reports in January 2021 of a planned acquisition of Bank
Kesejahteraan Ekonomi (BKE) by Singapore-based Sea, and moves in December 2020
by Indonesia's Gojek to increase its stake in Bank Jago, underscore the
ambition of tech firms to deepen their involvement in the provision of
financial services. Fitch has previously argued
(https://www.fitchratings.com/site/re/10130094) that Indonesia and the
Philippines provide the largest market potential among ASEAN's six major
economies owing to their large unbanked populations and low levels of
household leverage. The acquisition of existing banks may help to smooth the
path for fintech firms wishing to offer financial services in Indonesia, which
has moved more slowly than some other ASEAN governments in developing
so-called “virtual banking” licence guidelines. Sea secured a virtual
banking licence in Singapore in December, but will still need approval from
the Indonesian financial service regulator, OJK, to acquire BKE wholly due to
limits on foreign ownership. Approval from OJK, if granted, may come with
conditions attached. Aspiring tech entrants could target markets in a swift
and scalable manner, without the overheads associated with operating physical
branches, by leveraging data analytics on their extensive customer bases
across their regional operations. This may pressure incumbent banks'
profitability over the medium term, with smaller banks and those that have
sub-par digital offerings at greater risk of losing out. However, the impact
is likely to be manageable in the near term, as we believe that these new
entrants will first target niche segments of the market, such as more
tech-savvy, younger demographics or the underbanked, where yields are often
higher and competition is still developing. Some established banks have also
invested heavily in their IT infrastructure in recent years, with the pandemic
providing added incentive for incumbents to accelerate their digitalisation,
potentially closing off openings for some new entrants. It remains unclear
which companies will ultimately be able to realise benefits from the growing
nexus between technology firms and banks. In markets such as Indonesia, there
is a risk that aspiring virtual lenders may misprice credit risks when
targeting the unbanked, notwithstanding their potentially more advanced data
analytics capabilities. In more developed markets with dominant and more
tech-savvy incumbents, like Singapore, they may face difficulty out-investing
conventional banks in digitalisation to offer distinctive value beyond niche
areas. The growth of fintech in ASEAN is also prompting closer regulatory
scrutiny. In markets where digital bank licensing frameworks are already
available, regulators have generally opted to introduce viability requirements
for new digital banks, designed to minimise the risks to financial stability
presented by the growth of new services and market entrants. This will add to
execution risks around technology firms' strategies for expanding into
financial services, a sector that generally has high regulatory bars and
compliance requirements. Fitch believes the tech firms that are likely to
provide more formidable competition for incumbent banks over the longer term
include those that have established platforms and user bases or are backed by
deep-pocketed corporates. These are more likely to be able to sustain the
heavy financial investment necessary to attain scale, maintain cost
competitiveness and survive the initial loss-making stages of a start-up.
Contact: Tamma Febrian Associate Director, Financial Institutions +65 6796
7237 Fitch Ratings Singapore Pte Ltd One Raffles Quay #22-11 Singapore Duncan
Innes-Ker Senior Director, Fitch Wire +852 2263 9993

Media Relations: Leslie Tan, Singapore, Tel: +65 6796 7234, Email:
leslie.tan@thefitchgroup.com
Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email:
wailun.wan@thefitchgroup.com

The above article originally appeared as a post on the Fitch Wire credit
market commentary page. The original article can be accessed at
www.fitchratings.com. All opinions expressed are those of Fitch Ratings.


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