Going digital for many people is a matter of whipping out the mobile, logging into a banking app and making a transaction — be it transferring funds, paying bills, buying shares or ETFs, or checking an account balance. 

The mobile banking trend accelerated globally as economies slowed down from lockdowns. In Singapore, banks were well-prepared to deliver services digitally, to the extent that Oversea-Chinese Banking Corp (OCBC) customers were able to withdraw cash using QR codes. Elsewhere, customers of United Overseas Bank (UOB) could use their contactless ATM settings on the UOB Mighty app to withdraw cash. 

Every time a customer does an online transaction, banks get some data. Unsurprisingly, banks have been mining data for decades: risk assessment requires data and the credit history of the consumer or company. Now, the ability to collect transactional data has already enabled some banks to unlock new revenue streams from more personalised services through effective marketing. Banks can also better manage their own credit and operational risks, and achieve operational efficiencies. 

According to DBS CEO Piyush Gupta, the pandemic has seen many financial institutions complete three years worth of digital transformation within three months. “The acceleration has...allowed us to actually bring a lot of recalcitrant people — people who are naysayers or somewhat caught by inertia — into the mainstream of the change,” he observes.

 Gupta was speaking at the Singapore FinTech Festival (SFF) Green Shoots Series, a weekly FinTech e-meetup organised by the Monetary Authority of Singapore (MAS) in the run-up to the SFF proper in December. On a panel also featuring Sopnendu Mohanty, Chief FinTech Officer at MAS, the event sought to discuss issues related to digital disruption such as digitalisation in the financial sector, sustainable finance and the future of work. 

Gupta — who likes to think of DBS as the digital bank of Singapore — has been busy attempting to digitalise the banking supply chain. This is a challenge for a bank that has been caught on the wrong side with customers such as Hin Leong Trading which financially engineered its financial statements, or Eagle Hospitality Trust which misled readers on its prospectus. Some forms of digitalisation have clearly not kept up with financial engineering. Both Hin Leong and Eagle Hospitality Trust are under investigation by the Criminal Affairs Department. 

“We are thinking hard about the rules and the use of data, what makes data okay to use and not okay to use,” adds Gupta. The bank has developed a framework called “PURE” — Purposeful, Unsurprising, Respectful and Explainable — relying on those with knowledge of philosophy to develop the ethical foundation upon which this framework rests.

Everyone’s banking digitally

Since banking digitally was the mainstay for consumers and SMEs during the circuit breaker, both local and qualifying full banks (QFBs) reported increased digital activity during the period. 

For DBS, digital activity volumes have increased from 30–60% overall, especially among older clients whose activity increased fourfold. Banks must therefore improve the manner in which they deliver services digitally to adapt to the increasing digital activity of clients in a more timely and efficient manner. 

Other banks also reported large increases in digital activity. An OCBC spokeswoman says close to 100,000 “digital debutantes” have started using digital banking for the first time in 2020. OCBC recorded a 40% jump in digital transactions y-o-y by those aged 50 to 64 during the circuit breaker and a 48% jump in digital transactions y-o-y by those aged 64 years and above. 

In 1Q2020, OCBC announced a 40% y-o-y rise in financial transactions; a 4x increase in digital unit trust investments; and a 3.5x increase in OCBC RoboInvest investments. After the launch of its virtual wealth advisory service on June 9, OCBC recorded a 45% increase in the sale of wealth management products in the first 10 days of launch compared to the prior 10 days; and within the first two weeks of the circuit breaker, time deposit placements increased 150%. 

The number of digital transactions such as funds transfer and bill payments made on UOB’s mobile banking app, UOB Mighty, increased by 60% in 2Q2020 compared with the same period in 2019. In particular, the number of PayNow transactions made by our retail banking customers in 2Q2020 more than doubled compared with the same period in 2019. 

“Our customers are also buying more investment products through UOB Mighty and UOB Personal Internet Banking in the past few months. The number of online transactions for investment products such as gold and unit trusts in the second quarter of 2020 grew by 18 times compared with the same period in 2019,” says Aaron Chiew, head of mobile and digital, group retail, UOB. 

The focus on consumer banking’s “last mile” delivery has taken on an urgency for local banks including the QFBs, following the award of new digital bank licences later this year. The last mile in banking refers to delivery of banking services to consumers. These services are viewed as important for financial inclusion, particularly in emerging markets with significant unbanked populations. Over time, the aspiration for Asia’s unbanked millions to have access to bank accounts is likely to be fulfilled through digital or neo banks. 

“Increasingly, institutions are reshaping their digital presence to focus on the “last mile”. Building a foundation focused on this critical customer touchpoint requires banks to deploy technology that documents, in a fully compliant manner, consumer and commercial loan and deposit transactions while at the same time supporting a fully digital customer experience,” Kevin Polinsky, managing director of Financial Institution Sales at Compliance Systems, tells BankDirector.com. 

Deploying technology

With the data from app-based banking transactions, traditional banks are able to collect and process this data using automation, AI, and algorithmic processing such as machine learning (ML) and neural networks to process the data. 

Asked what trends will likely be the most prominent secular trends for financial services in future, Gupta highlights AI/ML and Big Tech as he believes that the future driver of the global economy lies in data. 

Banks are already using AI with customer data. UOB launched its digital-only bank TMRW in Thailand in February last year and in Indonesia earlier this year. TMRW uses FinTech in which UOB has either an investment or a joint venture. These include companies such as Personetics, an Icelandic company Meniga which does complex data categorisation, and Avetec.AI which focuses on AI-driven credit assessment. 

Unlike a digital banking app which is part of an omnichannel banking strategy, TMRW does not have any branches, and its model is to use data to engage customers as its primary goal and business model. TMRW uses net promoter score (NPS) to gauge its progress. NPS is an index that measures the willingness of customers to recommend a company’s products or services to others. 

OCBC has also made use of AI in its voice banking on its mobile banking app. A tool called “Personalised Insights” in OCBC’s banking app also gives customers personalised prompts to save, spend or manage their money better. 

A bank’s purpose

Financial services encompass a lot more than using a banking app. The role of banks — and they are the cogs of the wheel of any economy — is to manage risk. As is evident during the pandemic, banks provide liquidity to businesses. Hence, banking and financial services in general remain highly regulated. 

The impact of technology and data on banking is different than for companies like, Facebook, or even Ant Financial and Tencent. Ant and Tencent are increasingly coming under the purview of the People’s Bank of China, and the China Banking Regulatory Commission. 

For their own good, banks have to protect people and companies from borrowing money they cannot afford to repay. In Singapore, we have Hin Leong Trading in judicial management owing some US$1.3 billion ($1.8 billion) to local and foreign banks, or KrisEnergy which is trying to restructure its loans for the second time in four years. Its main creditor bank is DBS. 

Banks also have to stop their customers from making complex and risky investments they do not understand, especially with their retirement money. Once again, DBS was the sole financial adviser for Hyflux’s perpetual securities and for the IPO of Eagle Hospitality Trust. The latter is a case of financial engineering where Urban Commons took IPO monies, and judging by how quickly defaults took place after the IPO, one cannot help but think there is no intention of honouring its commitments to the trust. 

The main advantages banks have compared to FinTech firms such as Ant, Tencent, Sea, Grab and Razer are their reputation and trust. Customers trust banks with their deposits, and deposit gathering continues to be a service where banks have an edge over their FinTech competitors. Most customers are unlikely to approach a FinTech company for a residential mortgage. 

FinTech players would need to be regulated under the same rules and regulations as banks should they wish to attract deposits. More recently, Singapore, Hong Kong and Malaysia are offering FinTech firms digital-only bank licences to become full-fledged digital banks. Becoming a digital bank would involve these firms accepting capital and liquidity requirements that would undoubtedly erode their return on equity (ROE). If the FinTech companies do not accept these requirements, it would limit their ability to raise deposits at scale, notes a recent JPMorgan report. 

“We think the threat to lending and liability franchise from FinTech is limited in the near term. Banks have a significant advantage in deposit gathering in terms of trust which has been built for generations as well as regulatory factors. Even if FinTechs start digital banks, with similar regulatory burdens as traditional banks, it would take time for them to scale up the deposit franchise,” JPMorgan says. 

Alternatively, banks can also cooperate with FinTechs, in a co-opetition model to leverage the technological edge of FinTechs to add value to their offering and share revenues (like Robo advisors on their wealth platforms), the report adds. 

For digital banks, JPMorgan says “new regulations like those in Singapore require digital banks to chart a course to profitability. So they can’t take the loss-leading market share focused approach typical of FinTechs.” 

In a comprehensive report titled “Banking of the future: finance in the digital age”, Josh Bottomley, a director of HSBC Bank (Singapore) and global head of digital data & development, HSBC, says: “The successful bank of the future will need to carefully balance a series of trade-offs between what technology and data enable, in terms of improving customer experiences, with the need to ensure the highest standards are upheld and the integrity of the financial system is maintained.”