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The Peak (Hong Kong) - - Feature -

ank­ing is an in­dus­try that’s ripe for dis­rup­tion. These days, peo­ple are used to do­ing a lot on­line, but for most of us dig­i­tal bank­ing is lim­ited to check­ing our bal­ance and mov­ing funds around. By 2027, that will have changed dra­mat­i­cally.

The idea of the di­rect or branch­less bank has been around for a while – First Di­rect was launched as a branch­less tele­phone bank by the UK’S Mid­land Bank in 1989 – but in the past few years, a large num­ber of all-dig­i­tal or in­ter­net-only banks have sprung up around the world. Sev­eral are in Asia, in­clud­ing Ten­cent’s We­bank; Baidu and China Citic Bank’s Bi­axin Bank in main­land China; Timo in Viet­nam; K-bank and Kakao Bank in South Korea; DBS’S Di­gibank in In­dia and In­done­sia and Alibaba’s My­bank ( Th­e­southchi­namorn­ing­post is a sub­sidiary of Alibaba Group). As well as the added con­ve­nience of do­ing ev­ery­thing quickly through a phone or com­puter, dig­i­tal banks’ lack of branches drives their costs down, po­ten­tially al­low­ing them to of­fer fi­nan­cial prod­ucts at bet­ter rates.

Dig­i­tal banks largely fall into three cat­e­gories: en­tirely new op­er­a­tions set up by new com­pa­nies that of­fer a full range of bank­ing ser­vices, in­clud­ing sav­ings and cur­rent ac­counts; in­cum­bent banks giv­ing it a go in the dig­i­tal realm; and ser­vices with apps fea­tur­ing a sav­ings and pay­ment wal­let but not proper ac­counts, mostly aimed at peo­ple who have not pre­vi­ously held bank ac­counts.

“By 2027, the first two will be cater­ing to peo­ple who have a de­cent amount of money; the third one’s not even in­ter­ested in peo­ple with money, although it may be that peo­ple with money will use it,” says Chris Skin­ner, an in­de­pen­dent fin­tech com­men­ta­tor and au­thor of the book Dig­i­tal Bank.

Adds Joe Ngai, man­ag­ing part­ner of Mckin­sey Greater China: “Cus­tomers don’t think about whether it’s a dig­i­tal-only bank. Peo­ple bor­row, in­vest and save, and there are a bunch of play­ers try­ing to ful­fil those needs, from tra­di­tional banks to start-ups to tech­nol­ogy com­pa­nies.”

Viet­nam’s Timo bank is among those start-ups, although it has part­nered with an in­cum­bent, Viet­nam Pros­per­ity ( VP) Bank, to get a bank­ing li­cence – some­thing that would oth­er­wise cost about US$30 mil­lion in the un­likely event one be­came avail­able. VP, which doesn’t have an eq­uity in­vest­ment in Timo, han­dles back-end costs, while Timo han­dles front-end costs, and the two split rev­enues on a prod­uct-by-prod­uct ba­sis.

Viet­namese bank­ing reg­u­la­tions re­quire ac­counts to be set up in per­son, with a phys­i­cal sig­na­ture and ID val­i­da­tion; Timo’s an­swer was to launch two Timo Hang­out cof­fee shops in ma­jor cities where peo­ple can open ac­counts.

“The main dif­fer­en­tia­tor that we went to mar­ket with was that we’re a lifestyle bank,” says Timo CEO Cameron War­den. “Ev­ery­thing we do is fo­cused on the cus­tomer ex­pe­ri­ence, on mak­ing your life eas­ier. We’re also trans­par­ent; all the banks here [in Viet­nam] have hid­den fees.

“We don’t go af­ter the un­der­banked or un­banked ru­ral mar­kets. We’re not teach­ing peo­ple how to bank.”

At the other end of the scale are the dig­i­tal banks of main­land China, who most cer­tainly do go af­ter the many peo­ple un­touched by the coun­try’s ex­ist­ing bank­ing sys­tem. “In China the big in­ter­net com­pa­nies are so large and per­va­sive that peo­ple trust them,” says Ngai. “A lot of peo­ple grew up us­ing Alibaba as their main place to shop and Wechat ev­ery day. They’re the big­gest guys go­ing af­ter the mar­ket, and the in­no­va­tion they bring to the sec­tor is such that the au­thor­i­ties help. They cre­ate de­mand; if you’re an SME or an in­di­vid­ual, the banks won’t re­ally give you credit.”

James Lloyd, Asia-pa­cific fin­tech leader for EY, clas­si­fies the com­pa­nies mainly as tech­nol­ogy play­ers. “My view is that My­bank and We­bank are more de­signed to help other banks by pro­vid­ing them with tools,” he says. “In Asia, not many dig­i­tal banks are look­ing to com­pete head-on with in­cum­bent banks. It’s not like, for ex­am­ple, the UK, where they have am­bi­tions to be full banks.

“In re­tail bank­ing, I think the com­pe­ti­tion is around who owns the cus­tomer and who’s pro­vid­ing ser­vices to them. Who­ever man­ages cus­tomer re­la­tion­ships can of­fer ser­vices to them. Wechat in China can of­fer peo­ple any­thing. Ten­cent doesn’t need to be the man­u­fac­turer; it just needs to pro­vide the ser­vice. Profit tends to ac­crue to who­ever owns the cus­tomer. If banks just pro­duce prod­ucts but don’t own the cus­tomer, it will re­ally hurt their mar­gins.”

He high­lights the threat posed by Kakao Bank in South Korea, an off­shoot of the coun­try’s most pop­u­lar mes­sag­ing ser­vice Kakaotalk. “I’m sure there are a lot of banks look­ing at Kakao and say­ing: ‘This is wor­ry­ing’. They have cap­i­tal, brand recog­ni­tion, and cus­tomer re­la­tion­ships through the mes­sag­ing ser­vice; they’ve launched a tra­di­tional re­tail bank of­fer­ing but they’re not a bank.”

Most old-school banks have strug­gled to keep up, tend­ing to au­to­mate cus­tomer-fac­ing pro­cesses but not back-of­fice sys­tems.

“Most banks are con­vert­ing them­selves into a mar­ket­place of apps and pro­vid­ing that as a plat­form for cus­tomers,” says Skin­ner. “They recog­nise longterm that they have to do that, but it’s hard to do it. They’ve never had to open them­selves up be­fore; they’re used to con­trol­ling ev­ery­thing. They’re fail­ing to con­vert their core banks to dig­i­tal be­cause of legacy and lead­er­ship; there’s no un­der­stand­ing of tech­nol­ogy in the board­room.”

How­ever, as Ngai notes: “Tra­di­tional banks have the most to lose but they also have the deep­est pock­ets. Over the next few years banks will in­vest a tonne of money in the tech­nol­ogy it takes to go dig­i­tal, and they’ll buy fin­tech com­pa­nies; they’ll sur­vive be­cause they’ll adapt. Meet­ing banks’ CEOS at the mo­ment, this is the topic that comes up most. The banks with the tech­nol­ogy will be the banks of the fu­ture.”

“Only a tiny num­ber of start-ups will sur­vive. Bank­ing is still a cap­i­tal­heavy, reg­u­la­tion-heavy mar­ket.”

“We un­der-ap­pre­ci­ate the chal­lenge for new banks,” adds Lloyd. “You can build or lever­age the new­est tech­nolo­gies and busi­ness mod­els, and po­ten­tially ac­quir­ing the first batch of cus­tomers might be easy. But the cost of cus­tomer ac­qui­si­tion is likely to rise be­cause those early adopters are self-se­lect­ing. You don’t have the brand. Un­less you’re 10 times bet­ter than ex­ist­ing banks, it’s hard to change peo­ple’s be­hav­iour.

“There’s great scope for dig­i­tal banks in Asia, but it won’t be three guys in a base­ment do­ing it. It’ll be peo­ple in ad­ja­cent in­dus­tries mov­ing into it, like Ten­cent and Alibaba.”

The tra­di­tional bank might not be so mori­bund af­ter all, then. “In 1997, at all the bank­ing con­fer­ences peo­ple were pre­dict­ing that tra­di­tional banks would be out of busi­ness by 2017,” says Skin­ner. “It didn’t hap­pen.”

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