Their target markets have been severely hit by the pandemic.
The pandemic-induced fallout have hampered digital banks’ prospects in Asia, particularly in developed countries where competition is already fierce, reports Fitch Ratings.
On the other hand, those with the right financial and technological resources should still envision the market’s potential in the long run.
Whilst lockdowns and movement restrictions have hastened the shift to digital banking, the fight to quality has also benefited established banks in terms of access to funding. It has also forced established lenders to accelerate their digital offerings, hence lowering complacency risks and reducing opportunities for new entrants.
Moreover, the main target segment for many virtual banks – the unbanked and underserved – has been disproportionately hit by the economic shock, cutting momentum for profitable lending. At least in the near term, these adverse effects will more than offset the impact of greater digital usage, Fitch said.
Emerging markets like India, Indonesia and the Philippines hold the biggest opportunities for virtual lenders to cater to underserved clients, which gives them an easier path to critical mass. However, these countries are amongst the worst affected by the pandemic in the region, and even in the longer term, their potential may be dragged down by lagging digital infrastructure.
Nevertheless, there remains a risk that aspiring virtual lenders may misprice credit risks when targeting the unbanked, notwithstanding their potentially more advanced data analytics capabilities, Fitch noted.
But even if some digital banks have already turned profits, most of them have risk frameworks and businesses that have yet to undergo an economic cycle, and the current steep downturn could expose vulnerabilities in approaches of the lenders, the report warned.
However, those digital banks that will survive or thrive through the downturn are likely to be better-resourced and may pose a greater competitive threat over the medium term to digitally unprepared peers. Smaller banks in countries with feeble digital banking capabilities are more at risk to such disruption.
The virtual banks likely to provide more formidable competition for incumbents over the medium term include those backed by established technology platforms such as Facebook or Alibaba, or deep-pocketed corporates, such as Reliance or Singtel. These backers are more likely to be able to sustain the heavy financial investment necessary for entrants to attain scale, maintain cost competitiveness and survive the initial loss-making stages of a start-up, Fitch concluded.
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