Singapore incumbent banks should launch digital offensive in Asean

THERE was a scramble for non-bank players to speed-date the traditional lenders in Singapore, but thus far, none has made it to the altar with the final digital-bank consortia.

There is a simple explanation. The incumbents are entrenched, with the local trio holding a market share of more than 50 per cent here, and rules here have for years allowed them to set up digital entities separately.

Singapore is a small domestic market, and even as digital-banking consortia believe that this mature market has 38 per cent of consumers who are "underbanked", the Republic is more attractive as a base for these digital-banks to set up Asean operations, even as they go market by market to seek regulatory blessings.

But for Singapore's banking incumbents, the dating scene changes for them in Asean, with Malaysia already calling for digital bank applications. Here, the tables turn. For Singapore banks based in a saturated home market, the digital liberalisation in Asean allows them to go on the offensive. It also allows them to tap Asean flows in a more meaningful way.

On the digital front, DBS and UOB have made their first strides in this region, with DBS in Indonesia and UOB in Thailand. It would be hasty to dismiss this as an option for OCBC down the road. OCBC had considered joining a digital-bank consortium here, but that fell through in the eleventh hour as one partner tapped out.

There are a few ways to look at opportunities. Singapore banks that tap global fintech firms with operations here can offer a technology edge.

From credit-underwriting engines, to digital verification and machine learning for compliance and fraud detection, there is a spread of options if banks have been diligent in sieving them out over the last few years. Pick the right solutions at the right price, and a traditional lender could stack the right blocks to build a fresh and cost-efficient digital bank.

UOB's digital bank TMRW was built on fintech that allowed it to clean and sort data from new millennial customers, shunning legacy challenges that hindered a timely analysis of customers' banking needs. It is deliberately pacing out its customer acquisition, so as to funnel that data right.

As TMRW is rolled out to another large market in Asean, it will similarly calibrate the pace of customer acquisition against the value from hard-nosed analysis that is constantly refined. It is an experiment to watch.

DBS might feel compelled to provide more updates on how it is developing its digital bank in Indonesia, but it has said one significant lesson from its first digibank set-up in India was that it was better at selecting the right customers. It is now cautious on casting the net too wide in Indonesia.

These moves suggest that the two banks can calibrate nimbly with the right traditional sensibilities with their digital outfits. The strategies may differ, but the fiscal discipline likely converges. That is good strategic rigour to have to push further into Asean, a growth region that may offer some insulation from the US-China trade war, but still as emerging markets go, suffer from risks in non-homogeneity, regulatory uncertainty, and capital controls, among others.

The other opportunity comes from tapping the e-commerce market in Asean. An S&P report this month showed that e-commerce sales from this region should nearly double to about US$80 billion in 2022.

As it is, a Singapore digital full bank applicant, Sea Ltd, commanded through its e-commerce arm Shopee nearly a quarter of the aggregate gross merchandise value in Singapore, Malaysia, Thailand, Indonesia, the Philippines and Vietnam last year. Its e-commerce business presents it with more lending opportunities than a player such as Grab, as online shopping transaction values tend to be bigger than ride fares, S&P said.

Perfect match

That being said, where e-commerce players may find bank partnerships worthwhile is in credit underwriting. Merchant data may be a treasure trove, but credit underwriting is also a discipline that traditional banks are good at.

There are banks openly looking into this. Standard Chartered last year said it would explore a partnership with a large e-commerce partner of unicorn status in Indonesia to boost its retail banking, having sold off Bank Permata recently.

Banks here may look to do the same. UOB's TMRW in Thailand already partners Shopee and Grab, tapping their network to get customers at a lower cost than what it would be to use Google.

As e-commerce players signal ambitions to operate as a bank, a more pressing demand for profitability could spur these shopping sites to seek out more intimate partnerships with traditional banks that in turn, want to take a bigger slice of the Asean market. If so, more e-commerce players might entertain a direct tie-up with banks to accelerate such plans. Other lifestyle platform players could also jump on board.

Some stepping stones are in place by Singapore regulators to nudge the dating along. Rules were changed just a couple of years back to allow Singapore banks to invest some money in e-commerce platforms.

Meanwhile, retail payments across Asean should be a breeze five years on, once Singapore successfully links up their real-time payment systems with other regional markets to enable small payments via mobile numbers.

This doesn't tilt the competition for Singapore banks, but levels the playing field by building the pipes of an intra-Asean payments infrastructure. It also underlies that digital finance is increasingly borderless, and that future competition across old and new financial entities will be more in speed, technology, and scale.

As it is, the domestic banks in each Asean market are actively investing in technology. Kasikornbank's (KBank) digital banking app is one of Thailand's most popular app. Eight in ten transactions made by KBank's customers are already done digitally. KBank is also working with Grab on a mobile wallet to reach those without a bank account.

With their digital savviness, Singapore banks can fend off competition from new digital entrants for now, with an eye on the competition's impact on thinning margins. But playing defence isn't enough. Failing to capture more of Asean's growth in an era of digital liberalisation is a risk and a missed opportunity. There are still aces in hand: Singapore is small but holds an outsized status as a hub for Asean businesses, as well as for global funds and institutions.

Banks here should ready themselves to hunt. Even if the road ahead is bumpy and unkind, the trek looks more like a matter of survival.