[HO CHI MINH CITY] Digital banks in Vietnam have faced difficulties in staying afloat since the model was introduced a decade ago. Despite the country’s large underserved market, only one bank has announced profitability so far, amid fierce competition, high-risk lending, and regulatory uncertainties.
While the broader Asia-Pacific region has seen more positive results – at least 16 out of more than 45 digital banks have reached breakeven, says Fitch Ratings – the path to profit in Vietnam remains challenging.
The key to facing these challenges is a digital bank’s ability to stand out in a highly competitive environment as well as manage risks arising from their higher-risk customers, said Tamma Febrian, director of financial institutions at Fitch Ratings.
“We see prospects for more digital banks in Vietnam to achieve profitability, but this would largely depend on (those) two factors,” he told The Business Times.
Around seven digital-only banks are operational in Vietnam today, and they are required to be under the sponsorship of traditional banks taken from a pool of nearly 50 registered lenders in the country.
This approach shares certain similarities with Hong Kong, Singapore, Thailand, Korea and Taiwan, where regulators expect digital banks to be partially owned by incumbent banks or established non-financial companies to mitigate risks associated with their untested business models.
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Cake Digital Bank became the first Vietnamese digital native player to announce profitability in its 2024 earnings before interest, taxes, depreciation, and amortisation (Ebitda).
Launched in 2021 as part of private lender Vietnam Prosperity Joint Stock Commercial Bank (VPBank), Cake provides financial services by leveraging the power of AI to enhance its operations and customers’ banking experiences.
“Digital-only banks and traditional banks in Vietnam complement each other to address the financial inclusion challenge in Vietnam,” said its chief executive Nguyen Huu Quang. He noted that digital banks can tap into segments that are underserved by traditional banks, such as ride-hailing drivers, gig workers and online sellers.
Traditional lenders often exclude these customer groups due to the lack of credit history, insufficient collateral, and cumbersome procedures. Digital banks, on the other hand, have a comprehensive technology stack that includes AI-driven solutions to address such challenges more efficiently, and with fewer overhead costs, he noted.
By the end of 2024, Cake had grown its client base to 5 million, up from 4.1 million the previous year. It also recorded a threefold increase in revenue per user to US$12. Its income primarily comes from services like credit card openings, instant loan advances, micro-investing, savings and buy-now-pay-later options.
For instance, Cake offers a quick-loan product that enables customers to borrow up to 50 million dong (S$2,665) for as long as 36 months, with an interest rate starting at 2.3 per cent a month. Registration takes only two minutes, and approval is given online, without conventional income proof, the firm says on its app.
Customers can also access Cake’s financial services from a diverse ecosystem of partners, such as Vietnam’s third-largest ride-hailing platform Be, leading entertainment content-streaming app VieON, and electronics retail giant Mobile World.
Quang said Cake’s operating income rose sevenfold and its Ebitda quadrupled in 2024. He attributed the growth to improved customer service efficiency and cost optimisation, driven by the company’s financial technology, which he views as on par with domestic big techs and ahead of most traditional banks in Vietnam.
The firm currently employs around 250 people, with about 40 per cent being technology and data-related staff.
Higher profits, higher risks
The income of digital banks generally comes from interest spreads contributed from lending and investment securities, depending on the maturity of their business models. Their strength lies in the capability to offer customers unsecured and small loans quickly and digitally.
“However, such offerings often come with higher risks, especially over the long term. This is the dilemma of digital banks,” said Bui Hai An, a senior advisor and former deputy chief executive at Timo, one of the first digital banks in Vietnam founded in 2015.
Fitch Ratings analysts say that the higher risks from underserved borrowers in emerging markets like Vietnam come from their lower income levels and lack of credit history. When banks aren’t able to price loans adequately, they may end up with rising non-performing loan ratios and higher credit costs.
The availability of loans to these customers is also limited by the willingness of banks to take on risks, their ability to assess credit, and their financial strength.
However, digital banks in emerging markets like Vietnam have a larger pool of untapped customers, as these markets typically have lower credit and banking penetration than customers in developed markets, they added. This creates less competition from traditional banks, which opens up opportunities for digital players to become profitable.
Cake now aims to position itself among the leading digital-only banks in South-east Asia and the top 5 per cent of the world’s most profitable ones in the next three to five years. Quang observed that an achievable profit benchmark for a top digital bank in the region stands between US$30 million and US$50 million a year.
Despite the high-risk, high-return nature of the business, market players point out that digital-only banks in Vietnam are generally subject to the same or similar stringent safety requirements as traditional commercial banks.
A digital bank and its sponsor bank must, in turn, collaborate in designing financial offerings and in arranging credit provisions for customers in ways that ensure system-wide efficiency and security under the supervision of the country’s central bank.
“Most digital banks in Vietnam, while pushing for innovation, still want to position themselves to perform faster and even better than traditional banks in adhering to compliance standards. (This is because) they want to be perceived as legitimate banks, in case licences become available in the coming years,” said An.
“If a digital bank in Vietnam truly attains profitability through proper accounting practices, I believe it can make even more profits once it is allowed to operate separately from incumbent banks, given its lower cost structure,” he added.
