The coronavirus pandemic has made it harder for digital banks in Asia to thrive, Fitch says

Those looking to enter the digital banking space in Asia may find it harder to do so now as some opportunities may have been lost in the coronavirus pandemic, according to Fitch Ratings.

The pandemic has hit the global economy hard and is disproportionately affecting people and businesses with a “weaker” borrower profile — the customer segment targeted by many aspiring digital banks, said Tamma Febrian, associate director for financial institutions at the ratings agency.

“A lot of them are citing the unbanked and the underserved segment as their main target segment, and we think that the crisis currently will disproportionately affect them,” Febrian told CNBC’s “Squawk Box Asia” on Friday.

“What this means is that, technically, you’re talking about … potential reduced opportunities for profitable lending,” he added.

In addition, social-distancing measures and lockdowns around the world to slow the virus spread have forced many incumbent banks to improve their digital offerings, said Febrian. That could potentially close off openings for new entrants into the market, he explained.

In a report earlier this week, Fitch said such challenges would be felt more in Asia’s developed markets where “competition from incumbent banks was already fierce.” Those markets include Australia, Hong Kong, Japan and Singapore where there are “dominant” incumbents.

But emerging markets such as India, Indonesia and the Philippines still offer the “greatest” opportunities for digital banks, said the agency. Those countries have low banking service penetration, which gives aspiring digital lenders “an easier path to critical mass,” it added.

“However, these countries are among the worst affected by the pandemic in the region, and even in the longer term, their potential may be hampered by lagging digital infrastructure,” read the report.

Meanwhile, Febrian told CNBC that many aspiring digital banks designed their business models during a “benign” economic environment. So, it’s uncertain whether those models can survive this economic cycle, notwithstanding their potentially more advanced technological capabilities, he said.

He added that the current crisis is a time for digital banks to evaluate their business models. That includes studying whether the risks they’re taking are within their risk appetite, and ensuring that margins they receive could cover potential future losses, he explained. 

“The jury’s still out. We’re not at the point where the digital banks … can’t profit from some of these trends, but what we’re saying is that this is a tougher market for them to navigate and so they need to further refine their strategy.”