The ownership of digital banks in China, Japan, South Korea, and Indonesia by tech companies and conglomerates has helped them become profitable in several ways:

1. Access to established customer base: Tech companies and conglomerates often have an established customer base, which can help digital banks to acquire customers more quickly and efficiently. This can help reduce customer acquisition costs.
2. Leveraging technology: Access to cutting-edge technology and expertise can help digital banks to develop and deploy their products and services more quickly and efficiently. This can help to reduce costs and increase operational efficiency.
3. Cross-selling opportunities: Tech companies and conglomerates often have a broad range of products and services that can be cross-sold to digital banks’ customers. This can help to increase the average revenue per customer.
4. Brand recognition: The strong brand recognition enjoyed by these companies can help digital banks to establish their brand more quickly and effectively. This can help to increase customer trust and loyalty.
5. Ability to procure banking licence: The significant resources available to the parent company have made it easier for them to apply for and obtain banking licences. This has unlocked several benefits, such as access to cheaper capital and interbank payment rails.

Digital banks in Asia are killing it with their consortia business model! Unlike the greenfield approach we see in the UK, Europe and the US, successful banks like WeBank and MYBank in China are led by powerhouse companies like Tencent and Alibaba’s Ant Financial. The Indonesian digital banking sector is also becoming an extended battleground for Tencent and Alibaba, where GoTo (backed by Tencent) and Akulaku (backed by Ant Financial) have acquired significant ownership in Bank Jago and Bank Neo Commerce. These new owners have also facilitated a swift transformation of Bank Jago and Bank Neo Commerce into digital-first banks. And get this, it’s not just China – regulators across several Asian countries, including Hong Kong, Taiwan, Malaysia, Singapore, and South Korea, are giving out digital banking licences left and right to consortia.

The importance of SME banking

Small and medium-sized enterprises (SMEs) represent a significant and underserved market segment for digital banks. Digital banks can leverage this whitespace opportunity by offering tailored banking services to these businesses in the form of instant bank accounts, simplified lending processes, flexible credit options, digital invoicing and payment solutions, and accounting and bookkeeping services.

Several profitable digital banks, such as OakNorth, Redwood Bank, Judo Bank, Starling Bank, Tinkoff, and Webank, have focused on the SME segment as a part of their business growth strategy. While others like Revolut, bunq, and Nubank have launched new products and services that cater to the needs of SMEs. Revolut has launched a business account that allows SMEs to manage their finances, send and receive payments, and access a range of other financial tools, such as expense management solutions and payment terminals. Similarly, bunq has introduced a range of business banking products that include invoicing, payment requests, and international transfers, among other features. Nubank, on the other hand, has launched a range of credit products, such as overdrafts and loans, that are tailored to the needs of SMEs.

The crucial role of lending

Digital banks can capitalise on the lending, which remains the primary revenue source for traditional banks, by targeting monetisation strategies towards their substantial customer base. Banks with their own full banking licence have an added advantage due to a lower cost of capital, thanks to surplus customer deposits.

Credit-focused digital banks like Nubank, Tinkoff, Webank, Kakaobank, Judo Bank, Zopa, and Lending Club have successfully leveraged lending to drive their growth and profitability.

Nubank, for instance, offers consumer and business loans, while Tinkoff has a strong focus on credit cards and personal loans. Webank in China has a wide range of lending products including mortgages, personal loans, and auto loans. Kakaobank in Korea provides various lending products and services such as overdrafts, loans for small businesses, and home mortgages. Judo Bank in Australia provides lending to SMEs. Zopa in the UK and Lending Club in the US are both P2P lending platforms transformed into digital banks and offer personal loans and business loans.

Starling Bank and bunq have acquired Fleet Mortgages and Capitalflow, respectively, in order to concentrate on the mortgage lending and SME lending business.

Technology monetisation through BaaS

Technology monetisation through banking-as-a-service (BaaS) is becoming increasingly crucial for the profitability of digital banks. OakNorth Bank and Starling Bank are two examples of digital banks that have successfully leveraged their technology capabilities to offer BaaS solutions to other banks and financial institutions.

Starling Bank has partnered with Standard Chartered to offer digital banking services under the “Shoal” brand, while OakNorth has partnered with various banks in the US, such as Capital One, Fifth Third Bank PNC Bank, and SMBC Bank to power their commercial lending business. Similarly, Webank in China, has leveraged its technology platform to offer BaaS solutions to other financial institutions in the country to modernise their technology stack.

Non-traditional revenue streams

Premium subscriptions, crypto services, and marketplace offerings have become increasingly important for the profitability of digital banks.

bunq, a digital bank based in the Netherlands, offers a variety of banking services to its customers. One of the primary ways that bunq generates revenue is through its subscription plans, which offer different levels of features and benefits such as access to higher interest rates, cashback on purchases, travel insurance, and access to airport lounges.

Revolut offers a range of cryptocurrency services, allowing customers to buy, sell and hold cryptocurrencies. Nubank has recently launched a rewards program that allows customers to earn points for using their credit cards.

Additionally, digital banks such as Starling and Nubank are increasingly offering marketplaces where customers can access a range of third-party financial services such as investments and insurance, which helps generate additional revenue streams.

The pursuit of profitability

The pursuit of profitability is a critical factor for the survival and long-term success of digital banks. Successful and profitable digital banks have a differentiated customer value proposition, focus on revenue-generating products early on, have quick scalability, and operate with cost efficiency. As the digital banking industry continues to grow and evolve, with the participation of brands and digital platforms with embedded banking propositions, cracking the profitability code will emerge as a critical challenge for these challenger banks.