The most compelling of all themes in Asian financial services in the last five years has been the incursion of tech-savvy non-banks into the payments space. The first mention of Ant Financial in Euromoney came in April 2015; WeChat, January 2014; Paytm, September 2016; and Go-Jek, March 2018. Now it feels like those names have been around for ever.
Through these interviews we have learned a great deal about the potency of an offering that reaches the previously unbanked, makes smart use of big data and makes a virtue of simplicity and access. Institutions like these, and in particular those from China, lead the world in this field. They have made cash all but redundant in their markets and are making a fair fist of doing something similar to retail banking.
It is a theme that has its clearest expression in China, which was custom-made for disruption. It has a large population, with a growing mass-affluent young middle class that has been underserved by the banking system; people who are comfortable doing anything on a smartphone, and quite accepting of the privacy compromises involved in big data; a regulatory environment that has been far more benign for fintechs than existing banks; a considerable need for financial inclusion among the previously unbanked; and escalating e-commerce growth.
Not all of those attributes exist in other markets, but three of them – high populations with emerging affluence, comfort with and widespread use of the smartphone and high proportion of unbanked ready for financial inclusion – exist in India and Indonesia, the two other hotbeds of payments disruption.
It is the scale of these untapped markets, married with a newfound ability to reach them, that means Asia, not the US, leads the world in fintech.
So how have Asia’s banks responded?
February provided an informative example. That month UOB, an institution run by the third generation of the same family and noted for its caution and conservatism, followed through on plans for a digital bank and said it would open in Thailand, with an aim of collecting three to five million customers in the next five years as it rolls out to other Asean markets. It even has a funky name – TMRW, which you are meant to pronounce tomorrow – and it targets millennials who prefer to bank through their phones.
If dignified and proper UOB is doing this, then truly the moment has arrived when banking is taking on the tech threat en masse. But it shouldn’t be a surprise. Singaporean banks are perfect candidates for the use of digital disruption. They have highly sophisticated operations in their home base and are surrounded by markets with far higher populations but lower levels of banking penetration.
Wee Ee Cheong, chief executive of UOB, tells Euromoney in Singapore that he waited until all of the bank’s IT systems were centralized across the region before launching his new bank, so as to make the operation seamless.
“Because of that, it took me 14 months to launch a digital bank,” he says.
But he is very clear on the merit. “With the digital bank I can simplify my traditional banking operations,” he says.
A multinational client with operations in southeast Asia can now deal with UOB and have the same experience in Malaysia or Thailand as in Singapore, in cash management for example. Meanwhile there’s great potential for new consumer clients.
Why start in Thailand?
“First of all, it’s a big market,” says Wee. “Malaysia is our second-biggest market, but it is a little bit more established. The Thai consumer is quite tech savvy.”
After that, the digital bank will roll out in Indonesia and Vietnam, coming to Singapore last, the reasoning being that the bank already has well-established online operations and market share in Singapore.
“We want to use Thailand as a test,” Wee says. “If it is going well, we will use that to replicate some of its success in different countries.”
UOB has claimed – particularly Dennis Khoo, head of group retail digital – that it will be differentiated from other digital offerings because it will only seek good, remunerative clients. But how does one know who a good customer is?
Traditionally, Wee says, one would look at income tax records and so on. But now the bank is engaging with behavioural scientists.
“Especially in an emerging country, income tax may not be the only way of looking at it,” he says. “The underground economy is huge. We focus a lot on behaviour.”
UOB has tied up with AI and big data specialists in Israel and China to try to get the right people. It has given its Chinese data partner, Pintec, a trove of data on applicants UOB had previously rejected. “I said: ‘You look at it, see what you can get out of this,” says Wee. “It could be an opportunity lost for us.’”
There is something of a leap of faith.
“These are all unsecured credit, new generation – they have no money,” Wee adds. “We need to take certain risks. If they are successful in their career, hopefully they will migrate over” to more lucrative banking services.
Doing this without compromising UOB’s cherished standards of prudence and asset quality will be a challenging balancing act.
In launching its digital bank, there is no question that UOB will have studied closely its big rival in Singapore, DBS. Few banks have nailed their colours to the tech mast as vividly as DBS. Chief executive Piyush Gupta is evangelical about the whole thing, having had an epiphany several years ago that his institution should be measuring itself against the likes of Amazon rather than other banks. Everything the bank has done in the last five years has had an element of digital disruption to it.
“In Indonesia our strategy has been more successful,” says Gupta. “We learned from and modified our India strategy.
“In India, what we did was net-fishing. If you spoke English and had a smartphone, you were a potential customer.”
DBS’s data told the bank there were between 120 and 150 million people who fitted the description, but they weren’t all good customers.
“A lot of those people are kids from college who can just about afford the smartphone but don’t have a credit record,” says Gupta. “They don’t have the creditworthiness for me to lend to them and they don’t have enough money for me to take from them. You can add them, but it is very hard to monetize those kinds of people.”
Setting up in Indonesia a year later, DBS applied the lessons.
“You can see it in the numbers,” Gupta says. “In India, we have 2.3 million customers in two and a half years. In Indonesia we have 400,000. But that is deliberate. The 400,000 in Indonesia are far better customers.”
DBS gains from them in deposits and in lending, and has started unsecured lending based on a customer’s relationship with Indonesian wireless network provider Telkomsel.
“It’s working quite nicely,” says Gupta.
The bank has modified its India strategy, bringing customer acquisition down from 80,000 a month to 40,000 a month but with better customer profiles – balances on month zero (when they open the account) have tripled and so have lending rates.
Is he stuck with the bad customers?
“Well, they don’t cost you anything,” he says. “The cost to acquire them is $10 a customer. About half of the customers I don’t think will be productive, so you could argue we blew up the acquisition cost because we spent $10 million acquiring customers we will never be able to monetize. But the marginal cost is pretty much zero, they sit on the server.”
You’ve got to experiment. Every time you conduct an experiment, you learn something new- Piyush Gupta, DBS
Getting digital customers in these markets to be profitable means moving them up from deposits (although in Indonesia, where the bank can earn 7% to 8% from investing in government bonds, it can make a 5% spread on the deposits it takes in).
“The key thing that makes me confident today is that the lending capability in both countries has now taken off,” says Gupta.
The bank uses data-driven algorithmic credit underwriting models and as a consequence has been lending out about $4 million a month in both countries where the digi model operates.
“And these are high ticket loans,” says Gupta. “As we build that out with the liability base, you really start making money.”
Selling mutual funds and insurance products is next.
Asked about other banks launching regional digital models with a stated aim of just getting the best customers, Gupta says: “We’ve learned so much in the last three years about customer selection. In the old days there was a relationship manager in the branch: you could see what the guy looked like, knew what his income was. Now, you’ve got to think very differently – what digital channels do I market through?”
He was struck by the Silicon Valley principle of ‘fail fast’: “You’ve got to experiment. Every time you conduct an experiment, you learn something new.”
The leading banks in every important market in Asia can point to innovation in technology. Most say that they see fintechs as a challenge but also a potential partner. Again, Singapore is a leader here – in November DBS announced a tie-up with Go-Jek as UOB did the same with Grab – but a similar ‘if you can’t beat them join them’ theme is emerging in the rest of the region.
“In the bigger picture, in the long run, yes we see them [fintechs] as a threat,” says Kartika Wirjoatmodjo, chief executive of Mandiri, in Jakarta. “They are very effective in acquiring new customers in the millennial segments,” where people tend not to want a bank account but an e-wallet. “That worries me: the understanding of financial products among the new generation starts with an e-wallet, not a bank.”
But Wirjoatmodjo also sees an opportunity for collaboration with fintechs in such an unbanked market. He says he has met with founders Anthony Tan at Grab and Nadiem Makarim at Go-Jek to talk about potential ties.
To get rolling in this area, Mandiri set up a venture capital group three years ago, which has “already hopefully invested in some of the new unicorns of Indonesia” and is part of a new peer-to-peer business focusing on micro lending at the village level.
That worries me: the understanding of financial products among the new generation starts with an e-wallet, not a bank- Kartika Wirjoatmodjo, Mandiri Bank
Mandiri is one of six banks and state-owned enterprises jointly setting up a fintech company, starting with a QR code payment service called Link Aja. The project brings together Mandiri, BNI, BRI and BTN on the banking side, with Telkom Indonesia and the state oil and gas company Pertamina.
Once operational, the payments service will accommodate foreign systems like Alipay if they want to come in.
“Go-Jek has rides, food delivery; I don’t have those kinds of things,” says Wirjoatmodjo. “But payment collaboration with different companies give us quite a strong basic-needs use case.”
Wirjoatmodjo also wants his hiring mix to change.
“We hope that in the next few years we will have 1,000 to 2,000 people entirely as digital bank staff.” He’s not yet reducing branches.
“As CASA [current and savings account ratio] is still growing, as long as we don’t add more branches, efficiency is still good,” he says. “Probably three years from now when people start opening savings in wallets, we have to start reducing. But the inflexion point is then.”
The bank seems ready for it; 70% of its 38,000 employees are under the age of 35.
At Bank Central Asia in Indonesia, president director Jahja Setiaatmadja says the role of non-banks in payments “is a daily discussion.” BCA has launched numerous internet and mobile banking services of its own, under the premise: “Our vision is to be always by your side.”
“We believe that digital transformation is changing the whole industry, as well as customers’ consumption habits,” Setiaatmadja says.
Indonesia is also one of the places with the highest hopes that technology can help to bring about financial inclusion. Agus Martowardojo, former finance minister and central bank governor of Indonesia, says that in that country financial inclusion has improved from 36% to 44% of the population in the last few years.
“That means that 56% of Indonesian adults still don’t have access to financial institutions,” he says.
Dgitalization, including fintech initiatives, represents the best shot of reaching them.
CIMB, like the Singaporean banks, has reached the conclusion that: “Either we get disrupted or we disrupt ourselves,” as Zafrul Aziz, group chief executive, puts it. He is trebling tech investment in 2019 and is aware of a considerable staffing challenge.
“If you look at the skill sets that we have today I must admit, to be frank with you, it’s not the right mix of digitally savvy people to ensure the success of Forward23,” he says, referring to the bank’s five-year strategy announced in March. “If we look at the 3D-skilled people – that’s data, digital and disruption – they are about 5% of our 35,000 working population today. By 2023, it should be 15%. So we need to either re-skill our staff or get people from outside.”
CIMB has tried to develop innovation in Malaysia – it has a venture partnership division, an easy-pay touch card called Touch ’n Go and is the biggest e-wallet player in the country – but perhaps the most interesting thing it is doing is the digital bank it launched in the Philippines in January 2019. It recalls DBS’s India digibank: a testing ground for new ideas. Is it?
“It is exactly that, a test case for us in the Philippines and Vietnam, because we are not a big incumbent and they are new markets for us,” says Zafrul. “In the Philippines you can do video KYC [know-your-customer checks], so you don’t need a branch network.”
For one thing, the playing field is not level yet... It is very hard to compete with somebody who is willing to lose money- Nestor Tan, BDO Unibank
In another echo of DBS’s first efforts in India, he says: “Our target in the Philippines today is to acquire customers rather than just looking at the profit numbers. There is a period when you need to invest in any new startup.”
In the Philippines – which many foreign banks see as fertile ground for launching digital initiatives – Nestor Tan, chief executive of BDO Unibank, says he sees fintechs “as an opportunity and a chance for partnership.”
For him, fintechs can be competitors, service providers and a source of new technology and expertise; two of the three strike him as an opportunity for banks.
But it’s not all good.
“The e-wallet segment is the one that gives us the competition we’re afraid of,” Tan says. “For one thing, the playing field is not level yet. Second, they play by different rules financially. A lot of them are startups with venture capital money where the metrics may not be plain profitability – oftentimes it’s around market share, coverage, subscribers. It is very hard to compete with somebody who is willing to lose money.”
He recalls a central banker putting it like this: fintechs are knocking on the doors of the regulators saying: ‘Let us in,’ and the banks are knocking on the same door from the inside saying: ‘Let us out.’
“Somewhere around the middle, the playing field will level off,” says Tan.
Daniel Wu, president of CTBC in Taiwan, says: “A traditional financial institution has to embrace technology. It’s an opportunity to change.”
Every bank makes statements like this, but for Wu in practical terms it means that the old 20-80 rule – “where you can only serve 20% of your clients well to make 80% of the money” – no longer applies since tech allows them to reach the other 80% in other ways. “It’s the group of people you are supposed to serve, but in the past the problem was the cost.”
He says that the advent of robo-advisers means banks can help people with far lower levels of wealth.
CTBC says it is a mobile and internet banking leader in Taiwan in terms of number of users.
“To us, technology is number one to reduce your costs, shorten processes, reduce paper, be more efficient,” says Wu.
But the bank is not alone in this view and it is interesting that when Line (an extraordinary social media story in Taiwan, within 21 million users in a population of 23 million) set up an internet bank, CTBC could not get more than a 5% stake, despite existing partnerships with a business called LinePay through which CTBC got two million applicants in two years.
“We very much want to be the biggest player together with them, but it is only the beginning,” says Wu.
Wu points to Korea, where internet play KakaoBank has been a huge success, but its attempt to build a mobile bank, K Bank, has been impeded by an attempt to raise W150 billion ($131 million) that attracted only one-fifth of the targeted amount.
This was partly because of banking laws that limit the maximum stake ownership of a non-financial business to 10%, because of which K Bank’s ownership is spread across 20 different companies. (KakaoBank’s main shareholder is Korea Investment & Securities; other shareholders in K Bank include Woori Bank and NH Investment & Securities.)
Wu finds this somewhat fluid shareholder structure instructive. He thinks that over time the opportunity will come up for CTBC to increase its stake in the Line bank.
“If it doesn’t make money for three years, will everyone follow for the cash injections? “ he asks. “Probably not; it depends if you have deep pockets. The final round of shareholders will be very largely different.”
|Nestor Tan, BDO Unibank|
No country has tried as hard as India to make technology an agent of financial inclusion. The Aadhaar national card system, the most extraordinary biometric scheme ever attempted with one billion domestic users, is linked to a Unified Payments Interface (UPI) open to all banks, fintechs and licensed telcos.
“It is transformative,” says Uday Kotak, chief executive of Kotak Mahindra, whose bank has coined the somewhat awkward term ‘phygital’ to describe its own combination of a digital and physical presence. “Aadhaar is a unique Indian proposition, which is a game changer.”
Aadhaar and tech have brought a lot more competition into financial services from fintechs such as Paytm and some of the telcos.
“My view is that, thanks to Aadhaar, it’s a level playing field,” says Kotak.
To Raghuram Rajan, former governor of the Reserve Bank of India, whose tenure coincided with the launch of Aadhaar and the UPI, Aadhaar fits with one of his academic themes, expressed in his book ‘The Third Pillar’: that communities have to be strengthened in order to avoid inequality.
“The whole notion people sometimes have is that in this modern world it’s an absolutely dumb idea to try and preserve communities,” he says.
What is important for society is to adapt to technological change by using it to offset the worst effects of technology itself- Raghuram Rajan
While technology encourages virtual communities – Facebook is the clearest example – it can also strengthen things locally in the real world, he argues.
“Tech allows both services at a distance and work at a distance,” he says. “You don’t have to go into the cities to have the same kind of credit information associated with you as in the past. You don’t need to be near a bank. A lot more can be collected through your unique ID and your business in a village can help build a history.”
Rajan has argued that: “Technology-induced inequality and human-induced inequality have built on each other.”
But, he says, tech can also be a tool of inclusion: “I think it does both, and what is important for society is to adapt to technological change by using it to offset the worst effects of technology itself.”
Technology makes markets work better, which tends to enhance the returns to those who have the skills the market wants, increasing inequality, he argues. “But on the other hand, there are many ways that technology, by reducing the transaction costs of doing business, can allow you to provide services for the very poor.”
Aadhaar and the UPI, as Euromoney has argued before in an interview with its architect Nandan Nilekani, have no equivalent anywhere else: an infrastructure built by the public sector and intended to be truly interoperable.
“That’s very important,” says Rajan. “It gives operators an incentive to invest in improving their technology, knowing they will not be held up by the bridge owner,” meaning the underlying infrastructure.
There is another, perhaps surprising, voice arguing for the state to take the lead in digital development. Joseph Yam, former governor of the Hong Kong Monetary Authority, thinks the application of technology in the delivery of financial services is a good thing, provided the risks involved can be properly managed.
But he thinks that, conceptually: “Money is the role of the central bank: you print money, you produce cash in order to facilitate transactions. So if that medium can be digitalized, then should you actually be leaving that role to the market?”
He thinks there is a role for the state to offer everybody a digital wallet.
“If there is a winner among this proliferation of digital payment mechanisms – Alipay or WeChat Pay or whatever – you still have to get involved, because that winner will be in a position to create money and the central bank will need to control that.”
In particular, it is the linkages between systems that concern him. “The risk of one particular system will be transferred to another system if they are linked.”
There is no question that the epicentre of tech
disruption is China. But are its domestic banks too late? Have they already let Tencent’s WeChat and Alibaba’s Ant Financial take the market?
“Technology is fundamentally changing the banking business,” says Sun Yu, vice-president at Bank of China.
Domestically, that means being active across retail, financial institutions and corporate customers.
“We have no ambitions to be a retail bank in Western countries,” he says.
“But for corporate clients – either Chinese corporates going global or foreign local corporates doing China-related business – we want to be their main bank that can provide almost anything.”
Bank of China has a centralized IT team of nearly 10,000 people and clearly wants to do a lot in-house.
“And we work closely with other companies,” says Sun. “There is a clear link in interest between business and banking technology.
“For example, we cooperate in some projects with Tencent. Yes, we may compete in some areas, but there are many in which we do not and can gain mutual benefits through cooperation.”
For the internationals in China the lead will come from head office on tech initiatives, but there is plenty they can learn here.
“China is going to show the world the way for electronic payments,” says Jin Su, co-president for Asia Pacific at Bank of America.
“A year ago, China had 50 times the volume of electronic payments the US has. Young kids don’t use cash. What does this mean for the banking system? And as it becomes more sophisticated and digitized in China, what does it mean for Asia and potentially the world?”
One thing it clearly means is fee compression.
“Those payments that used to go through the banks got charged a fee on that,” says Su.
Doing it through Alipay or Tencent eliminates the middleman and creates pressure on fees.
Different international banks approach the challenge in different ways. Citi, for example, stands out for its range of partnerships with local fintechs; former regional chief executive Francisco Aristeguieta spoke frequently of the bank’s desire to embed itself in the ecosystem of its clients’ lives.
He has recently taken a new job as head of international operations at State Street.
Those banks that don’t have big consumer businesses will nevertheless try to bring consumer ideas – simplicity and ease of access – to institutional client needs in, for example, cash management or trade finance.
Joydeep Sengupta, co-head of fixed income, currencies and commodities for Asia at BAML, says one initiative even allows institutional investors, among other things, to trade FX transactions on their phones.
The need to innovate is particularly pressing in this part of the world.
“In Asia, you’ve seen a lot of things jump straight to digital,” he says. “It’s coming.”