Finance companies to crank up game as digibanks target SME turf

Singapore

HAVING enjoyed some lift in their business following relaxed financing rules in 2017, finance companies may have to brace for a tougher fight defending their turf in their core small and medium-sized enterprise (SME) segment in the next few years.

Known to be more traditional institutions that lag behind their banking counterparts in digital capabilities, Singapore's three finance companies need to ramp up their technology transformation, partner with innovative startups, or risk being left behind, analysts warned. This comes as upcoming digital banks threaten to steal their lunch with greater speed and simpler processes.

Of the trio, Singapura Finance - the smallest - is the only one said to have applied for a digital bank licence, but there are no details yet on its game plan. The other two, Hong Leong Finance and Sing Investments & Finance, have both confirmed that they did not put in a bid.

Finance companies have mostly been on an upward swing since the relaxation of SME lending rules back in February 2017 that included higher limits on uncollateralised business loans and allowed them to offer current accounts to SMEs.

In the latest 2019 Q3 results, all three finance companies saw their loan books grow over a nine-month period: Hong Leong Finance grew 9.9 per cent to S$11.3 billion, Sing Investments and Finance grew 5.5 per cent to S$2.2 billion, and Singapura Finance grew 7.4 per cent to S$730.5 million. For FY18, all three also posted higher after-tax profit from a year ago.

"Despite this success, the rise of online lenders may pose a threat to financing companies in the future," noted William Hofmann, senior analyst at consumer finance research firm ValueChampion. For instance, these new lenders tend to offer a smoother application process and quicker cash disbursement, he said. As these new entrants mature, they could even offer more competitive interest rates and services compared with the finance companies, he added.

Some analysts believe that the introduction of digital bank licences, where players are expected to cater to segments such as SMEs, is a signal that there are still unmet financing needs here.

Stuart Last, partner, Financial Services Transaction Advisory Services, Ernst & Young Solutions, said: "There is still a gap between where finance companies are and where they could be in SME and consumer financing since the relaxation of rules in 2017."

Even with the regulatory changes, a 2019 report by EY and the Singapore FinTech Association found that SMEs, especially the micro SMEs, still have difficulty getting funding and that a lack of collateral and limited credit history are some key reasons for loan rejections, he noted.

Fintechs and the digital bank contenders are seeking to address this gap with their tech capabilities, with the possibility of expanding their reach into the coveted mainstream SME segment once they gain scale. This means that finance companies will soon see stiffer competition for their traditional customer base.

Anshuman Singh, partner, Financial Services Digital, Ernst & Young Advisory, concurred: "It will be a challenging three years for finance companies with new entrants entering the market with what is likely to be more digital and innovative offerings."

To compete in such a competitive landscape, firms will need to decide if they are going to compete head-on with the new virtual banks and fintechs, or partner with them, he pointed out. As it is, the three finance companies are doing just that, in varying stages of progress.

Singapura Finance recently paid US$5 million for a 1.6 per cent stake in the enlarged share capital of homegrown digital payments firm MatchMove Pay as part of the group's "strategic positioning into the financial technology era", according to its latest financial statement. The duo are believed to have joined forces in the hopes of landing a digital bank licence in Singapore, but both parties declined to confirm they've submitted a digibank bid.

As for Sing Investments and Hong Leong Finance, they told The Business Times that they are in talks with fintechs to explore potential partnerships.

Lee Sze Siong, deputy managing director, Sing Investments & Finance, told BT that the company is aiming to "uncover synergies" with fintechs to propel them to the next level of digital growth "without having to reinvent the wheel", but did not give specific names.

Earlier in December, it became the first finance company here to launch its retail mobile app, which provides services such as in-app account opening and a consolidated view of all accounts with the company.

It also replaced its traditional core banking system - or its back-end system - to a digital-enabled one in preparation for its digital plan.

For Hong Leong Finance, the biggest of the three lenders, its president Ang Tang Chor said the company is in discussion with fintechs to explore partnerships to fill knowledge gaps as well as to meet the needs of younger customers.

So far, nothing has been firmed up yet.

While the three finance companies are making steps to keep up with the digital era, the question is whether time is on their side, given the impending entry of digital banks.

"The new virtual banks will target millions of customers through partnering with organisations with strong customer reach," said EY Advisory's Mr Singh. "The ability to forge these partnerships to access a large customer base is a key challenge for the finance companies."

He added that the ability to attract the talent needed to drive new business, technology and operating models will also be another barrier. This comes as the finance companies tend to be seen as less tech-savvy and progressive, making it difficult to hire the best.

That being said, analysts flagged that finance companies' strengths should not be overlooked either.

Mr Singh said: "They have been in the market for a long time and have their own customer base and possess knowledge of the market and ability to price for the risk."

DBS' equities analyst Lim Rui Wen noted that the companies' relationships with SMEs, experience in credit underwriting and industry knowledge of customers are some of their key advantages.

"With more players interested in banking the SME space, fincos (finance companies) will be up for the challenge, though they have an edge currently due to their customer deposit base compared with fintechs which have none," she added.

The finance companies also expressed confidence in their future, even as they acknowledge the intensifying competition.

Sing Investments' Mr Lee said it is prepared for the new entrants in the SME lending landscape, on the back of its five decades of experience and "sizeable" customer base.

"Over the past two years, we have been transforming our business while developing new digital capabilities as a platform to serve our customers better," he said. "We embrace the 'new normal', or the digital financial world, and view this as an opportunity for us to... remain relevant to our customers and to grow new ones."

But with the speed at which the landscape is moving, it remains to be seen whether the finance companies are able to innovate fast enough to maintain their lead.

"Incremental changes or a 'do nothing' strategy is unlikely to reap benefits in the medium term," concluded Mr Singh.

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