Though safe for the coming two years, traditional banks in APAC face a real challenger in virtual banks which threaten to take market share with efficient, low-cost solutions pit against legacy infrastructure that is transitioning.

«Our current base case is that virtual banking may not lead to rating or outlook changes for Asia-Pacific banks over the next two years,» according to S&P’s report. «Over a longer time horizon, however, as virtual banking strategies take hold and further disrupt the traditional bank sector, the potential for ratings differentiation is greater.»

The report highlighted nine different jurisdictions in the region where the regulatory sphere of virtual banking has progressed in clouding Hong Kong and Singapore where eight and five virtual bank licenses will be offered, respectively.

Horses For Courses

The report underlines that the path to developing tech capabilities at traditional banks will differ in large part by their sizes. Large traditional banks with well-established client bases are expected to be better prepared to face new challengers compared to small and mid-sized banks. Smaller banks will have to rely on collaborations with tech companies withstand competition.

In addition, some are tapping into new Asian markets and debuting with digital-only offerings. Examples include the launch of UOB's mobile-only bank in Thailand, the first of its kind in ASEAN or CIMB's entry in the Philippines as an all-digital and mobile-first bank app in partnership with around 8,000 convenience stores.

Digital Profitability Not Assured

Despite their potential, the long-term profitability of virtual banks will remain a challenge. S&P highlights adherence to strict requirements including capital and anti-money laundering controls in addition to managing business, credit, market and technology risks.

«While operating costs for a digital-only bank are in principle lower, the long-term sustainable profitability of the digital-only banking model is only likely to be achievable commensurate with increasing scale and if ongoing risk and other business considerations are well-managed,» it said.

Still, there are already examples of success stories. South Korea’s Kakao Bank, a jointly launched venture between a major chat app and securities firm, attracted nine million users and turned a first-quarter profit as of end-March 2019, just 18 months after its launch.