KUALA LUMPUR: 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, Fitch said such moves were unlikely to pose a material challenge to the biggest incumbent banks in the near term as technology firms were first likely to target underserved segments of the market.
Early this month, there were reports on consumer Internet firm Sea planning to buy Bank Kesejahteraan Ekonomi (BKE), and mulling the purchase of another Indonesian bank.
Indonesia’s Gojek is also increasing its stake in Bank Jago.
This highlighted the ambition of technology firms to make further inroads in financial services, said Fitch.
“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,” it said in the report.
While Sea has secured a full digital banking licence in Singapore in December last year, it will still need approval from the Indonesian financial service regulator to wholly acquire BKE due to limits on foreign ownership.
“Approval, if granted, may come with conditions attached,”said Fitch.
The firm said 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, Fitch believes that the impact was likely to be manageable in the near term, as these new entrants would first target niche segments of the market, such as tech-savvy millennials.
“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 said.
Fitch said it remained unclear which companies would ultimately be able to realise benefits from the growing links between tech firms and banks.
In markets such as Indonesia, there is a risk that aspiring digital banks may misprice credit risks when targeting the unbanked.
More developed markets with dominant and more tech-savvy incumbents like Singapore, digital banks may face difficulty out-investing conventional banks in digitalisation to offer distinctive value beyond niche areas.
Nevertheless, the rating agency said the growth of fintech in Asean was also prompting closer regulatory scrutiny.
“In markets where digital bank licensing frameworks are available, regulators have usually opted to introduce viability requirements for new digital banks to minimise the risks to financial stability,” it said.