Local banks are using technology to innovate, differentiate, and to ensure the numerator of the cost-to-income ratio is contained, and the denominator expands.
“What does technology do for the consumer and end-user? Am I getting a better, more convenient and cheaper banking product?” asks Harsh Modi, co-head of Asia (ex-Japan) Financial Research at JP Morgan. “Those kinds of value-additions and lower pricing lead any bank to end up gaining market share.” Modi declines to discuss specific banks.
The three Singapore banks have well articulated digitalisation strategies. DBS Group Holdings and United Overseas Bank (UOB) have digital-only banks in a couple of countries. Although Oversea-Chinese Banking Corp (OCBC) has resisted launching a digital-only bank in Singapore, OCBC-NISP launched a digital-only bank in Indonesia, OCBC Nyala, in 2019.
DBS started digibank in India in 2016, and digibank in Indonesia in 2017. DBS has since pivoted to a phygital — physical and digital — strategy. UOB launched TMRW in Thailand in 2019, and in Indonesia the following year. TMRW remains a digital-only bank, using net promoter scores to measure its progress, and advocacy to attract new customers. In a results briefing on Aug 4, UOB group CEO Wee Ee Cheong indicated that TMRW’s cost of acquisition remained very low.
Challengers and incumbents
The local banks turning into challengers in new markets are part and parcel of the New Economy. In a July report titled Rule-Bound Innovators, JP Morgan points out that the traditional business model of banks is changing as economies go digital.
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“Technology has changed intermediation and the definition of money,” the report states. Originally, safety, intermediation, trust and returns were the objectives of bank customers. And if the local banks are anything to go by, these factors matter.
In 1H2021, for the six months to June, all three Singapore banks reported increases in deposits. DBS’ total deposits rose 7.8% y-o-y, OCBC’s deposits were 2.2% higher y-o-y (current accounts & savings accounts rose 13%), and UOB’s total deposits were 5% higher y-o-y.
As JP Morgan sees it, customers deposit money in banks because of safety. Banks are licensed and regulated. “A banking licence basically allows a ‘put option’ to the depositor on the government, which ends up providing a credible safety net,” JP Morgan says. “There is a possible path to direct claims on the central bank, via introduction of retail CBDCs (central bank digital currencies), which can theoretically provide better ‘safety’. But till then, ‘safety’ stays as a reason to keep money at commercial banks.”
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On the intermediation front, keeping money in a bank makes it easier to access payments and transactions. Yet, payments and transactions are where banks are being disrupted by FinTechs because these products and solutions are technology-intensive.
According to JP Morgan, the banks have themselves to blame for being disintermediated. “Many banks have used their place in the financial ecosystem to generate super-normal returns. These include merchant transactions charges, high fees and commissions for remittances, and the biggest of all, free float by delaying transfers or charging high fees,” JP Morgan points out.
While disintermediation of banks is likely to continue in the payments space, the Singapore banks are fighting back in populous countries elsewhere in Asean. Despite sharing personal data on their super apps such as spending and eating habits, few are likely to use FinTechs to manage their savings.
FinTechs would also be find it challenging to generate the kind of investment products and treasury operations that SMEs and high-net-worth individuals (HNWIs) require. In the wealth management sphere, which is a focus of all three local banks, HNWIs and the mass affluent populace are unlikely to trust FinTechs the way they trust well-regulated banks. Anti-money laundering and anti-terrorism regulations also make it more appropriate for banks to police this space.
Traditionally, money was kept in banks for returns. Returns on cash are minimal following a decade of low interest rates and quantitative easing. However, banks have marketed — successfully — investment and bancassurance products to customers to increase returns, and to garner fee income for themselves.
Regulation could tame FinTech challenge
Against this background of innovation and disruption, what trends could take hold for the next five years?
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Modi reckons that most of the trends are likely to be an acceleration of old trends, and increasing regulation of FinTechs is one of them. “Regulation of all the challengers is the biggest trend. You are seeing that in every country and that will accelerate. Different countries, depending on their individual systems, will deal with regulation differently. That’s the most important trend,” he stresses.
“[Lack of] regulation had allowed a lot of the challengers to build their businesses almost with a light touch, and the logic was they are not big enough to create systemic risk. If you start putting too much regulation, you stifle innovation,” Modi reasons.
“Regulations will be required for lending and are a must for deposits. My sense is, you will have this continuum from FinTechs that ultimately start banking operations and will have no choice but to get regulated,” Modi adds.
Of note is the manner in which the Chinese government is attempting to regulate its FinTechs. The experience in China has also led to some regulatory shifts elsewhere in Asia. This has limited the market share build-up of assets at FinTechs in most of the countries. “Over time, we see a banking licence as an important driver of on-balance sheet retail asset build-up for challengers,” JP Morgan notes.
Already, Grab and Sea, which have grown exponentially as FinTechs, have to follow the same capital ratios and liquidity rules that local banks adhere to following the approval of their digital-only licences.
The challengers have become sizeable, to the extent where regulators need proper bank level risk management, liquidity, process management and legal frameworks to protect customers, serve customers better, ensure sytemic risk is avoided, and to ensure all these processes can be done at scale, Modi indicates.
A second big trend is seamless cross-border at-scale payments and transfers. Cross-border payments are likely to be as seamless as domestic payments at some point in the future. In the same way that money can be transferred from one account to another via PayNow or FAST, banks envisage a day when cross-border transfers can be done instantaneously and cheaply.
“We have yet to reach that point. But we can do international settlements at scale as demonstrated by Project Ubin in Singapore, and other projects by central banks,” Modi points out. For seamless cross-border settlements, commercial banks, settlement banks and central banks need to jointly establish a system across multiple platforms and countries.
Banking as a service
Banks with better technology and capabilities can offer an expansive banking experience. The evolution of various platforms (financial, social, ride-hailing, chat, etc) with banking offerings is and will be ongoing, JP Morgan says. These are evolving into banking-as-a-service (BaaS) and banking as a platform (BaaP).
BaaS is likely to be an e-commerce platform that allows its customers access to banking services provided by a bank. The customer can complete entire banking transactions without leaving the e-commerce platform.
In BaaP, the platform is provided by a bank, with the additional services provided by a third party. These additional services could be restaurant booking or booking a property, or other retail or wealth management or insurance product. Already, local banks offer such services on their apps.
“These trends are already happening. The banks which are taking the lead to solve all those problems and are able to do all this seamlessly are the tech leaders and in a better position to benefit,” Modi says. He declines to name individual banks, but adds that every country will have a couple of banks in the lead.
According to MomentumWorks, a website that ranks digital banks in Indonesia, TMRW’s downloads, which are a proxy for user growth, grew five times in 2020. OCBC Nyala’s downloads grew two times. TMRW grew in particular, due to its strong appeal to the younger generation, through unique gamification features (such as: You can watch your virtual city grow as you save), MomentumWorks says.
However, the downloads of DBS’ digibank fell by 59%. This is likely to be caused by its cumbersome online registration process which uses offline verification, and obviously impacted by Covid, according to MomentumWorks.
Macquarie Research says that ANZ Indonesia, which was acquired as part of DBS’ acquisition of ANZ’s retail operations in 2018, was used as a base to expand digibank, out of which grew DBS’ phygital strategy.
In December 2020, DBS acquired Lakshmi Vilas Bank in India, leading to a physical presence of 590 branches and more than 1,000 ATMs. “DBS’ opinion was that a digibank in itself is unlikely to achieve the scale necessary in India, and having physical branches improves the brand and customer acquisition prospects. Post the merger, the India balance sheet of DBS is around 3% of the group,” Macquarie Research says.
In an update following its 1H2021 results, UOB has indicated that TMRW has reached a customer base of 355,000, with deposits up four times y-o-y. Macquarie estimates that the average deposit size is around $500 per customer.
“More than 25% of the Indonesia retail base are TMRW customers and this metric is 12% in Thailand; 70% of TMRW’s customers are new to UOB, indicating it is appealing to a different segment of the market,” Macquarie says. It estimates that TMRW should break even on a standalone basis with two million customers.
During its 1H2021 results briefing on Aug 4, CEO Wee had said that UOB plans to use its shared regional infrastructure for TMRW to launch products at speed, and with efficiency. He is also looking at “ecosystem partnerships” to expand TMRW’s reach and products. Wee hints that TMRW could be launched in Singapore next, where Grab-Singapore Telecommunications and Sea could start operations as digital-only banks.
As the future unfolds, Modi believes that five years from now, two sets of institutions will dominate the banking landscape: the first are the tech leader banks; and the second are the challengers who are licensed and able to create a track record of managing their risks the way the banks do, which is why the JP Morgan report is titled Rule-Bound Innovators.