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The challenges facing digibanks: Opinion

The challenges facing digibanks: Opinion

Source: Straits Times
Article Date: 21 Sep 2022
Author: Vikram Khanna

The digital banks have timed their entrance well, says the writer, as the Covid-19 pandemic accelerated digital adoption.

As at September, consumers and SMEs have more banking choices - digital banks have finally arrived and a publicity blitz is under way.

Most of those licensed are up and running. For consumers, there is GXS Bank - backed by Grab and Singtel - which launched its app on Sept 5 and is signing up new customers by invitation. There is also Trust Bank launched by Standard Chartered Bank and the FairPrice Group, which, because of StanChart's status as a "significantly rooted foreign bank", is able to offer a broader suite of products and services and also has ATMs. Mari Bank, which is backed by the gaming, payments and e-commerce company Sea, has yet to launch.

Among digital wholesale banks, there is ANext Bank, a wholly owned subsidiary of China's Ant Group, which claims to cater to "next gen SMEs", and Green Link Digital Bank, which is owned by Chinese developer and state-owned enterprise Greenland Holdings and supply chain financing platform Linklogis of Hong Kong.

Good timing

The digital banks have timed their entrance well. The Covid-19 pandemic accelerated digital adoption, particularly of payments. For instance, cashless payments like PayNow roughly doubled in 2020 and e-commerce adoption by businesses has expanded.

Digital banks' offerings seem attractive, and include no requirements for minimum balances, no annual fees, competitive interest rates, creative, fixed-deposit-type accounts with higher payouts and opportunities to get discounts with their partners, such as NTUC Linkpoints rebates in the case of Trust Bank. The wholesale banks' offerings include free local payments, easy cross-border transfers in multiple currencies with flat fees and term loans without collateral.

The digital banks are targeting under-banked segments as well as the customers of their backers. GXS Bank, for example, aims to target digital natives such as millennials and gig workers, as well as customers of Grab and Singtel. Trust Bank plans to plug into the FairPrice group's large customer base. Mari Bank will presumably focus its offerings on users of its e-commerce platform Shopee and the wholesale banks are looking to attract SMEs and micro- businesses that traditional banks do not serve.

But for all their attractive offerings, experts say that digital banks face several hurdles. To begin with, the amount of deposits the retail banks can take is initially capped at $5,000. But, even after the cap is raised, customers are unlikely to switch away from their main bank. A PwC survey showed that 99 per cent of Singapore customers plan to keep their current primary bank accounts even after opening a digital bank account, and about two-thirds will continue to use their existing account as their primary bank. "New digital banks are therefore more likely to initially displace customers' secondary bank account rather than a customers' primary bank," the survey points out.

Second, traditional banks also offer digital banking. "Digital banks won't change my life in any meaningful way," says Insead economics professor Antonio Fatas. "The increase in digital payments in Singapore was happening anyway, so it's not a huge leap, just an additional step. There is nothing special about being digital any more."

He adds that this contrasts with the entry of digital payment companies in China, for instance, where traditional banks did not offer efficient payment services, which opened up opportunities for the tech giants Tencent and Alibaba to dominate the space.

But Prof Fatas points out that Singapore's digital banks do have the advantage of large pools of potential customers of their partners. "Traditional banks don't do ride hailing or deliver food or do e-commerce," he says. "So digital banks have some advantages. But it's important that they execute well and use their partners to achieve scale."

When it comes to execution, user experience rather than product is key, according to Dr Dennis Khoo, who was responsible for launching UOB's TMRW digital bank in Thailand and Indonesia, which won Global Finance's Most innovative Digital Bank award in 2019. Dr Khoo is programme director for the NUS Digital Transformation Leaders Programme, and is author of the book Driving Digital Transformation, which could be considered the definitive guide to setting up a digital bank.

Sweat the small stuff

"Digital banking must be experience-led," he says. "It's not about having one or two big features like giving a good rate - other banks can also give a good rate. It's the design and process that have to be very good. On-boarding, transacting and granting credit should be super-easy. This calls for an obsession with detail. Find 20 or 30 small things that need attention and do them really well."

He explains, for example, that if a user needs to key in a five-digit PIN, he should not have to press "Enter" after that - it's an extra key that's unnecessary. If a user contacts a bank about an unresolved issue, he should not have to repeat the problem - it should already be there for the bank's service representative to see. Or if a customer has insufficient funds in his account and thus a recurring debit fails, he should be alerted in advance rather than made to pay a penalty afterwards since the bank has the data to prevent the failure.

In sum, there are three critical steps that digital banks need to take. First, provide a user experience that is super-easy. Second, if there's a problem, fix it quickly, and, third, use data to prevent problems.

Unfortunately, in a lot of banks, process does not often get top-level attention, according to Dr Khoo. "The process people are usually from the more junior ranks of the bank," he says. "The senior people don't sit in on those meetings, because they are about little, little things - boring stuff." The senior people like to talk about strategy, products and risk management, not tedious details relating to the customer experience.

But CEOs of top-ranked companies get deeply involved in such minutiae. A standout example was the late Apple Computer co-founder Steve Jobs. He once called up a senior executive of Google on a Sunday to complain about the shade of yellow in the second "O" in the Google logo and how it showed up on the iPhone. He would even demand that the chips on the circuit board inside Apple's computers were perfectly aligned, even though customers would not see them.

"That passion for the details that define the customer experience is what digital banks need to have," says Dr Khoo. "The fact that traditional banks' digital offerings in Singapore are already of a high standard calls for even more attention to those details," he says.

One of the most widely used measures of customer satisfaction is the net promoter score (NPS). Customers are asked how they would rate a particular company on a scale from zero to 10 in terms of their willingness to recommend the company to their family and friends. The NPS is the number of customers that give a rating of nine or 10, minus the number that rate it six or less. Given that customers do not easily switch their banks, new digital banks need to have an NPS that is double that of incumbent banks, according to Dr Khoo. Market sources estimate the highest NPS among Singapore's top retail banks in 2019 was around 20. So the digital banks need to have a score of at least 40 after they launch. A high NPS score reduces marketing costs because customers do a lot of the marketing for the bank, which lowers customer acquisition costs - the key to profitability.

Common mistake

Research has shown that a common mistake that newly launched digital banks make is to go for the highest number of customers as soon as possible. A report by the consulting firm Simon Kucher and Partners, which showed that one of the most important reasons less than 5 per cent of digital banks are profitable, is that they prioritise the number of new sign-ups rather than monetisation.

"Everybody wants hockey-stick growth in the number of sign-ups," says Dr Khoo. But what really matters is how many active users there are. "If it costs $50 on average to acquire a customer, I would rather have half a million customers with a 30 per cent active rate than two million customers with a 5 per cent active rate," he points out. And that depends above all on customer experience and indicated by a high net promoter score.

Leveraging customer data from partners can help lower customer acquisition costs - as borne out by the experiences of Kakao Bank in South Korea which drew on the huge customer base of the country's top messaging platform Kakao Talk as well as MyBank and WeBank in China - which recruited users from the platforms of Alibaba and Tencent, respectively.

But when it comes to extending credit, Dr Khoo cautions that the digital banks have to demonstrate that transactional data from retail, e-commerce or ride-hailing platforms are superior to that from consumer credit bureaus, which traditional banks rely on, otherwise it will not make a significant difference.

This is because there is a minimum annual income of $20,000 in Singapore before banks can lend unsecured, and the $20,000-plus market is already served by incumbent banks. But transaction data can be more useful for lending to SMEs. SME-focused digital banks can also connect to SMEs' accounting systems and, with fraud-detection algorithms, get access to reliable data on the creditworthiness of this more risky segment.

However, experts believe that there is little danger of serious credit risks emerging from the lending operations of digital banks. "Singapore's regulations are strict and conservative," says Prof Fatas.

If they execute well, there are pathways to success for Singapore's new digital banks. While their superior products, such as better rates and no fees, can be copied, traditional banks are unlikely to match them immediately, says Dr Khoo. The incumbents will wait, because they would have more to lose - for example, by giving up on fees. So the newcomers will have a window of opportunity.

Over time, banking habits can evolve. He explains how this works: "You open an account with a second bank and you find it's really good, so you use it more often. Then you transfer more money to it, and then still more. Eventually, your second bank becomes the first. It happens over a few years. It's for the long haul, and it's not easy."

Eventually, some winners may emerge. But, amid the intensifying competition, the biggest winner will be the consumer.

Source: Straits Times © SPH Media Limited. Permission required for reproduction.


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