Better rates, lower fees not enough for digital banks to make a profit: analyst

Those who can tap into their parents’ customer base have the best chance of success.

No, building a successful digital bank won’t come about by wading into an interest rate war with incumbent banks. Neither will targeting just the younger demographic work. 

These are just some of the myths dispelled by senior executives of Southeast Asian banks and industry experts in a panel discussion on driving digital banking profitability during the Singapore Fintech Festival 2022.

“A lot of people think that the way for digital banks to win is to compete on the basis of better value, and value in terms of better rates, lower fees, and that will be the way for digital banks to win. That's a myth,” Chew Seow Chien, senior partner, Bain & Company, told attendees of the conference.

“Initially, perhaps, there might be more competition on the basis of value to gain customers. But over time to win more sustainably, I do think the basis of competition is going to be around customer experience," she added.

This is one advantage that digital banks have over incumbents, Chew said, sharing that Bain & Co’s study on banks’ net promoter scores–a measure of customer satisfaction to banking service providers– found that digital banks and new banking players tend to actually perform better than traditional incumbent players.

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“If digital banks and also incumbent banks can make that the real basis of competition, that becomes a much more sustainable way to win in the longer term,” she added.

"Nepo babies" win
The real warfront, however, lies not with their peers or their incumbent rivals, but rather with their own ability to make a profit.

“I think the difficult question here is around profitability,” Chew said. “If you look at the world today, there are hundreds of digital banks. But if you look at how many of them are truly profitable, the sobering truth is that you can count the number of profitable banks today on two hands.”

Chew named customer scale acquisition as the most important factor that will determine whether a digital bank becomes profitable or not. In this regard, neobanks who are brainchilds of larger corporates tend to win.

“If we look at the digital banks that are profitable today, most of them, almost all of them belong to parent groups that have already invested over the years in building that customer platform and building that customer ecosystem that the digital offerings can then write on top of,” Chew said. 

“Advertising the acquisition costs to customers of other products and services that the parents have built up, and then putting a financial product on top of that–that makes a huge difference in terms of the path to profitability for the new player,” she added.

Incumbents are learning
Incumbents aren’t sitting pretty doing nothing either–and are more than capable of learning new tricks, as noted by Darren Buckley, chief retail banking group officer for Vietnam Technological and Commercial Joint Stock Bank or Techcombank.

Buckley highlighted his 35-year career working with incumbent banks, noting that in 2005, a bank he worked in was able to put live into a market a mobile phone based, fully digital unsecured loan proposition that was fully-digital, for an average application time of 17 minutes. This, he said, dispels the myth that before digital players came into the fray, incumbent banks have not done any steps to make leaps in the digital space.

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Nowadays, traditional banks have been trying to focus on customer journeys, and delivering very targeted solutions on seamless customer journeys. He conceded that it is true that traditional banks haven't always been so good at it. However, they are learning, he said.

“FinTechs have been great in coming in and taking specific pain points, and saying, “Hey, look, there's a better way to do this. There's a more seamless, intuitive way to deliver a solution or a service or an experience to banking clients.” But that doesn't mean that traditional banks can't learn these things. And they are. And so the competition between all is actually very healthy for the consumer,” Buckley said.

Buckley also said that areas in which traditional banks have been slower were due to regulations in infrastructure, capabilities, and governance–high barriers of entry which actually present an advantage when it comes to the brand name. It gives consumers and customers a certain sense of trust, he argued.

Clear answers only
Karim Siregar, president director of Indonesia’s PT Bank Jago, dispelled the notion that digital banks are only for younger users, or the demographic considered to be more “tech-savvy” than their older peers.

“We have to break that myth that digital banks are only for digital savvy,” Siregar told conference attendees, “We should not be constrained by that [mindset].”

Siregar observed that funds often come from those who belong in older demographics, and that in order for banks to become self-sufficient, they should also target that demographic.

Meanwhile, Chew noted that the digital bank should be able to clearly explain the reason why they exist.

“What is it that you're offering that is differentiated, that is different from what's already available in the market. And the other factor is really around, have you really designed a digital bank for a low operating cost?” Chew said. 

“A lot of digital banks, you would assume, have been designed for low operating cost. But as we look around the world, you'll find that even though they started off that way, over time, there's a lot of back office operations people that they have had to add, as a result of adding additional complexities of the business,” she added.

Dispelling doubts
For Toh Su Mei, chief executive officer of ANEXT Bank, one of Singapore’s newest digital-only banks, noted the amount of doubt placed upon digital banks–in particular, the mindset that digital banks can only earn money if they lose money. 

“Some say digital banks can earn money without losing money, or can make money without losing money. I've heard it a lot even before taking up this role, from clients, that digital banks are more vulnerable to security threats, [to] losing clients money, [to] shutting accounts without rhyme or reason,” Toh said. 

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“In my opinion, if done right, if done well, digital banks would pave the way to financial inclusion as well as security in digital financial services. And all SMEs will be empowered with new growth opportunities when the new digital banks craft out a framework,” she added, noting that these SMEs have the opportunity to be deemed credit worthy by the new system being pushed by the virtual banks; otherwise they will remain with little financing options under the existing financial system.

Experience is king
Customer experience is also a key topic for Manish Bhai, founder & CEO of Philippine-based UNO Digital Bank. In particular, Bhai said that the myth that digital banks offer less personal experiences is not true.

“One of the biggest myths for an end user is about the non-personal experience, which [is] the thing they will interface with the digital bank. My view on this is that it completely depends on the strategy of the banking organization, [on] how much you want to engage,” Bhai said.

He shared that UNO Digital Bank created a human-backed contact center which they call the customer happiness center to meet the personal experience needs of their customers.

“We felt that personal experience is key, especially in emerging markets, and people are not yet ready to transition [away] from branches–from a lot of interaction to completely interacting with [a] technology box,” Bhai said.