Digital banking is at a crossroads in Thailand. A small but not insignificant part of Thailand’s population is underserved by banks—as of 2021, research shows that banking penetration stands at 85 percent. Digital adoption in Thailand is high, with smartphones seeing 106 percent penetration and digital banking being used by 90 percent of customers who have bank accounts. But digital banking offerings are limited, with either digital banking extensions of large existing banks or digital players specialising in only certain aspects of banking such as lending or payments, leaving ample room for the growth of full-fledged digital banks.
Come 2024, the Bank of Thailand is planning to issue three new digital banking licenses in for operations that begin in 2025. How can players who vie for these opportunities better position themselves for success?
Turning to the digital banking landscape in Indonesia, it can provide key learning points. Fifteen digital banks have launched in Indonesia over the past five years, and one in three Indonesians use a digital bank. This scenario can inform other markets in Southeast Asia, including Thailand.
Based on our extensive and prolonged observations of digital banking development in Indonesia, McKinsey experts identified five key takeaways that could point to where digital banking in Thailand is heading and help banks capitalise on the opportunities that lie ahead as well as avoid significant pitfalls.
Mid-sized banks are shrinking and losing out to large banks and new players. Valuations of incumbent banks and emerging attackers have increased, while those of mid-sized banks have not. In the last four years, the valuation of the top four incumbent banks in Indonesia rose by a total of $47.3 billion from $109.6 billion to $156.9 billion; that of new players increased collectively by more than $8 billion from a zero baseline—despite fintech valuations having plummeted in 2022—while mid-sized banks lost $3.5 billion leaving them at $20.8 billion, down from $24.3 billion. This is greater flux than has been seen in the entire decade prior to that.
No digital bank is an island. New successful players in the past three years are all part of large ecosystems from which they derive high growth potential, and large banks have gone through extensive digital transformations to defend their positions. These ecosystems are the fertile ground from which rapid growth in valuations can arise.
“Physical” ecosystems have created large value. Beyond converting a bank’s ecosystem to include digital banking, ecosystems with a physical footprint can also be successful. Examples in Indonesia show that offering offline benefits to online customers has significant promise. Bank Aladin, for instance, is the most used payment platform at Alfamart, one of Indonesia’s largest chains of minimarts with roughly 17,000 outlets; as is AlloBank at Carrefour that has been included at over 100 Carrefour Transmart superstores.
Digital banks have swept up customers but balances trail. Digital banks in Indonesia have been able to win over 20 million customers through high incentive-based acquisition drives but then find it challenging to convert these customers into active users with significant balances. Often, digital banks are not the customers’ primary bank, so having a strategy to further engage customers after acquiring them, convincing them early on of the value and quality of digital banks is key. For instance, the average bank balance in a savings account is about $375 while that in digital banks trail at about $130. Consequently, digital banks in Indonesia have over the last year been shifting from focusing largely on customer acquisition towards establishing a sustainable path to profitability.
Contrary to popular belief, digital customers are more loyal than physical ones. Many people might have thought it was more intuitive to get a new app than drive to a new branch of a bank, but the opposite is turning out to be true. Digitally savvy customers in Indonesia are 60 percent less likely to switch their main bank in the coming year than “branch-only” traditional customers. Therefore, traditional incumbent banks are now enhancing their mobile proposition and shifting their service model to at least a partially digital one in order to retain their customer base.
Fintech and banking are converging. Large fintechs, after quickly scaling up, are now aiming to offer a full array of banking services, typically by acquiring a bank— based on observations of what is happening in the industry, such as Kredivo acquiring Krom Bank, Investree acquiring a share in Amar bank, and Alami acquiring Bank Perkreditan Rakyat, to name a few examples. Traditional banks are putting a lot of effort into digitization, offering end-to-end services that also go beyond banking to encompass lifestyle, payments and services for small and medium enterprises.
Digital banking has changed Indonesia more in the last two years than in the prior 10 years. While some conditions have shifted—access to capital was generally easier a few years ago than today, and regulations have evolved—digital banking is likely to massively change Thailand too. Banks that are willing to embrace this stand to enjoy huge gains and have the opportunity to set themselves up for this success now.
About the Authors: Guillaume de Gantès is a senior partner in McKinsey’s Jakarta office, where Sonia Barquin is a partner and Alexey Korkmazov is an associate partner. For more information contact: Deaunrada Buasup (Candy) Email: [email protected], Tel: 097-228-1803
Series Editor: Christopher F. Bruton, Executive Director, Dataconsult Ltd. [email protected] Dataconsult’s Thailand Regional Forum at Sasin provides seminars and extensive documentation to update business on future trends in Thailand and the Mekong Region.
