Perhaps the most obvious sign that the local banks are preparing for battle is the sudden hike in headline interest rates for their respective savings accounts last month.
While some may argue these are delayed responses to higher interest rates set by the US Federal Reserve, DBS Bank was the first to raise rates with its signature Multiplier account.
On Aug 1, Singapore’s biggest lender revised its headline interest rates from 3.0% p.a. to 3.5% p.a. for savings above $50,000 and up to $100,000.
Similar to the tiered structure of other banks’ savings accounts, customers can only receive the headline interest rate if they credit their salary to the account or spend on associated credit cards, among others.
Just before the launch of GXS and Trust Bank later that month, Oversea-Chinese Banking Corp (OCBC) announced higher interest on its flagship 360 savings account. Customers can earn interest of up to 4.05% p.a. on their first $100,000 deposited in an OCBC 360 account, up from a maximum of 2.38% p.a. previously.
United Overseas Bank (UOB) followed suit, raising interest rates for its flagship savings account. From Sept 1, UOB One account holders can earn up to 3.6% p.a. on balances above $75,000 and up to $100,000, provided they receive a salary of at least $1,600 and charge at least $500 to their credit card that month. This is up from the previous interest rate of 3%, which was raised at the start of August.
Speaking to The Edge Singapore, leaders from the three banks are mostly unfazed by the challenge from digital banks.
“I think everyone is quite excited to find out how banks like ourselves are thinking about it,” says DBS’s Singapore country head Shee Tse Koon. “I guess in the past 10 days, with all the launches, there has been a lot of buzz. But for us, we’ve already been at it for the past 10 years.”
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Banking in Singapore “is already very digital”, he adds. DBS soft-launched its digital banking platform, Digibank, in Singapore in March 2016, months after piloting a digital account opening for new customers in December 2015.
DBS has five million customers in Singapore today, of which 3.5 million are on Digibank. Shee says: “Today, 80% of all transactions are already done digitally. When the country went into the ‘circuit breaker’, we didn’t skip a beat. Banking and financial services went on, and we could do it with our customers transacting digitally.”
After DBS raised the interest rates of its Multiplier account, new customers doubled in August, he adds. “In September, that momentum continues.”
GXS offers interest of up to 1.58% p.a. but with a deposit cap of just $5,000 per customer. In comparison, DBS Multiplier customers aged 29 and below with no income can earn between 0.05% and 1.1% p.a. on their first $25,000, provided they spend with PayLah, the bank’s digital wallet. DBS’s headline interest rate of 3.5% p.a. only comes with a salary and transactions in three or more categories, such as card spending, home loans and insurance.
“You can’t run on rates,” says Shee. “We’ve seen digital banks launch in other countries with high rates. But they had to revise it back down in a couple of months because it’s just not sustainable.” But there is a price point to delivering banking products and services. “When we run a business, especially in financial services, it has to be a model that is profitable and sustainable.”
Tech companies or banks?
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While interest rates in Singapore, even those by the new challenger banks, have been moderate, customers should be cautious of high interest rates being offered, says UOB’s Kevin Lam, head of TMRW and group digital banking. “In Singapore, we don’t feel it. But in places like Indonesia, institutions that pay very high interest rates are typically challenged. Why do they need to pay a higher interest rate? Because they are short on funds. The higher the value, the more scared you are.”
Last September, UOB merged its Mighty mobile app with its digital bank TMRW in Singapore, announcing that it would invest up to $500 million to scale and commercialise the platform.
In Singapore, TMRW has “more than a million digitally active customers”, says Lam. TMRW first launched in Thailand in March 2019, then in Indonesia in 2020. As of August, UOB has onboarded over a million digitally-acquired customers, says Lam, with between a quarter and a third of them actively using TMRW as their transaction accounts.
By 2026, UOB aims to serve more than seven million customers across Asean. This includes three million to five million digital-only customers.
In addition to UOB’s near $5 billion acquisition of Citigroup’s consumer business in four Asean markets — announced at the start of 2022 — next in TMRW’s sights are Malaysia and Vietnam, which Lam says is planned for 2023. “We intend to launch TMRW in all the five markets where we have a consumer business.”
Singapore is but a base for digital challengers like GXS, says Lam. “Singapore is a small market. You don’t have a big population to scale. The underserved segment is not as big as China and Indonesia.”
Lam says there are pockets of opportunity, particularly in the SME segment. Some may have difficulty accessing credit, but banks must be prepared to take on potentially higher losses.
He adds: “Risk and returns, right? How you manage the credit model of riskier customers — that is a challenge.”
Emphasising “funding before lending”, he paints a bleak picture of digital banks in other markets. “During the Covid-19 period, there was a flight back to quality because people wanted to ensure their money was safe.”
In 2019, Australia issued five digital bank licences, but only Judo Bank and In1Bank remained after the pandemic. On Sept 14, In1Bank received a second extension of its licence to operate as a restricted bank.
One of the digital banks which collapsed, Xinja, had offered high interest rates on its deposit accounts after receiving a full licence in September 2019. Without developing a lending business, however, it received no income and, in December 2020, returned its licence and more than A$500 million in deposits.
Lam asks whether GXS is a tech company or a bank and whether its priorities lie in aggressive growth or prudent profit margins. Shareholding structure and strategic decision-making, he adds, are critical. “We speak about ecosystem partnerships, but one voice needs to prevail in the boardroom. How do you decide in that case?”
Neither DBS nor UOB have been elbowed as badly as OCBC. For 18 years, OCBC had co-branded cards with NTUC FairPrice. With Trust Bank, the latter has linked up with Standard Chartered, and customers’ loyalties are being tested. OCBC’s Plus! card partnership with NTUC will expire at the end of January 2023.
Responding to queries by The Edge Singapore, OCBC head of consumer financial services in Singapore Sunny Quek thanked NTUC “for the great partnership [and] we look forward to deepening our working relationship as we continue to support NTUC’s banking needs”. He adds that its team is ready to assist all customers through the transition.
Existing customers will no longer be able to use NTUC and OCBC Plus! products from Feb 1, 2023, but affected cardholders will not lose any Linkpoints, says Quek of NTUC’s loyalty programme.
He adds that an alternative card — the OCBC 365 Credit Card — has been sent to members and can be used with a Link Rewards card or tagged to a Link account via the FairPrice mobile app.
The bank will also send a similar debit card to its cardholders soon. Meanwhile, Quek says consumers in Singapore are “hyper-banked”, and the new digital banks face a “hyper-competitive environment”. “The word ‘digital’ separates the incumbents from the digital banks. In practice, we already deliver seamless and frictionless banking services to our customers via digital banking platforms.”
The OCBC Digital mobile banking app lets customers open bank accounts, trade equities through 15 exchanges and access instant foreign exchange services, insurance, and investment products. Quek notes that the bank’s robo-investment service — OCBC RoboInvest — saw digital wealth sales grow 4.5 times between 2020 and 2022.
OCBC’s ATMs can perform more than 80% of over-the-counter services, and more than nine in 10 of all financial transactions can now be performed digitally on OCBC’s digital banking platforms, says Quek.
The banking industry has always been competitive, says Quek, and the contest has been heating up. “We have noticed the demand for time deposits, especially the popular 12-month tenors, has increased, with placements in August growing 60% from July and close to 150% from June. We will continue to monitor the landscape and ensure our interest rates stay competitive.”
Digital banks are expected to have lower fixed costs, as they do not operate large numbers of physical branches, write RHB Group Research analysts in an Aug 22 report. “On the contrary, the existence of office branches for conventional banks is essential to provide financial services, and it may not be economically feasible to enter rural areas that fetch lower ticket sizes.”
RHB analysts note that conventional banks have started closing their branches, opting to shift online instead. The International Monetary Fund and MomentumWorks also found that between 2015 and 2020, the number of bank branches in Indonesia per 100,000 adults shrank by 2.4%.
Ultimately, DBS’s Shee says running a profitable banking business over a long time is “not always that straightforward”. “Digital banking is not about piecemeal things. It’s not going to be easy for any challenger.”
Does he have any words for the likes of GXS? “Welcome to our world."
Infographic: Irene Saswito/The Edge Singapore