INTRODUCTION
You may have heard or read that the Monetary Authority of Singapore (MAS) recently awarded 4 new digital banking licenses to Grab-Singtel, Sea Ltd, Ant Group and a consortium comprising Greenland Financial Holdings, Linklogis Hong Kong and Beijing Co-operative Equity Investment Fund Management.
The question is – how will this affect the traditional Singaporean Banks, namely DBS, UOB and OCBC? These aforementioned banks have been the market darlings of the Singapore stock market, and many Singaporeans and PRs have some form of investment in all or some of these banks. Furthermore, we know of many experienced investors that are extremely confident of their investments in these banks, since they have been holding on to these stocks for decades, and truth be told, these stocks have been on a long-term bullish uptrend with regular dividend payments as well.
However, is past performance a guarantee of future performance? We, at AlgoMerchant, are also a disruptor to the fintech trading and investment space, and we know that many of our readers and their family and/or friends have made investments with these banks too. Hence, our main objective in this article is to provide some idea of how these 4 new digital banking licenses may change the banking landscape in Singapore, and how they may affect investors in the traditional banks.
TAKEAWAY
- Singapore is no stranger to digital disruptions. It has already occurred in the e-commerce and taxi transportation industries and is coming for the banking industry.
- Other sectors experiencing digital disruptions have seen share price reductions due to new competition.
- There appears to be sufficient market share domestically for both incumbents and new entrants to compete with.
- We expect Grab-Singtel, Sea Ltd, Ant Group to leverage on their existing digital wallet and e-payment capabilities to build and expand into digital banking.
- These additional digital banking capabilities may be achieved via organic in-house development, and/or via strategic merger and acquisition activities.
- The general direction of where the DBS, UOB and OCBC share prices are heading towards will be subject to how fast the traditional banks can digitally transform versus how fast the new entrants are able to build and execute their digital capabilities.
What can we learn from other industries experiencing disruptions?
Singaporeans, PRs and long-term residents are no strangers to major disruptions in Singapore. We were witnesses to how the taxi industry had been and still is significantly affected by new entrants such as Uber (no longer active), Grab and Go-Jek. In the telecommunications space, the market pie previously shared between Singtel, M1 and Starhub also underwent disruptions with a total of 11 active telcos aggressively competing for market share.
Putting on a consumer’s hat, these competitions have benefited the consumers for sure. We have seen taxi rates come down and as a result, increased demand usage throughout the city states since 2013. The stiff telco competition also resulted in decreasing mobile and broadband price plans. Without a doubt, the average consumer has indeed benefited from these disruptions.
From an investors’ perspective, however, what has not been so great are those who have continually held what many believed to be ‘long-term can’t go wrong’ blue chip taxi and telco shares. They have been in for a less than an ideal ride!
For starters, let us evaluate ComfortDelGro’s shares – since 2010 from the bottom of the great financial crisis, we have seen the strength and dominance of ComfortDelGro in the Singapore economy. They expanded quickly and taxis were ubiquitous on the Singapore roads. They dominated the taxi transportation system in Singapore up to 2015, which allowed them to charge high prices, including compulsory booking fees through calls or via mobile.
However, when Uber and Grab started to aggressively undercut the market by lowering prices and introducing flat rates on predetermined routes, the status quo was changed substantially and very quickly!
From 2015 to 2018, ComfortDelGro started to experience declining revenue growth and this resulted in declining share prices (-50% drop) as well. Things only started to recover for them when they changed their pricing structure and improved their mobile apps to be more in line with their competitors. Even so, the effects were short lived post-2019.
A similar story took place in the telco arena – the chart below compares the stock prices of Singtel (blue) and Starhub (red). Whilst both stocks performed very well coming off the 2008 lows, the Singapore telco industry started a price war in Sep 2014 in the high speed fibre broadband market that eventually extended to mobile subscriptions as well. The net result? An almost -50% and -70% share price drop for Singtel and Starhub respectively, off their all-time highs.
What can we expect from the new Digital Banks?
We can almost be certain that the new entrants will attempt to fight for market share with the existing incumbents, and this may be done in a disruptive way. While we may never know for sure since Grab-Singtel, Sea Ltd, Ant Group and the Greenland Financial et al consortium will only be allowed to operate starting in 2022, we may be able to infer what they plan to do based on their past actions.
Leveraging on existing Digital Wallets
What many may expect is a strategic enhancement of the digital e-wallets currently offered by the new Digital banks. For Grab-Singtel it could very well be a combination of GrabPay and Dash; Shopee Pay for Sea Ltd and AliPay for Ant Group.
What kind of new offering do you think we can expect down the road? For one, we should definitely be expecting interest rates to be offered for deposits made into these e-wallets. In fact, we may be seeing some new offerings for higher savings interest rates compared to the incumbents. The new entrants will be able to do so because they have less overheads compared to the traditional banks, and given their aggressive market share penetration practices, we should not be surprised to see offerings of higher saving rates even though it may not be profitable in the short run.
More importantly, this is where customers will likely see the most benefits. The new entrants will likely promote a 3-prong benefits system:
1
Interest rates on e-wallet deposits
2
Rewards on spending through their e-commerce and gaming platforms.
3
Interest-free instalments, or the ability to ‘borrow first, pay later’ on consumer spend.
A key difference which customers may observe will be the lack of annual fees typical of credit cards. On the financing aspect for borrowings, we may see some disruptions in the ‘admin fee’ and ‘annual fee’ practices typically adopted by the incumbents.
We believe these to be the upcoming competitive advantages offered by the new digital bank entrants.
Upping the game on Loans
One key feature of a digital banking license is to provide all existing banking features and services without a physical branch. Thus, one can obviously expect loan applications and approvals to be conducted online.
This is how we see digital banks changing the financing loan landscape in the future:
1
Fast and full online loan applications and approval systems. Digital loans will likely be very successful due to the speed at which applications can be processed and approved. Technology will be used to analyse the data borrowers provide, followed by determining the eligibility of loans, and also highlighting any key risk factors.
2
More attractive interest rates due to lower overheads and operating costs; focusing on using technology to improve efficiency.
3
Single platform for all types of loans including mortgages, student loans, personal loans and credit card loans.
4
Opening new addressable micro loans and credit markets. This will once again increase the number of customers using their mobile and online platform(s).
Leverage on Network Effects
This applies particularly to Grab and Sea Ltd. Grab has extensive digital networks across various industries such as taxi transportation, food and beverage, consumer products, and delivery. Sea Ltd, through SeaMoney, has network effects through her Gaming arm Garena and e-commerce platform Shopee.
Why is this network effect important for investors to know?
The answer is simple. Consumers are already depositing money into these wallets for spending purposes such as gaming, e-commerce and transportation. The hurdle is small to convert these consumers to deposit more money into their e-wallets for additional saving purposes. In fact, these consumers will see more benefit having all their money in a single location whereby executing multiple transactions in the most efficient manner is possible, along with being in a position to gain interest.
Expanding Digital Payment Channels
The Covid-19 situation has greatly accelerated digital payment adoption in the world economy, particularly in the space of e-commerce, food and beverage and deliveries.
It is very obvious that Singapore has more scope for digital payment expansion. We have 114 hawker centres and numerous other food courts regulated by the NEA. Most of these establishments operate very traditionally and still accept cash payments only.
Anyone living in Singapore will appreciate how extensively integrated these hawker and food courts are to the locals with regard to the variety of food choices available. We can only imagine how much more network effect Singapore will be getting once these hawker centres and food court stall operators start to embrace digital payment systems.
To date, credit card or even debit payment systems have not achieved mass adoption in hawker centres and food courts due to the high costs associated with the utilisation of MasterCard and Visa payment systems. This is likely to change in the near future with the introduction of the new digital banks.
We believe the expansion of digital payment channels into the remaining and untapped hawkers and food court operators will favour the digital banks more than the traditional banks, unless the latter proceeds to adapt quickly in light of such changes in order to remain competitive.
Digital Brokerages
All the 3 key traditional banks in Singapore have their own brokerage arms. DBS has Vickers, UOB has Kay Hian, and OCBC has OCBC Securities.
While none of the new entrants have brokerage offerings, it is not hard to imagine merger and acquisition (M&A) plays in the future with digital brokerages that already have reputable platforms and customer databases.
Digital brokerages are aplenty in the market space, and have already disrupted their traditional counterparts in the following manner:
1
Low cost / zero commission fees
2
No hidden costs
3
Partial shares purchasing
While none of these M&A plays are on the cards at the moment, it will come as no surprise if they were to happen. M&A activities between new digital bank entrants and digital brokerages will only serve to consolidate further gains of digital banks within the banking industry.
Welcoming Digital Wealth Management
It will not be surprising if our readers may feel that there is a lesser chance of disruption to the wealth management services offered by traditional banks, especially those of high net worth. This opinion may not be unfounded as the preference to have personal and exclusive service for the high net worth individuals is something no digital experience can replace due to the lack of human touch.
While that may all be true, we can expect the following benefits to digital wealth management:
1
Connecting – Technology, data and client surveys will be used extensively, to connect investors with the right advisors.
2
Advisory – Digital interfaces and data analytics will be leveraged on to deliver tailored advice. This is expected to complement and further enhance the relationship managers’ capabilities to sell financial products using data-derived facts.
3
Investing – Access to non-traditional, institutional type of trading and investment strategies that were previously only accessible to the high net worth or institutional players will now be provided to digital investors too.
Should I sell my DBS, UOB and OCBC Shares now?
We do not see it as our role to provide financial or investment advisory. We will, however, provide the following facts and information for our readers to make informed decisions on their own investments:
1
The new digital banks can only operate early 2022, which is more than a year away from now.
2
As a result of the digital banks’ impending competition, there will not be any actual reduction in revenue growth for the traditional banks until 2022. The next year’s revenue growth for traditional banks will be subject to actual market conditions in 2021.
3
Many of the aforementioned digital banking services are merely possibilities made at the time this article was written. Based on what is publically known about Grab, Sea and AliPay digital wallets, it is a fact that none of these platforms in their current form will be able to provide the full scope of digital banking.
4
The general direction of where the DBS, UOB and OCBC share prices are heading towards will be subject to how fast the traditional banks can digitally transform versus how fast the new entrants are able to build and execute their digital capabilities.
Conclusion
Overall, Singapore is not a stranger to the transformation of the digital landscape with regard to industries such as e-commerce and taxi transportation. With the 4 new digital licenses that have been awarded, there is no doubt that disruptions will also be made in the banking industry. This may ultimately affect the share price negatively due to new entrants in the digital banking arena.
Grab-Singtel, Sea Ltd and Ant Group are expected to leverage on their current digital wallet and e-payment capabilities to build upon and expand into digital banking in Singapore. These may be achieved through organic in-house development, and/or strategic mergers and acquisitions.
Ultimately, whether the DBS, UOB and OCBC share prices increase is highly dependent on how fast these traditional banks adapt and take advantage of the digital landscape as well, and how fast these new entrants are able to build and execute their digital capabilities.
AND HERE IS THE GOOD STUFF..
Checkout special promotion on our TradersGPS solution, a market neutral solution that performs optimally in stock markets. TradersGPS screens which stocks are potential for trade and gives user signals when to enter / exit the market. For more detail, click the image below.
Psstt.. If you subscribe to our journal via this link, you will get an additional 10% discount. Coupon applicable till 31 Dec 2020. Hurry up and subscribe!
How it works: An email with a coupon code will be sent to you and you can apply it during check out.
