Digital banks in South-east Asia face profit pressure as rates slump and credit risks rise

[SINGAPORE] Digital banks in South-east Asia could be hitting an inflexion point, as falling interest rates and rising credit risk pose roadblocks in the industry’s nascent rise.

The path towards profitability remains a difficult journey for many digital banks in the region. Neither Singapore nor Malaysia have had any players turn a profit.

Falling interest rates have further dealt South-east Asia’s digital banks a bad hand, as the region’s central banks surprised markets by easing policy in the face of market uncertainties.

“Digital banks across South-east Asia could struggle to attract depositors without keeping interest rates relatively high,” said Sarah Jane Mahmud, senior analyst for South and South-east Asian banks at Bloomberg Intelligence.

In Malaysia, the budding industry has seen attractive deposit rates reach as high as 5 per cent, compared with an average interest rate of 1.2 per cent among traditional banks.

“Products on offer are presently limited,” said Maybank analyst Desmond Ch’ng in a September note. “The focus has primarily been on deposit gathering.”

But preserving the deposit base is a challenge. He noted that outstanding deposits among Malaysian digital banks declined 5 to 17 per cent between December 2024 and June 2025.

Singapore faces a similar challenge as interest rates fall. GXS Bank has lowered rates on its main savings account to 1.08 per cent per year, down from 3.48 per cent when it launched in July 2023.

“As central banks across all key markets continue to cut rates, this will limit their ability to generate net interest income and prolong the time it will take them to break even,” added Mahmud.

Credit-risk fears

But it is loans, rather than deposits or the consumer base, that determine a bank’s main income stream.

Renny Thomas, senior partner and Asia-Pacific banking lead at McKinsey, said that while digital banks excel in getting people on board quickly, particularly in the payments space, this does not always translate to strong income statements or balance sheets.

Chulayuth Lochotinan, head of Thailand at technology consultancy firm Capco, said: “You have to start high-yield services, such as micro-SME (small and medium-sized enterprise) lending or merchant services, to make money while reducing the cost of acquisition and operation.”

Within the region, some major players such as GXS and MariBank offer multiple loan and investment products, in addition to deposit services. But revenue streams for digital banks remain narrow outside of lending activities, when compared with their traditional counterparts.

Anosh Pardiwalla, head of Indonesia at consulting firm Oliver Wyman, noted: “The issue for a number of digital banks is that avenues to grow non-interest income are not a lot beyond smaller-ticket insurance and other related cross-sells.”

Even loans are far from a straightforward matter.

Dr Jan Ondrus, professor of information systems at the Essec Business School, pointed out that the main issues faced by digital banks in Indonesia and the Philippines surround creating credit scores for people with no formal records, such as gig workers.

Digital lenders have often focused their efforts on micro-SMEs and underserved individuals, who may have insufficient credit histories for traditional loans. However, volatile macroeconomic conditions in 2025 have intensified credit risk.

“There is a risk that asset quality could deteriorate, as higher tariffs across the region hamper trade activity and erode small-business profitability on a rise of cheap imports from China on tariff differentials,” noted Bloomberg’s Mahmud.

In Indonesia, consumer non-performing loans rose 25 per cent in the third quarter of 2025 from the same period last year, a Macquarie report noted in November.

“We think now is not a particularly good time to be expanding aggressively in unsecured personal credit,” Macquarie head of Asean research Jayden Vantarakis noted of Indonesia’s banking sector.

Over in the Philippines, the country is seeking to add to its current tally of six digital banks to serve its underserved population.

Natalia Goh, regional banking group chief executive of MariBank, told The Business Times that around 51 per cent of Filipino adults remain unbanked or under-banked.

Meanwhile, Internet connectivity across the country’s many islands remains patchy. “Connectivity is still uneven in certain far-flung communities,” said Goh.

The country’s central bank reopened applications for digital bank licences in January 2025 after a three-year moratorium, with the intention to bring four additional digital banks to the market.

But little seems to have come of this reopened window, which once again closed in November with hardly any talk about potential licensees.

“It’s a really difficult time to launch a digital bank that serves the under-banked community, with interest rates falling and higher tariffs raising credit risk,” Mahmud explained.

Yet, she remains optimistic about the market potential. “The Philippines is one of the key markets in South-east Asia where digital banks do have more opportunity with a young, digitally savvy population,” she said.

MariBank’s Goh noted that while Internet penetration stands at about 73 per cent across the archipelago, mobile penetration is high at about 150 per cent.

Trodden paths

As the region’s digital banking industry matures, younger markets stand to benefit from the lessons of their forerunners’ struggles.

Sheyantha Abeykoon, group chief executive of Malaysia’s Boost, noted that the country’s digital lenders enjoy the “benefit of hindsight”, drawing lessons from markets such as Indonesia and Singapore.

“Malaysian digital banks can study what worked and what did not, and avoid some of the missteps seen in those markets,” he told BT. “This is especially relevant for asset growth, product design and partnership strategies with fintechs.”

Crucial steps include finding ways to drive customer stickiness, noted Avishek Nandy, partner and head of financial services practice at Bain. This could include using loyalty programmes, credit cards or even wealth management, he said.

Regulators are also taking notice of regional struggles, particularly in Thailand, where three digital banking licences were issued only as recently as June this year.

Capco’s Chulayuth noted that the kingdom’s adoption of digital banking has taken notably longer than that by its regional neighbours, despite the high number of people who are digital natives.

Its central bank has implemented tight requirements for applicants, which have to be backed by legacy banks, and with sufficient technological and governance capabilities to protect consumers from fraud.

“Thailand has traditionally been cautious and prudent – it is risk mitigation by design,” added Chulayuth.

The three new players in Thailand entering South-east Asia’s digital banking market could also reveal a growing trend: Fintech startups have all but ceased to be the driving force behind the industry, as large consortiums of banks and tech firms now back most online lenders.

Tech unicorn Sea, for instance, owns MariBank in Singapore and the Philippines, SeaBank in Indonesia, and has a stake in Malaysia’s Ryt Bank.

Even heavyweights beyond the region have thrown their hats into the ring. South Korean Internet conglomerate Kakao, for instance, has owned a stake in Indonesia’s Superbank since 2023, and won a bid for a Thai digital lender in a tie-up with Siam Commercial Bank.

Further consolidation between smaller digital banks within the region may become increasingly likely, particularly in Indonesia’s crowded market.

“Consolidation between banks has been a longstanding objective of Indonesia’s financial regulators,” said Macquarie’s Vantarakis.

Mergers and acquisitions could become increasingly likely with larger players entering the market, as cannibalisation across similar products weighs on profits.

Bloomberg’s Mahmud pointed out that with “more obstacles in the way to achieving profitability, consolidation in the sector is inevitable”.

Simultaneously, embedding a smaller bank’s customer base within a larger investor’s ecosystem could boost bottom lines. “Embedded lending is emerging as a promising revenue source, with digital banks integrating loans directly into customer experiences like shopping checkout or ride-hailing apps,” noted Capco’s Chulayuth.

Prof Ondrus of Essec Business School added: “Success could come from targeting gig workers and micro-SMEs who lack formal credit histories, but can be profitably assessed using alternative data...

“The winners will be those who can make micro-lending work at scale, where legacy banks potentially lack the infrastructure, digital capabilities or even appetite to follow.”

Additional reporting by Tan Ai Leng and Benjamin Cher