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Banks partner fintechs in quest for digital dominance

Alliances can trump digital bank setups but may sour swiftly on tighter funding, data ownership questions

In late 2018, DBS and UOB both picked their ride-hailing app partners. In working with the incumbent Grab, UOB will become Grab's preferred banking partner.

DBS picked Indonesia's GoJek to be its ride-hailing app partner, but the focus thus far has been on promises of promo codes.


THERE is a power play ahead for Singapore banks as they cosy up to fintechs that offer quicker ways to scale and deepen their reach to bankable customers.

But the quest for digital dominance in the next few years through partnerships comes down to whether fintechs will be pinched by funding constraints, and how both fintechs and banks manage an era of uneasy data alliances, analysts said.

What surfaced in late 2018 was the way in which DBS and UOB picked their ride-hailing app partners that are evolving into fintechs - a tech cluster attracting premium valuations.

In working with the incumbent Grab, UOB will become Grab's preferred banking partner. UOB also wormed through a new channel into the GrabPay wallet, as UOB customers can top up funds from their bank account - a move that may make credit-card top-ups less relevant if this cash option takes off.

DBS picked GoJek, but the focus thus far has been on promises of promo codes.

On the face of it, fintech partnerships could be a credible and stronger alternative to building a standalone digital bank - an option traditional banks are simultaneously exploring - Singapore-based partner at McKinsey & Company Badrinath Ramanathan told The Business Times (BT).

Such partnerships open up payment channels, but could mean the use of rich data to offer lending and other forms of financing later.

But Mr Ramanathan cautioned that the partnership needs to address sensitive issues such as value sharing, ownership of the customer relationship, data and intellectual property sharing, and customer privacy.

Indeed, the short-term opportunities from data partnerships could bring "unfavourable" relationships once partners become dependent on the data flows, said a Deloitte report.

"Partnerships are proliferating across the financial services ecosystem, but only time will tell if these relationships drive sustained value. We observe that data partnerships are in the early stages of being formed, but are not yet at the stage where tensions have major impact," it said.

"By positioning themselves as the critical link across the ecosystem, firms can turn other participants into commoditised service providers. Tensions arising from this may limit the longevity of emerging alliances."

Banks' other power play may come in the form of blessings from tighter monetary conditions. As cost of capital starts to rise as rates normalise, bargaining power may begin to tip in favour of traditional financial firms as compared with fintech companies that may have burnt through significant cash to secure their market.

UBP's chief investment officer, private banking, Norman Villamin, told BT: "Where the balance of power shifts is when the tech guys become funding-constrained, creating a similar playing field. At that point, who would generate the better return for the same dollar?"

As shifts in business models and funding collide, incumbents such as banks can snap up fintechs that help to make up a few years of organic development of tech capabilities, analysts said. That would translate essentially to a grab for valuable patents owned by fintech firms.

This would bring much-needed growth in revenue, so banks can make a convincing case of growth through technology, rather than using technology to reduce costs alone.

"There is a limit to how much you can command a premium by cost-cutting," added Mr Villamin. "Is that a viable way to transition? Yes. But at some point in the future, you'd need to have some topline driver."

Where banks are likely to draw the line is in exploring alternative forms of lending in the way fintechs have, Nick Lord, head of Asean banks research at Morgan Stanley, told BT.

"Lending is a core competency of banks. Banks will continue to apply the same sort of rigour that they apply with lending," he said.

But to be sure, revenue can already be driven by greater productivity driven by existing technology developed in-house. Mr Lord added that banks can use data to more quickly process loans. This also makes smaller loans more accessible.

Partnerships are not the only route to digital dominance explored by Singapore banks, as they will look to simultaneously test out different styles of digital bank outfits.

DBS has already started standalone digibanks in India and Indonesia. UOB will look at a digital banking operation for its Asean markets, while OCBC has said it would stick with a digital makeover from within.

McKinsey's Mr Ramanathan said that banks with an existing customer base can significantly reduce the cost of customer acquisition, should they start their own digital banks.

This is since they can use data analytics to personalise finance offerings, shortening the estimated five years that it would take to turn a greenfield digital bank profitable.

To add, Morgan Stanley's Mr Lord said traditional banks had earlier spent on customer acquisition, with that expense spread over decades and across branch networks.

This gives banks a steady base of customers to work with today, but the work ahead is in keeping these customers. Startups are burning cash now to acquire many of these same customers quickly.

Mr Ramanathan said some large institutions would still want to build greenfield digital banks as "a controlled bet".

The aim in this case would be to learn how to build digital businesses, attract new staff and experiment with new offerings without risk to the existing business.

Banks can also insist on a pure digitalisation route, and can make substantial gains if they are steadfast in changing behaviour from within via "tough decisions" from the top.

"Such transformation, however, is not easy and often these efforts face resistance to change and get entangled in cultural issues," said Mr Ramanathan.

To UBP's Mr Villamin, one differentiating premium for banks surviving in the digital economy is leadership. "The question is, how much am I willing to pay for the optionality behind management?"

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