Impact of digital banks on incumbents

Impact of digital
banks on incumbents
Need for banks to re-evaluate their
business model and customer
retention strategies

January 2020

1
Impact
Impact of
of digital
digital banks
banks on
on incumbents
incumbents

Authors:

Varun Mittal
EY Global Emerging Markets
FinTech Leader
Ernst & Young Solutions LLP.

Neena Antal
Director, Digital
Ernst & Young Advisory Pte. Ltd.

Akshay Tatke
Manager, Strategy & Operations
EY Corporate Advisors Pte. Ltd.

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 Impact of digital banks on incumbents

Contents page
1 4

Digital banking landscape in Asia-Pacific

2 6

Digital banking landscape in Singapore

3 8

Key focus areas of the NDBs

4 12

Impact on the existing customer base of incumbents

About this report

Incumbents have to act now in order to be prepared for the digital
bank launch in Singapore by 2021. The New Digital Banks (NDBs)
aim to launch customer-centric, differentiated products to meet
their lifestyle goals along with simple and superior user experience.
The new age customers expect transparency and frictionless
experience from their banks.

The incumbent banks should leverage the trust and relationship

built with their customers over the years. They should re-evaluate
their strategy, invest in understanding customers’ needs and enable
a digital experience that is at par with leading technology players
in the market. Incumbents should take timely action by choosing
a viable option to position their business ahead of competition
and disruption!

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Impact
Impact of
of digital
digital banks
banks on
on incumbents
incumbents

Digital banking landscape in Asia-Pacific

Regulators are driving competition through new
digital banking licenses and framework in the region.
The digital banking landscape in Asia-Pacific (APAC) has seen major
advancements since 2015. The regulators in the region have been
opening up financial services markets to non-financial institutions
(FIs) as well. The aim is to create new digital banks (NDBs) with
innovative models and solutions to meet the customer demands and
cater to the underserved segments.

Korea Financial Taiwan Financial Monetary Authority

Services Commission Supervisory of Singapore (MAS)
accepted applications Commission granted accepted applications
in 2015, and by 2017, three digital banking in December 2019, to
the first batch of licenses in 2019, grant second full and
NDBs in Korea were which will be launched three wholesale bank
launched in 2020 licenses in 2020

Hong Kong Monetary Bank Negara Malaysia

Authority accepted released the Expectation
applications in 2018, Draft in December 2019,
issued eight licenses and to accept digital banking
by December 2019, the applications by end
first NDBs in Hong Kong, of 2020
“ZA” was launched

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 Impact of digital banks on incumbents

NDB: key features

The NDBs are fundamentally different from the incumbents across their business and operating models.
They are more customer-centric and focus on delivering state-of-the-art features to engage and retain them.

1. Target micro-segments
2. World-class customer experience
Business model 3. Simple products, pricing and transparency
4. High degree of personalization
5. Embed in daily life of target segments

1. No or limited branch network

2. Design process for “no ops”
Operating model 3. Aim to achieve low 30s cost-income ratio
4. Mobile-only, virtual or robo-led servicing
5. Leverage non traditional data for credit assessment

1. Configurable core banking

2. Built on today’s leading technology practices
Technology 3. High leverage of cloud and open application program interface (API)
4. High leverage of artificial intelligence and machine learning
5. High degree of automation

1. High proportion of engineers and design professionals

2. Multi-disciplinary teams working together
Talent 3. Flat, non-hierarchical structures
4. Employee value proposition for entrepreneurs and millennials
5. Values or purpose-focused

To compete in this dynamic and demanding environment, incumbent banks need to think differently
about their business and operating models to “keep the lights on”, while also transforming and innovating
at speed.
Furthermore, regulators have been supporting innovation and trying to be a part of the change rather than
disrupting it. They have been putting in stringent customer security measures as well to ensure that above
all, customers are protected. We predict that the presence of digital banks is set to grow with the support
from regulators in the region.

1. In this paper, the digital bank licenses granted by the regulators will be referred as New Digital Banks or NDBs
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Impact
Impact of
of digital
digital banks
banks on
on incumbents
incumbents

Digital banking landscape in Singapore

Competition in the market is heating up with the
issuance of up to five digital bank licenses by MAS
in 2020.
On 7 January 2020, MAS announced that a total of 7 and 14
applicants will be competing for the full bank and wholesale bank
license respectively. The five NDB licenses, in addition to the
internet banking framework introduced in 2000, will create a
digitally enabled ecosystem. The NDBs are expected to:

1. Promote innovative business models and develop strong digital

capabilities
2. Enhance the resilience, competitiveness and vibrancy of the
banking sector
3. Add diversity and strengthen Singapore’s banking system
4. Increase distribution of banking services to the underserved
segments of the market

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 Impact of digital banks on incumbents

Slowdown in economic growth puts pressure on margins

With overall Singapore gross domestic product (GDP) growth rate slowing down in 2019 and loan growth
rate reducing to 0.5% against 3% in 2018, incumbent banks are expected to struggle with maintaining
profit margins and lowering cost-income ratios. Technology players are offering cutting-edge and fast
services to the current customer base in Singapore that is digitally mature and tuned in to the digital
ecosystem to get more value for their money. The competition between NDBs, technology players and
incumbent banks to get a larger share of this overbanked customer’s wallet will heat up the market in
coming years.

5.6%
Singapore banking
sector sees a declining
year-on-year loan growth 3.0%
rate, indicating a need
for innovative products
or alternate data to 0.5%
access credit worthiness
of current customer base 2017 2018 2019

Source : Euromonitor and FITCH

Solutions Macro Research 2019

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Impact
Impact of
of digital
digital banks
banks on
on incumbents
incumbents

Key focus areas of the NDBs

NDBs will leverage on the distribution network, data
richness and brand awareness of the consortium
members to create unique propositions.
Most NDB applicants already have a huge customer base and are
a part of the customer’s day-to-day life. They have no legacy in
terms of technology, operations and products that would limit their
product proposition and speed to market. The NDBs will fill in the
void that incumbents have left open by not responding fast enough
to meet the digital experience needs of the customers.

The different digital bank players bring one of the following three
differentiators to the table that could give the NDBs an edge over
the incumbents.

Access to large customer base with multiple touch

Distribution
points on a daily basis passing the toothbrush test

Data on multiple touch points during the day and

Data
leveraging it to create personalized propositions

Strong brand awareness in the market, with a

Awareness base of loyal customers open to try the new digital
banking products

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 Impact of digital banks on incumbents

The NDBs are aiming to create new value propositions by focusing on selected
customer segments, offering differentiated products supported by the latest
technology, to offer great user experience to entice the customers.

Customer Customer Customer

segments products experience

• Initial focus in serving • Offer new and innovative banking • Differentiated and seamless
underserved segments products banking experience
• Gradually shift scope to • Developing new technology • Building an extensive
cover the “massive middle” capabilties and methodologies to ecosystem to provide
offer products in a new way non-banking services

Customer segments: serving the traditionally underserved segments

The NDBs will focus on targeting the underserved retail and wholesale sub-segments through the effective
use of technologies. Over time, they will broaden their scope towards the “high-value pool” segments, which
are reasonably well served by the incumbent banks.

Retail Wholesale
• Over 200,000 individuals taking up • Potentially 100,000 young
short-term or event-based work businesses that lack financial
Gig economy Young history and track record
• Traditionally ineligible for
participants MSMEs3
credit, and lack personalized • Require digital management tools
insurance coverage due to lack of resources

• Over 1 million digitally native • 120,000 businesses that may

young millennials, heavily not possess assets for collateral
Digital influenced by lifestyle platforms Asset light
• High frequency, low volume
natives SMEs
• Expect a banking experience that transactions often cause short
is truly differentiated term credit challenges

3. Micro SMEs refer to corporates that has an annual revenue of less than S$1 million and/or with less than 10 employees

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Impact of digital banks on incumbents

Customer products: differentiation aimed at solving key pain points4

Products offered by the NDBs s are expected to be more innovative, following in the footsteps of successful
global case studies. These products will be tailored to address current customer pain points. The new banks
will aim to become a one-stop shop for lifestyle or business needs of their target segments.

• Revenue pool of • Revenue pool of S$186m

approximately S$11b 5
• One-stop market place with an
• Alternative credit underwriting extensive network of merchants,
Lending and
for wider eligibility, faster Payments incentives and deals
cards
approvals, cheaper credit • Flexible payment terms
• Personalized and secure cards leveraging technology
linked to customer lifestyles

• Revenue pool of • Revenue pool of S$5.9b

approximately S$3b • Bite-sized affordable insurance
• Simple one-click micro premiums and premium-based
Investments investments, removal of Insurance packages to attract millennials
minimum investment barriers • Event driven coverage and
• Digital financial advice with real- pricing for enhanced relevance
time investment alerts

Customer experience: legacy-free, new age banking experience4

The NDBs will launch world-class user experience at the get-go to onboard and engage customers.
Cutting-edge technology is expected to be embedded across banking processes, whether customer facing or
at the back-end. The banking stack will be more reliable, available, secure and seamless, acting as a day-to-
day platform for both retail and SME customers.

• Goal-oriented savings and offers

• Personalized offerings
Personalized Lifestyle • Digitally-enabled advisory
• Profile and situation-specific
and based • Meeting customers’
contextual • Right place and at the right time
non-financial needs

• Frequent interactions • Frequent interactions

with customers with customers
Delightful Engaging
• Increased touchpoints, • Increased touchpoints,
incentivizing customers to login incentivizing customers to login

4. Above products and customer experience features are representation of key area that NDBs will play in and is not complete
nor exhaustive.
5. EY analysis on revenue pools for various products in Singapore market
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 Impact of digital banks on incumbents

“
We see an emerging trend of ‘FinLife’, the coming together of
financial services and lifestyle to enable seamless customer
experience and innovative financial products.

Varun Mittal
EY Global Emerging Markets FinTech Leader

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Impact
Impact of
of digital
digital banks
banks on
on incumbents
incumbents

Impact on the existing customer base of the

The new age banking customer is deeply influenced

by the engaging user experience offered by digital
platforms that have woven themselves seamlessly in
their lifestyles.
Today’s customers expect their financial services providers to offer
a similar digital experience like those offered by lifestyle platforms.
These customers are dynamic in their quest to select the right
platforms that serve them personally, and are open to switching
to platforms that offer a better overall user experience. They seek
personalized recommendations, offers and financial advice to
ensure maximum savings and more value for their dollar. As a result,
they expect their financial products to be embedded as part of the
daily lifestyles.

Fulfilling these new-age customer demands is exactly how the NDBs expect to win market share in the
competitive banking landscape of Singapore. There will be an impact on the existing customer base of the
incumbents, and some customers will move with their money and relationships to NDBs.

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 Impact of digital banks on incumbents

incumbents
The new crop of digital banks aim to fulfil these NDB foray matrix
customer expectations by building a legacy-free, High
slick user experience on both online and offline
fronts, and gradually increasing their market share
3 4

Customer Satisfaction
at a faster pace than the incumbent banks.
The NDB foray matrix below depicts the incumbent
bank’s existing customer segments that are likely to
move to the NDBs, in addition to the underserved
customers of the market. The segmenting 1 2
approach is based on two key parameters:
a) customer satisfaction or happiness, and
b) the amount of revenue the banks can earn from
the customers.
Low Banks’ propensity to earn revenue High

3. Happy 4. Profitable
Characteristics 1. Indifferent 2. Flight-risk
minimalist loyalist
Usage of banking Free basic services Longer term Transactional Consider bank as
services such as savings products such as services and one-stop financial
account mortgages rewards shop
Engagement with Rarely interact Interact at time of Frequent Deeply engaged as
bank need interaction part of day-to-day
life
Stickiness Low Medium Medium High
Potential hook Financial advice Personalized Attractive offers Simple and user
with lifestyle services like wealth on low margin friendly digital
linked products products products

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 Impact of digital banks on incumbents

To penetrate into incumbents’ customer base, NDBs will rely on a combination of differentiated products and
the customers’ likeliness of using these products in comparison to its traditional alternative.

Customer-product mobility matrix

High

Illustrative products
Potential to differentiate

10 14 8 1. Savings accounts 8. Payments

11 2. Deposits 9. Forex
3 3. Micro loans 10. Insurance
7 4
4. Term loans 11. Wealth and investments
6 5
13 5. Mortgages 12. Treasury management
12 2
9 6. Overdrafts 13. Advisory services
1
7. Credit and advances 14. Value added services
Low Customer’s propensity to switch High

The NDBs are expected to focus on products that lie close to the fourth quadrant, offering maximum
differentiation through innovation, while also enticing customers to switch from incumbent banks. Whereas,
products in the first quadrant will see less innovation, proving to be more challenging to excite customers to
switch from their primary banks in the initial years.
Existing banks have been acting as the primary bank for their customers for many years and have built a
strong brand that their customers can trust with their money and financial needs. The NDBs will have to
offer differentiated products and be agile in the coming years to win the trust of the customers.
According to a recent survey, its quite evident that up to 70% of the young banking customers are open to
try products and services offered by NDBs.6 This puts the incumbents at a juncture where they would need
to devise strategies to increase the stickiness of their customer base by offering innovative and personalized
solutions, along with managing the profitability and margin pressure. Status-quo might not be an option any
more!

6. Source: J.D. Power 2019 Singapore Retail Banking Satisfaction Study

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 Impact of digital banks on incumbents

Incumbents have to take action now, given that doing nothing is not a viable
option anymore.
There are multiple options that incumbent banks can choose from and formalize their strategy to compete
with the NDBs and increase the top-line. Below are the four main approaches that banks can take to protect
and increase their customer base in the current market.

Easy

Targeted digital Defensive and targeted offering to protect their price, product
1 offering and segments
Implementation effort

Create new digital Create new digital front-end channel, but most of the
2 front-end operations and technology remain similar as current

Grow in-organically or Create a digital-only offering by acquiring or partnering with

3 partner firms to deliver innovative solutions

Launch NDB using Create a digital-only bank with current license with separate
4 existing license operations, technology stack and potentially brand
Complex

Incumbent banks have a short time frame to realign their strategy and focus on
execution to compete with digital banks.
MAS aims to award the digital bank licenses by June 2020 and the NDBs should most likely be operational
by Q2 in 2021. This gives the incumbent banks a limited time frame to design and implement their
strategic plans in next 12 to 18 months. The banks should take advantage of their existing customer
database to deepen the current relationship by meeting their expectations, and respond to their needs in a
speedy manner.

Create new
Identify areas
strategic options Build and
of impact or
to defend and roll out
growth
expand

12–18 months

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Impact
Impact of
of digital
digital banks
banks on
on incumbents
incumbents

Contact us

Nam Soon Liew

EY Asean Regional Managing Partner
Ernst & Young Advisory Pte. Ltd.
nam-soon.liew@sg.ey.com

Brian Thung
EY Asean Financial Services Leader
Ernst & Young LLP
brian.thung@sg.ey.com

Anshuman Singh
EY Asia-Pacific Financial Services
Digital Leader
Ernst & Young Advisory Pte. Ltd.
anshuman.singh@sg.ey.com

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 Impact of digital banks on incumbents

Chris Lim Neena Antal

Partner Director, Digital
Advisory – Risk and Regulatory Financial Services
Ernst & Young Advisory Pte. Ltd. Ernst & Young Advisory Pte. Ltd.
chris.lim@sg.ey.com neena.antal@sg.ey.com

Stuart Last Varun Mittal

EY Asean Financial Services EY Global Emerging Markets
Transaction Advisory Services Leader FinTech Leader
EY Corporate Advisors Pte. Ltd. Ernst & Young Solutions LLP
stuart.last@sg.ey.com varun.mittal@sg.ey.com

Li Yun Seah
Partner
Financial Services
Ernst & Young LLP
li-yun.seah@sg.ey.com

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Impact of digital banks on incumbents

Notes

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Impact of digital banks on incumbents

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