Big 3 banks can defend market share against fintech threats: Moody's

Singapore

SINGAPORE's Big Three banks are able to defend their market share against fintech competitors despite the rapidly growing threats to their business from these upstarts, Moody's Investors Service said in a report on Monday.

This is partly because DBS Bank, OCBC Bank and United Overseas Bank (UOB) have abundant financial resources to invest in technology, whereas startups are facing increasing competition for funding, said Simon Chen, a vice-president and senior analyst at the credit rating agency. Moody's noted that fewer fintech firms received funding in 2018 than in previous years.

The banks' continued investments in digital transformation are enabling them to defend their competitiveness, Moody's noted.

Their digitisation efforts have helped them improve efficiency, as technology significantly lowers costs for acquiring customers and processing transactions. Digital customers are also more profitable than traditional branch users, because they generate more revenue as a result of closer engagement with their banks.

However, the banks' efficiency gains from digitisation have been insignificant as they continued to channel their cost savings back to technology investments, Moody's said. From 2014 to 2018, DBS and UOB spent a total of S$1.8 billion and S$1.6 billion, respectively, on digital initiatives. OCBC's technology spending amounted to 11 per cent (about S$500 million) of its total operating expenses in both 2017 and 2018. The pace of branch closures has also been slow because the banks need to maintain physical outlets to cater to older customers who are less tech-savvy.

For the banks to meet their targets to lower their cost-to-income ratios to less than 40 per cent in the coming years from 43-44 per cent in 2018, they must increase the share of digital customers for their businesses, Moody's said.

As for fintech firms, one challenge they face is they cannot expand into deposit-taking and lending, Mr Chen said. This is despite Singapore's supportive environment for fintech innovation, with regulators actively encouraging companies to experiment with new products. The reason is that the authorities want to strike a balance between preserving financial stability and giving companies sufficient room to innovate.

While startups have been gaining traction with products such as GrabPay, their ability to disrupt the financial services sector is also constrained by a high degree of banking penetration in Singapore and the three large banks' strong franchises.

As a result, fintech firms increasingly opt to collaborate with banks to jointly develop products instead of competing with them for market share. For banks, such partnerships also enable them to streamline their internal processes.

Moody's said fintech firms are typically attracted by Singapore's developed financial infrastructure and policy framework, and the gateway it provides into South-east Asia. The number of fintech ventures in Singapore increased by 60 per cent to 756 as at end-October 2018, up from 479 at the end of 2017, Moody's noted.

The industry is also becoming more diverse. Prior to 2017, fintech investments in South-east Asia were primarily for digital payments and mobile wallets. But new fintech investments are increasingly flowing into emerging areas such as blockchain, online lending platforms, investment technology, robo advisory and artificial intelligence.

More than one-third of fintech funding in Singapore last year was for technology development related to financing for SMEs (small and medium enterprises) and wealth management services.

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