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Technological instability in retail banking: Singapore banks are front runners in digitalisation

Technological instability in retail banking: Singapore banks are front runners in digitalisation
By Karan Kapoor
Banks in Singapore are turning adversaries into partners. Doomsayers have forecast the demise of banking as we know it and praised Fin-Tech after the internet bubble as the most significant breakthrough. Yet tech-start-ups are not annihilating banks in Singapore. Alternatively, they link hands with innovators in search of win-win outcomes.
The argument for Singapore's digital banking infrastructure has become stronger because of COVID-19. Throughout the COVID-19 epidemic, a record amount of digital banking transactions occur, leading to a significant increase in Fin-Tech adoption. The number of customers who migrated to digital banking has risen tremendously, particularly those in the 60-80 age group.
For instance, from January through March 2020, more than 100,000 DBS Bank customers made their debut digital transactions. Clearly, during these difficult times, customers who were previously hostile to new platforms are adapting out of need. The number of digital purchases has also dramatically increased.
Singapore promotes digital banking creativity and growth while retaining commercial continuity and preventing undue instability in the regional banking industry. The banks are alive and well, based on the four-factor study of technology, policy, business and priorities (TRIP) given by S&P Global Ratings.
The benefits of Fin-Tech are clear from a financial standpoint. Big financial conglomerates are sluggish in making an internal culture of creative work and are held back by tradition and legislation. Tapping new brains into an existing reservoir of potential is more effective and much cheaper. Fin-Tech alliance provides a ready and cost-effective vector of creativity that helps banks to retain their dominance or even boost their customer service levels.
The tech companies are winning too. They have creative plans but don't recognise or have the resources for the highly regulated banking industry. Banks will also have access to a large anonymised archive of customers — a critical asset in the modern world. It helps engineering companies to adapt their innovations and technologies to Fin-tech projects, such as ai-advisers or credit networks.
The cooperative strategy helps banks to protect their security from global disruption. Fin-tech acquisitions by banks would ensure that existing and future leading banking developments stay under their influence.

Big domestic banks rule and build high barriers to entry
The Banking sector in Singapore is bloated. DBS Bank Ltd., Oversea-Chinese Banking Corp., is heavily focused and dominated by three major players. Ltd. (OCBC), United Overseas Bank Ltd. (UOB)—which has over 60 per cent of the domestic consumer loans and deposits market combined.
The banking industry began the transition process many years ago in response to increasing consumer tastes, switching from conventional bank branches to online and offline experiences. In reality, by providing technologically open and technology-forward services, mainstream banks, insurers, and investment managers are undermining their proposals.
Fin-Tech is a start-up that will benefit from the resources of existing banks: market awareness, proven customer base, solid balance sheets, regulatory expertise, and human-interactive physical branches, which will remain a vital part of banking. Furthermore, mainstream banks are acquiring new insights from Fin-Techs, business intelligence, and technological skills.
Singapore banks should not, in our view, seek to push Fin-Techs out of the market landscape rather, the banks want to consider places where they can expand internally and those where they can collaborate with Fin-Techs. We conclude that Singapore's primary domestic banks and big qualified full banks are better equipped to succeed in the Fin-Tech age.
They have two important advantages :
  • The money required to invest in technologies to get start-ups; 
  • To a vast pool of consumer data to turn the technologies into a commercially successful product or service.

Singapore banks are well-positioned technologically 
Considering its technology capabilities, widespread mobile penetration, and enabling regulatory climate, Singapore is well-positioned as a Fin-tech centre. Similarly, Singapore was ranked highest in the 2019 released CISCO Digital Readiness Ranking. Singapore stands out within the Association of Southeast Asian Nations (ASEAN) as having strong connectivity and substantial mobile penetration that favours digitisation. The real salary of the nation is also considerably higher than that of its ASEAN neighbours and makes a convincing case for payment and cashless service providers.
Banks have been, and continue to do, spending extensively in technology. They have also adopted digital banking by transforming workplace culture and attitude, revamping IT infrastructure, and introducing groundbreaking technologies like mobile payment applications, workflow management, and the use of biometrics in their current processes. In addition to this, banks integrate developments in the study of big data and artificial intelligence to better understand and meet the demands, desires and aspirations of their customers.
Many Fin-tech startups join broader financial industry niche segments. They have mainly creative, retail-oriented financial services, such as payment platforms, electronic banking, and peer-to-peer lending. The latest era of industrial evolution has not yet revolutionised the entire financial world. Financial companies have remained dominant, suggesting that there could be little space for competition for potential automated banks.
Boosting consumer service in holding market share and attracting current clients is the main incentive to invest in fin-tech. It usually includes slashing processing times leveraging automated platforms and artificial intelligence to improve the consumer experience. In February, DBS Bank completed its first Networked Trade Platform automated trade finance operation. Fin-tech could also increase the cost-to-income ratio of banks, considering the reduced operating rates of digital consumers, which in turn makes them more competitive than conventional consumers. For a fact, reductions for production costs have yet to be understood.
At the flip side, the major Singapore banks that began their digital journey many years ago still have to demonstrate substantial cost savings or revenue increase. Such gains will primarily stem from cuts in branch and personnel, which would likely entail significant investment in technical technologies or applications and services for information technology. Until now, the Singapore banks' productivity and efficiency ratios that we rate have stayed stable, and have mainly maintained existing conventional facilities such as ATMs and branches. 
Cost-efficiency standards are primarily motivated by a transition from conventional to digital consumers, not a contraction of the branch per se. Bank management advice in Singapore is for expanding branches rather than shutting branches, such as providing smaller branches with less counter personnel and more self-service kiosks. Conversely, Thailand's banks have increasingly closed their branches as they develop their digital capabilities.
Singapore has an ageing population and a large number of clients dependent on branch banking. While it is a shrinking pool of buyers, banks favour extremely inelastic and stable deposits from the older cohorts. Maintaining market share in deposits is important for banks to see the profit in streaming higher prices through to net interest margins. Besides, cutting branches and headcount is also a locally sensitive issue and we expect that rationalisation should be gradual and protracted. 

The regulations strike a fine line between innovation and the calculated intervention

So far as we are concerned, the MAS is pragmatic and has been able to strike a fine balance between maintaining financial stability and fostering creativity. Up to five new wireless bank licenses are issued by the Bank. This will boost competition in the banking industry but it is unlikely that it would challenge the domination of the country's three biggest banks — DBS Bank, OCBC, and UOB.
The COVID-19 epidemic has postponed Singapore's award of wireless licenses — originally scheduled for announcement in June. Singapore's Monetary Authority (MAS) stretched its review duration to the second half of 2020 for its decision. The regulator announced in January that it had issued 21 licensing applications: seven were for full digital bank licenses and the remaining applications for digital wholesale bank licences.
The first digital banking licenses issued by Singapore could boost competition on an already competitive market, but domestic banks with the existing franchise are well-positioned to protect their market share. By restricting the potential entrants to underserved markets, the regulator is committed to avoiding value-destructive pricing. There are usually lower-income people or start-ups who do not fulfil the collateral standards of mainstream banks.
We think the regulatory risk is balanced as regulators track financial developments closely which may lead to disruptive instability in the banking sector. Around the same time, policymakers are, in our opinion, pro-innovation.
In the past, China has taken a similar soft-touch policy in governing the fintech industry but in recent years it has been more strict. In China, developments are powered by major tech companies rather than banks, and some of those tech-giant programs have become broad enough to pose a systemic challenge to the financial sector.

Accountability is the biggest hurdle to use a fin-tech competitor in markets such as Singapore, as opposed to mainstream financial institutions. Thirty-four per cent of clients do not trust their data to digital banks. One in three clients is not sure digital banks will be financially secure. While tech companies are more flexible in designing their technologies, on the confidence front they are not as successful as conventional banks which have developed confidence in their customers for decades.
Fin-tech firms that rely exclusively on technology and transactional performance do not last long in the current climate in Singapore. Retail banks with traditional bank branches tend to be the primary option for clients for activities other than digital transfers, particularly when applying for personal and business loans, and finding investment advice. Singapore's consumer experience shows this that is going to continue. Before tech firms win the confidence of the customer they do not own the customers.