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Even with the arrival of the digital banks, don't write off the incumbents

By Vihang Patel

Much has been written about the likely death of incumbent banks in the face of coming competition from neobanks (or digital banks) soon to be launched in Singapore, that will be more nimble and agile, have more streamlined processes and lower cost overheads, be free of any legacy (in the form of infrastructure, and mindsets) and give customers exactly what they want.

It is a narrative that has received a considerable amount of buy-in, and that is unsurprising. Incumbent banks, after all, do carry legacy in terms of systems, processes, market perceptions and operations. When the shifting nature of demographics and their demands are considered, it appears difficult for incumbent banks to realign themselves.

Moreover, incumbent banks have already invested heavily in infrastructure which they cannot simply offload, while neobanks are asset-light and have incorporated nimbler practices to provide services to millennials and post-millennials in a more palatable manner. Digital banks have a reduced set of overheads on a per account basis – a key advantage in their service arsenal.

Does that mean digital banks will leave incumbents by the wayside as much literature would suggest? Hardly.

Incumbent banks not sitting idle
Incumbent banks are not simply waiting for this shift to happen. They are trying to be part of this change through investment in innovation, both in capital and people. Some banks have built transformation and innovation teams, and appointed chief digital officers, sending a message top-down that innovation in digitalisation is key for their organisations.

Second, incumbent banks are starting to better understand existing customers and figuring ways to cater to new demographics that they have hitherto not gone after – through incorporating simple tweaks to products and services to compare with digital banks’ offerings. While some banks have chosen to do so in-house, others have chosen to work with telcos and fintechs. This means banks are listening to their customers’ feedback and requirements.

The third way in which incumbent banks are responding is more disruptive – some have embraced the concept of neobanks. The incumbents realise there is a symbiotic relationship they can maintain with startups where they can provide a variety of services to consumers. Finaxar has implemented this in Vietnam through its partnership with Indovina Bank and Taiwan’s Cathay Financial Holdings. This has streamlined access to credit, providing working capital to fast-growing SMEs in the region – all of which has been accomplished through the Finaxar Credit Line (FCL) product.

In some cases, incumbent banks are setting up subsidiaries to create digital banks from the ground up. There have been announcements in this area, and although this route is still uncommon, it is a shift we are witnessing.

Overcoming legacy mindsets
Legacy mindsets and infrastructures are common challenges incumbent banks are straddled with. But these can be overcome when the banks have no other choice. This happened with telcos, whose models (characterised by high charges for voice and SMS services) were disrupted with the arrival of mobile data, which progressively became cheaper. Almost overnight, incumbent telcos’ business models were disrupted by new telcos that offered data and also offered in-demand content services, without charging a premium for data.

Likewise, in banking, there are myriad transaction charges imposed by legacy banks. One could argue they ought to reduce these rates, but they have not because they are not compelled to. This is now starting to change rapidly. In the area of remittances, for example, there are new companies with the infrastructure exclusively to transfer money, that can provide this service at a lower cost. This is resulting in mass adoption of remitting funds through third-party service providers. The more agile banks acknowledge growing consumer awareness, and are seeking ways to make remittances cheaper without impacting their own margins.

The space for digital banks
SMEs are open to using added banking services from new providers, increasing their banking relationships. However, switching to a digital bank because of cheaper remittance costs, for example, or a better user interface alone, is not likely.

In the context of Singapore, a large number of SMEs are largely satisfied with banking services provided by incumbents. The new digital banks will likely not compete in the main SME space, but will identify niches that may not be an area of focus for the incumbents. Many neobanks focus on really small companies that may only have one to five employees – in many ways, an in-between space between retail and SME banking. Thus far, incumbents have not focused on this space given the potential upside is lower than it is with their core business.

SMEs are digitising rapidly, using more software to streamline operational processes, be it paperwork, human resources, accounting or billing. Many of the smarter neobanks have sought to alleviate SME pain points by providing non-core banking services such as payments reconciliation and HR management.

Collaborating to compete
Many “traditional” banks are working hard to shed the tag of “traditional” and demonstrate a willingness to keep with the times. Particularly in markets such as Singapore and Malaysia, where regulators are issuing digital banking licenses, this is already happening, with banks preparing themselves for disruption. They are looking to become more digitally competitive, and in many cases, are open to partnering with fintechs to offer something that digital banks would look to.

There may not be a clear winner in this new race to capture niche or mass market customers, but those digital banks that create considerable improvements or innovate in the way banking services are consumed—while providing trust and safety—will thrive. That said, just “digitisation” or “marketing-led” strategies will not be enough to win over a customer base from incumbents who are already there digitally or catching up. They need to successfully make the banking experience more wholesome.

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