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Freeing banks to take on tech firms for market share

Plans to relax rules timely as large e-commerce players extend reach into payments and remittance services

The time may soon come when we can buy refrigerators or make doctors' appointments through our banks.

Regulators here plan to relax certain rules on "anti-commingling" so that banks here can invest up to 10 per cent of their capital funds in certain non-financial businesses.

In particular, they will be allowed to operate digital platforms that match buyers and sellers of consumer goods or services and conduct the online sale of such goods or services.

Strange as it may seem, it is already a reality in some countries and a necessary step for banks to survive today.

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After all, many online shopping sites are already acting like banks.

TECH COMPANY OR BANK?

Finance Minister Heng Swee Keat noted in his announcement at the Association of Banks in Singapore's annual dinner late last month that the line between financial and non-financial business is blurring.

Banks are facing increasing competition from online and non-financial players that have amassed a large user base, and then begun to provide digital wallets, payments and remittance services.


ST ILLUSTRATION: MANNY FRANCISCO

DBS chief executive officer Piyush Gupta noted one major example in his speech that night: Alibaba.

It is now one of the biggest payment companies in the world. Its financial unit, Alipay, handles more fund transfers than many banks around the world.

It is also one of the fastest fund gatherers in the world. Its four-year-old money market fund Yu'e Bao hit US$100 billion (S$138.5 billion) in just over a year and is now the world's largest.

Alibaba also has a rapidly growing loan book, extending 50 billion yuan (S$10 billion) of loans to businesses and providing credit lines to over 100 million individuals for Single's Day.

Mr Gupta also noted the example of TransferWise, which moves over £1 billion (S$1.8 billion) every month and claims a 10 per cent market share of the international transfer market in Britain, more than most other international banks.

"As new players enter our industry, they operate much like banks, but often benefit from a more favourable regulatory regime, often in the desire to spur innovation and competition," he said.

LEVELLING THE PLAYING FIELD

Regulators here have taken heed.

At the release of the Monetary Authority of Singapore's (MAS) annual report, managing director Ravi Menon made the point that despite their smaller size, tech firms do have an unfair advantage as they elbow their way into financial services.

South-east Asia, with more than 600 million consumers rapidly moving into the middle class and hungry for e-commerce, is widely seen as a big battleground between Alibaba and Amazon.

A report by Google and Temasek Holdings last year forecast that the South-east Asian e-commerce market will grow at around 32 per cent a year to be worth US$88 billion (S$122 billion) by 2025.

With these two behemoths coming head to head to win over the South-east Asian market, it will only be a matter of time before each starts offering a gamut of convenient solutions - including financial products and services - to lure customers.

With that in mind, the MAS' move certainly seems timely. What remains to be seen is whether it goes far enough.

"What you're seeing is a phenomenon of many non-financial institutions offering a variety of services and solutions on digital platforms, and then payments become part of it, and then sometimes they do lending, sometimes they do advisory, so they're encroaching into the territory of financial institutions, which are regulated and subject to very strict requirements and compliance burdens," he said.

He was quick to note, however, that the MAS would not stop tech players from doing that.

"The consumer benefits from better solutions and services, but what we do need to make sure of is that financial institutions can compete on a level playing field."

In some other countries, banks have already waded into e-commerce waters for a few years.

Bank of America, for example, has an online shopping portal that links customers to major retailers.

Emirates NDB entered the fray in May this year with the launch of SkyShopper, a platform through which merchants from around the world can offer special deals to Emirates NDB customers.

In these cases, the banks do not sell the products and services themselves but facilitate the payment or provide loans for customers' purchases.

Chinese banks have gone a step further, taking steps to become fully fledged e-commerce players in their own right, selling everything from cars to underwear, as they take on local behemoths such as Alibaba and Tencent.

Bank of Communications, China's fifth-biggest listed lender, opened an online shopping mall in 2012, while China Construction Bank launched its online mall, buy.ccb.com, the following year and ICBC started its own mall, Rong E Gou, in 2015.

THE PATH FORWARD FOR SINGAPORE'S BANKS

Here in Singapore, the MAS would like to see banks doing more of the former, not so much the latter.

Mr Menon said at the annual report media conference that the MAS does not want its new rules to be seen as an encouragement for banks to move into e-commerce.

"We don't want them to diversify outside financial services. We want them to remain rooted in financial services but be able to provide ancillary services that are synergistic to the provision of their core financial services."

For example, he said, they could provide a matching platform to point private banking clients to health services, or provide travel-related services linked to their basic banking offerings.

"And if they need to take a small stake in such a company, which is well within the 10 per cent capital funds limit that we've set, that's not a problem."

OCBC Bank's head of e-business, business transformation and fintech and innovation, Mr Pranav Seth, said the future of banking is one where banking is "ubiquitously embedded into day-to-day life and day-to-day financial decisions".

That is, banks have to engage customers on e-commerce platforms and fulfil their banking needs "almost invisibly", he said.

"For example, by providing a loan for a new refrigerator while they are browsing or comparing different fridge models, this would definitely improve customers' experience and can potentially create significant opportunities for the bank."

DBS' Mr Gupta agreed, noting that with the ubiquity of the smartphone, "customers increasingly want banking to be seamlessly integrated into their daily lives".

"There are a number of areas where a banking service can be nicely integrated into e-commerce, and we welcome the opportunity to do so."

The MAS' move is timely, to say the least.

E-commerce giant Amazon has said it plans to set up operations here this year, although it has not specified a date since a delay earlier this year.

While Amazon does not offer financial services in a big way, it has begun dipping its toes into banking. In 2016, it partnered with Wells Fargo in the United States to offer its Amazon Prime customers discounted interest rates on student loans.

It also offers a service called Amazon Pay, a payment gateway solutions for merchants to accept payments from customers using their Amazon accounts.

(When you check out at the merchant's online store, it prompts you to log in to Amazon, and your purchase is billed to your Amazon account.)

It is not unthinkable that Amazon's entry here will likely rouse its main competitor, Alibaba, into taking some action.

Alibaba already has a presence in Singapore and South-east Asia through stakes in companies such as SingPost and Lazada, giving it a footprint in the logistics and e-commerce sectors.

South-east Asia, with more than 600 million consumers rapidly moving into the middle class and hungry for e-commerce, is widely seen as a big battleground between Alibaba and Amazon.

A report by Google and Temasek Holdings last year forecast that the South-east Asian e-commerce market will grow at around 32 per cent a year to be worth US$88 billion (S$122 billion) by 2025.

With these two behemoths coming head to head to win over the South-east Asian market, it will only be a matter of time before each starts offering a gamut of convenient solutions - including financial products and services - to lure customers.

With that in mind, the MAS' move certainly seems timely. What remains to be seen is whether it goes far enough.

A version of this article appeared in the print edition of The Straits Times on July 12, 2017, with the headline 'Freeing banks to take on tech firms for market share'. Print Edition | Subscribe