THIS year, market participants all over the world witnessed a fascinating phenomenon in the South Korean banking sector.

       Kakao Bank, the first purely digital bank with assets that reached US$25bil (RM104bil) in as little as four years, conducted a successful initial public offering (IPO) in early August. Kakao Bank’s capitalisation value now sits at US$28bil (RM116bil) to overtake KB Financial Group Inc, a conventional financial group with a capitalisation value of US$19bil (RM79bil).

       The same phenomenon was also found on the Indonesia Stock Exchange (IDX). Imagine, amid the IDX’s stagnant growth of almost 0% in 2021, several issuers instead saw their share prices skyrocket from two- to three-figure percentages in just a few short months. These issuers were generally tech companies and conventional BUKU II banks that went digital.

       A prime example is Bank Jago (ARTO). The bank’s share price shot up 400% during the January-July period, with a market capitalisation of 248.7 trillion rupiah (US$17bil or RM70.5bil) that ranked it fifth in the IDX Top-10, ahead of prominent companies such as Astra International and Unilever.

       Not only that, Bank Jago almost overtook Bank Mandiri, one of the largest banks in Indonesia, with a market capitalisation of 266 trillion rupiah (RM77.21bil).

       As a former banker myself, I see this as an exciting, “miraculous” phenomenon in the so-called new economy era. The arrival of a new economy within a specific era is usually marked by a massive tech boom that revolutionises and disrupts previous economic activities.

       Today’s new economy is driven primarily by rapid advancements in information and communications technology, more commonly known as digital technology.

       Technology is changing the way we work, think and go about our day in almost all areas of life, including banking. Without us realising it, we are moving from offline activities to all things online.

       That is why the shares of tech-related issuers, particularly banks that have successfully created “stories” about going digital or completed their digital transformation, provide a fantastic premium for their shareholders.

       At the same time, however, several large and well-established conventional banks that currently dominate up to 30% of the IDX’s market capitalisation have not experienced any significant increase in market capitalisation this year, with some faring worse than others.

       In 2021, conventional banks are still struggling with increasing non-performing loans and restructuring loans that comprise almost 20% to 25% of their portfolios. There are hardly any “new stories” for retail investors. If anything, most still revolve around innovative digital banking products or newly emerging digital banks.

       The jump in share prices among digital bank issuers is closely linked to the contribution of retail investors, which reached around 50% of the IDX’s daily trading volume in 2021.

       People deem digital banks as a phenomenon of the new economy as well as a game-changer for the future of the banking industry. Meanwhile, conventional banks are seen as part of the old economy that has been running business as usual for decades.

       Not to mention, there are major differences in how conventional banks are valued compared to digital ones. Conventional banks are valued based on profits and earnings prospects, while digital banks are valued based on the number of customers times the value per customer. In this new economy era, conventional banks are evaluated more on their performance numbers, while digital banks are judged more on their “stories” regarding digital business prospects and future potential.

       Kakao Bank is an excellent example of a successful digital bank model. First, it has successfully realised its “story” as the first purely mobile digital bank with a successful IPO.

       Second, it has acquired 13.4 million KakaoTalk monthly active users as customers. Third, when Kakao Bank launched its IPO, it had already scored a profit “number” of US$705mil (RM2.92bil) with around three-quarters of its income from interests.

       Now is the perfect time for conventional banks to consider developing a digital ecosystem built upon their loyal and long-standing customer base. For example, banks can choose to collaborate with existing customers who already have a large customer base of their own and encourage them to use bank-owned digital payment tools. The bank’s customer ecosystem will no doubt expand exponentially with the addition of these customers.

       Concurrently, digital banks must seek out strategies to acquire more customers and earn their loyalty and trust. Studies have shown that digital bank users are not particularly loyal customers. If they are dissatisfied or unhappy, they will simply leave and might even uninstall the digital bank app from their devices.

       If that happens, it is sure to take longer for the digital bank to turn a profit.

       Retail investors who are impatient about waiting for their dividends will easily unload or sell back the shares. This means that share prices may fall as quickly as they rise. Studies reveal that it could take two to five years before digital banks can turn a profit, though this depends on how fast they obtain customers by building their ecosystem as growth boosters.

       Moreover, retail investors should be wary when they come across digital banks with, for example, capital one trillion rupiah (RM290.4mil), as well as assets worth 15 trillion rupiah (RM4.36bil) and yet, are still losing money and have not made any meaningful breakthroughs in developing their ecosystem.

       Meanwhile, their share price is rising fantastically by several hundred percent in just a few months and is valued at 10 trillion rupiah (RM2.9bil). Take a step back and look closely at the situation, is a “story” really worth nine trillion rupiah (RM2.61bil)?

       Any digital bank, following a successful IPO and soaring share value as a result of its digital aspirations, needs to work extra hard to prove it can translate all of its sweet promises and beautiful “stories” into reality.

       Because at the end of the day, whether they are digital or conventional, a bank is still a bank, which means earnings are generated from net interest income as well as fees and commissions.

       If digital banks are unable to fulfill their stories and promises, then get ready for the disgruntled voices of retail investors who are expecting capital gains.

       Not only does selling shares mean taking a loss, but who wants to wait for dividends that never come?

       Let us hope it will not come to that! ― The Jakarta Post

       Arwin Rasyid is founder and chairman of TEZ Capital Group. The views expressed here are the writer’s own.