THAILAND’S BANK OF THE FUTURE: WILL THE NEW VIRTUAL BANKS RESHAPE THE INDUSTRY?

Thailand’s Bank of the Future : Will the New Virtual Banks Reshape the Industry?

  • Chulayuth Lochotinan and Andrew McGinn
  • Published: 23 July 2024

 

With the application window for Thailand’s new virtual banking licenses currently set to close on September 19, 2024, the country’s banking sector is poised for change. The advent of new branchless providers promises to reshape the competitive landscape and kickstart innovation to better reach underserved consumers and SMEs. 

Chulayuth Lochotinan, Partner and APAC Banking Lead, and Andrew McGinn, Partner and Head of Digital for APAC & Middle East, discuss the challenges and opportunities presented by virtual banking, what Thailand’s banking customers want from digital services, and how incumbents and new entrants can best meet these aspirations. Chulayuth and Andrew also assess the lessons that can be learned from markets where digital-first banks have already been licensed, including Hong Kong and Singapore.

What are ‘virtual banks’ and what will they look like in Thailand?  
Chulayuth Lochotinan: A virtual bank is a form of licensed digital bank that typically operates without physical branches, with Thailand’s first examples expected to be operational by mid-2026. 

They will be able to offer standard banking services – checking and savings accounts, bill payments, money transfers, simple loans and financing – with customers able to manage their money through their mobile or computer without the need to visit a branch. 

There will be differences to the online banking available today. Unlike many traditional banks that are constrained by legacy systems, virtual banks will likely use cutting-edge financial technology to simplify labor-intensive banking processes and offer innovative mobile-oriented features. Their goal will be an easier, quicker and more seamless customer experience that is also more engaging. 

In other markets, we’ve seen that virtual banks sometimes offer better interest rates on savings accounts and lower fees, partly because they have lower overhead costs compared to traditional banks.

What other factors are driving the launch of virtual banks in Thailand?
Chulayuth Lochotinan: In addition to improving competition and innovation in the banking market, regulators are hoping that through leveraging technology, lowering costs and applying new kinds of data and analytics to assess customer risk, virtual banks will address the challenge of financial inclusion. 

An estimated 63% of Thailand’s adult population is either unbanked (18%) or underbanked (45%), with those missing out on banking services including many on lower incomes but also many owners of small and micro businesses. 

Virtual banks are not just about digitizing existing banking services. They are about creating a new paradigm of financial inclusion, where anyone, anywhere, can access essential financial services through the power of technology.

The Bank of Thailand (BOT) is thus looking for applicants with strong tech, IT and data analytic capabilities, in addition to the experience and resources to run a virtual bank. Meanwhile, leading Thai banks are partnering with international digital banks, telecom companies or conglomerates to pursue the new virtual licenses.   So the new virtual banks may benefit from novel outlooks and marketing strategies and might be able to leverage partners’ existing customer bases and insights to reduce the cost of customer acquisition.
 

What lessons can be learned from those markets that have already licensed digital-first banks?
Andrew McGinn: The regulator’s targeted adoption of only three virtual banks may itself be a lesson learned from Hong Kong, which back in 2019 granted eight virtual banking licenses. For customers, there was almost too much choice, and from the regulator’s perspective a lot of new businesses to oversee and support. 

Even small things like market terminology can make an impact.  Hong Kong Monetary Authority (HKMA) recently announced they would change the term ‘virtual bank’ to ‘licensed digital bank’ because ‘virtual’, when written in Chinese, can also mean fictional.

Regarding adoption, in Hong Kong we saw demographic splits driven by the nature of the customer experience. For example, ZA Bank got local and mainland Chinese hearts racing through a focus on interaction, user interface (UI) animations and gamification. It currently offers a cash-back ‘power draw’ for eligible transactions.  

Thailand market entrants will need to decide on the extent to which they want to be all-encompassing or market towards certain segments. 

Ease of use is also critical. From day one, Hong Kong’s Mox Bank – which like ZA Bank has built a strong brand with consumers – offered document scanning and facial recognition to help speed up account opening and onboarding.  Many virtual banks also try to make everyday tasks simpler and more fun, for instance through providing personal financial management insights, or ‘gamifying’ saving goals with features such as the ability to make micro-savings and split savings into various wallets.

Chulayuth Lochotinan: Around the world, we see that digital and challenger banks often target specific audiences with relevant tools. These include green consumers (for example, offering the ability to track carbon footprints related to spending); freelancers and ‘solopreneurs’ (integrated invoicing tools); immigrant communities (competitive exchange rates and money transfers); and kids and teens (prepaid debit cards, parental oversight).

Will the new virtual banks disrupt incumbents in the Thailand market?
Chulayuth Lochotinan: Virtual banks will increase competition but there will be a limited number of new banks and most people won’t move away from traditional banks altogether. The evidence from markets such as Singapore suggests that people still feel more secure using reputable traditional banks with a strong physical presence – the vast majority keep their current primary bank accounts even after opening a virtual bank account.

Although virtual banks may not immediately threaten incumbents, they could gain advantages from offering superior customer experiences and highly personalized everyday banking. Over time, incumbent banks could begin losing out on vital transactional data and insights into consumer and SME behavior, impeding their efforts to become more customer-centric.  

In addition, virtual banks will try to reach underserved areas and demographics that traditional banks haven't prioritized. This could prompt innovative thinking and low-cost business models that later become a disruptive force in the market. Virtual banks will likely use gamification to transform financial literacy through engaging customer journeys, turning learning into an adventure where every decision shapes a smarter, more financially empowered future and supports the customer’s financial goals.

That said, as new players, virtual banks face the challenge of becoming profitable while acquiring customers and offering what will be a limited product range. Currently, virtual bank licenses in Thailand don’t allow the new players to offer a full suite of financial products such as investment products (mutual funds or bonds) or more complex lending products. 

Andrew McGinn: The experience of markets such as Hong Kong and Singapore is that virtual banks don’t so much revolutionize markets as catalyze faster evolution. Customers are not looking for a completely different set of core banking services, but they do want virtual banks to instigate a jump forward in the customer experience. 

How might consumer attitudes in Thailand help to shape the bank of the future? 
Chulayuth Lochotinan: Thailand’s consumers are mobile-oriented and keen for digital innovation. Capco’s Bank of the Future survey found that more Thailand respondents (85%) use mobiles to access banking services than is the case in Singapore (81%) or Hong Kong (70%).  

Furthermore, 89% of respondents said they wanted a better online banking experience, while three-quarters (76%) said they would like to handle all their financial services needs within one digital application. This latter ambition echoes the rise of super apps, such as Grab, which help consumers to meet a host of daily lifestyle needs within one app.

 
 
Andrew McGinn: For players operating in the Asia-Pacific region, our survey data indicates that Thailand might be an interesting market in which to test out new propositions and digital capabilities. With most new services built on data, and specifically personal information, over half of Thai consumers (51%) say they are ‘definitely’ willing to share more data – with a further 30% willing to consider the idea – compared to 17% in Singapore and 22% in Hong Kong. 

That could make Thailand a great regional testing ground for AI-driven innovation in, for example, personal financial management.
 

How can Thailand’s incumbent banks respond to the arrival of new competitors? 
Chulayuth Lochotinan: Incumbent banks don’t need to become virtual banks to thrive. But they do need to prepare now to improve digital offerings and enhance data management and AI capabilities. This is the key to providing customers with more tailored experiences and countering future strategic threats.

That means addressing the challenge of legacy systems, especially the core banking system, which will otherwise limit the pace of innovation and the bank’s data and AI capabilities. This could involve replacing the core or establishing a middle layer that can better support personalization through the mobile banking app. Other areas that the incumbents should focus on include cloud migration, edge computing and cyber security.

Adopting open banking is another way to give customers more control over their financial information and to provide new services and applications through integration with third parties. The Bank of Thailand has set up a regulatory sandbox to encourage experimentation and collaboration between financial institutions and fintech startups, including most recently a testing project for programmable payments.    

Additionally, banks have launched open APIs to empower software developers and enterprises to create services integrated with their banking operations, while developer portals have been established to simulate applications and provide sandboxes for testing before deployment. 

 
 
Andrew McGinn: In banking markets around the world, the key is to reduce cost bases while creating the right environment to roll out innovations that enhance the customer experience. In the future, customers will have more control and more options in how they complete tasks, such as whether they use a card at an ATM or their mobile. I think we will also see the borders of banking domains begin to blur, for example, as daily transactional banking merges with wealth management. 

The winners will be the banks that engage with customers in the most personalized manner. However, core financial products will remain central, especially in more difficult times. Thailand’s consumers are likely to be intrigued by the new virtual banks, but the lesson from other markets is that people are commercially savvy – incumbents should also consider fundamentals such as the interest rates on offer, family/group incentives, and loyalty rewards.

Chulayuth Lochotinan: The future may turn out to be as much about collaboration as competition, with incumbent banks leveraging strengths like their customer base and trust, and the new virtual banks offering innovative solutions and experiences. However, becoming effective collaborators within ecosystems will require incumbent banks to transform themselves using modern technologies.

 

REFERENCES

1 https://www.macquarie.com/au/en/insights/delivering-digital-financial-inclusion-in-southeast-asia.html 
2 https://www.nationthailand.com/business/banking-finance/40036579https://www.nationthailand.com/business/banking-finance/40036579 
3 Hong Kong’s monetary authority to replace ‘virtual bank’ with ‘licensed digital bank’ to boost public confidence | South China Morning Post (scmp.com)
4 https://business.yougov.com/content/48454-yougov-brand-equity-ranking-2023-hong-kong-virtual-banks 
5 https://www.capco.com/intelligence/capco-intelligence/bank-of-the-future 
6 https://www.bot.or.th/en/financial-innovation/digital-finance/fintech-in-thailand.html 
7 https://www.bot.or.th/en/news-and-media/news/news-20240611-2.html 

 

 

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