Across the globe, there has been frenzied activity in the fintech space driven by big telecom providers. A slew of digital banks have launched just as traditional banks have been embarking on their own digital transformations. The traditional banking industry has been slow to adapt, hindered by the thick amounts of regulation and heavy legacy systems that cannot be readily changed without disrupting the business.
New upstarts the like of Monzo (UK), Starling Bank (UK), Varo (US) and Revolut (UK), developed by entrepreneurs, were able to move in just as the digital revolution was to envelope the world. More than just facilitators of digital payments, these fintech startups also give loans, take deposits, offer investment services and sometimes even insurance.
In return, traditional banks have resorted to starting up separate digital banks to responding to the threat that these neobanks pose. For example, HSBC has rolled out HSBC Kinetic and RBS has developed its own digital bank Bo.
Apart from entrepreneurs, non-banking players are also forming neobanks. Most interestingly, telecom operators have taken an interest in financial services.
Orange Bank forms the best business case for the telecom neobank
After acquiring a 65% stake in Groupama Banque, European telecom giant, Orange, transformed the business into Orange Bank. This was then launched in France in 2017 and then Spain in 2019. Orange Bank is a mobile-centric bank that touts to offer everything a traditional bank can offer from the mobile phone. It was reported in November 2019 that they have more than half a million customers, with a steady pace of customer acquisition.
Orange Bank is planned to be launched across all European countries where the group operates. Banking services such as micro-credit will eventually be rolled out in Africa and the Middle East from 2020. This will augment the already established mobile money service, Orange Money, which is available in France and many of Orange’s affiliates in Africa.
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The success of Orange’s diversification into financial services has not been lost to the telecom industry. In the Asia-Pacific, new digital bank licenses have been up for grabs with notable telecom operators participating.
Asia-Pacific telecom operators are upbeat on the prospects of venturing into digital banking
Across the Asia-Pacific region, financial regulators are catching on to the digital banking fad. They are spurred on by promises of much needed innovation in the banking sector.
In Taiwan, the Financial Supervisory Commission has issued a batch of three digital bank licences to Next Bank, Line Bank and Rakuten International Commercial Bank. Next Bank comprises of a consortium led by Chunghwa Telecom, which owns a 41.9% stake, and Mega Financial Holding, which holds 25.1%.
In Singapore, central bank and financial sector regulator MAS announced in June 2019 that it would be giving five digital bank licenses to non-bank players. The results of the application process will be announced in June 2020.
Among the applicants is a 40:60 joint venture between telecom operator Singtel and ride-hailing app Grab. Both share longstanding aspirations in finance. Riding on the near ubiquitous adoption of its ride-sharing platform, Grab expanded its dedicated mobile wallet into a widely adopted payment network in Singapore with the launch of GrabPay and further ventured into Malaysia with the same the year after. It also offers lending and insurance services.
If successful in winning the bid, this will be the second time Singtel has partnered up to venture into mobile payments and banking – the last being Singtel Dash, a mobile wallet launched in 2014 in partnership with Standard Chartered that failed to gain traction against rival offerings.
Malaysia appears to be following suit
Khazanah (the Malaysian Government’s foreign investment fund)-linked telecom operator Axiata, has reportedly been eyeing a license as well. Through its venture investment arm Axiata Digital Services, it owns a successful mobile wallet Boost and has been giving out loans through a platform called QRedit. Venturing into digital banking and consolidating these businesses is a sensible next step.
South Korea’s K Bank is a cautionary tale on regulatory risks faced in financial services
South Korea’s K Bank, formed by a KT led consortium, launched with much fanfare in 2017. It promised an era of “Bank Everywhere” where customers will be able to use banking services anywhere and anytime. It is the result one of two digital bank licenses issued, the other being Kakao Bank, built on the back of popular messaging app Kakao Talk. The bank touted innovative features such as allowing users to take out loan with fingerprint recognition technology and the ability to withdraw from cash machines in GS 25 convenience across the country.
Two years later, K Bank is floundering as Kakao has begun to post solid earnings figures. K Bank has suffered capital shortages that constrained its lending business. Struggling to find sources of capital from new investors, KT was unable to come to the rescue despite being committed to participate in its recapitalisation. It was barred from doing so by the financial regulator, citing an anti-trust investigation into KT. Under the regulations governing digital banks, major shareholders cannot be in violation of financial laws, including anti-trust and tax laws, in the previous five years.
An uphill battle
Telecom neobanks certainly face an uphill battle to accumulate the necessary depository base required to make themselves into viable and profitable lenders. A key challenge is to convince customers to move in their funds from incumbent banks and to choose them over other potentially more compelling digital platforms, especially those attached to messaging apps.
In the meantime, the digital bank will require large amounts of capital at the outset from financial backers in order to build a sustainable loan portfolio. The blunders of K Bank highlight the impact that a disrupted cash flow can have on a fledgling bank.
Regardless the business risk, an era of increasingly competitive telecom services has pushed many telecom operators to look for value in diversification strategies.