Navigating the 'new world' of banking

The rise of technology has been swift, and many industries have been transformed drastically in the 21st century.

The Amazon Kindle almost rendered physical bookstores obsolete; online shopping has proven disruptive to bricks-and-mortar retailers.

The financial technology sector, commonly referred to as fintech, has captured the imagination of many with its promises to offer potentially more attractive alternatives to customers in areas such as peer-to-peer lending, algorithm-based investment management and blockchain cross-border payment solutions.

While fintech has not dramatically transformed the financial industry yet, it would be imprudent for traditional banks to be dismissive of these developments.

Indeed, Singapore's banks have not remained passive in the face of the challenge from fintech. They have invested in developing technological solutions that are customer-centric. A clear example of this is the advancement of Internet and mobile banking, which have enabled customers to address their banking needs on the go.

But fintech firms, leveraging their technological prowess, have been able to make some headway in areas such as the payments space.

There is therefore considerable impetus for banks to identify and focus on the business segments where they have a competitive advantage over fintech firms.

The pursuit of "growth at all costs" is now not just viewed as undesirable - it has become nigh impossible. What this means is that banks have to recognise the value of the limited resources available to them, and be able to allocate these resources in a manner that is efficient.


The global financial crisis of 2007-2008 brought to the fore the problem of moral hazard, where implicit government support and the safety net of financial bailout led to excessive risk-taking behaviour by banks deemed "too big to fail".

Operating within the Basel II framework, banks capitalised on this implicit "subsidy" and issued capital that was not loss-absorbing and maintained thin liquidity buffers, which were insufficient to withstand economic shocks.

In the aftermath of the crisis, banking regulators around the world dialled up regulatory standards.

While some have asserted that this results in an unfair playing field for traditional banks - fintech firms are not subject to similarly stringent rules - it does present an opportunity for banks to deepen the trust that customers have in them. Compared with fintech companies, which are largely self-regulating with few boundaries, banks operate in a highly regulated environment for good reason.

Supervisory oversight and tighter rules strengthen the foundation upon which banks foster and build trust with customers. With a regulated bank, customers are assured when they place deposits, knowing that their funds will be readily available when required.

High-net-worth customers entrust the management of their wealth to an institution that will act in their best interests.

Large corporate firms embarking on new projects similarly require financing to be provided in a reliable manner. The onus is on banks to preserve and build on this trust as they navigate the new realities of technology and regulation that define their operating environment.


Without doubt, intensified regulatory standards are challenging the convention of how banks run their business.

Under Basel III, banks have been required to enhance the quantity and quality of loss-absorbing capital, with the objective of protecting depositors from losses in the event of a bank failure.

Liquidity standards were also introduced to curb the over-reliance on short-term wholesale funding that led to the high-profile failure of Northern Rock in the United Kingdom.

Together, these constraints have compressed banks' profitability. Capital and liquidity, more than ever before, are expensive, essential and finite resources.

The pursuit of "growth at all costs" is now not just viewed as undesirable - it has become nigh impossible. What this means is that banks have to recognise the value of the limited resources available to them, and be able to allocate these resources in a manner that is efficient.

In practice, this requires a keen understanding of the macro environment, a finger on the pulse of long-term trends and opportunities, and a considered strategy that plays to a bank's competitive strengths.

This approach applies to how banks can best position themselves, given the advent of fintech.

Banks currently derive competitive advantage from their extensive distribution network of branches, strong expertise in credit underwriting, and existing customer relationships. But their existing infrastructural competitive advantage could be at risk as fintech firms, building a ubiquitous digital distribution network, could potentially reach out to more customers at a lower cost.

For banks, it would make sense to place added attention on their high value-add businesses which require greater customisation, such as private banking and corporate banking. Cultivating and growing relationships with the customers in these segments will be more important than ever.

Fintech start-ups are essentially created to take on research and development projects in the pursuit of "the next big thing" in financial services for venture capitalist investors with a huge appetite for risk.

In contrast, banks have traditionally preferred to invest in, or grant loans for, physical and tangible assets where the realisable value of the asset is fairly certain in the event of a default.

This prudent behaviour of banks is understandable, as they are primarily funded by customer deposits.

Depositors would be apprehensive if their banks were to start investing significantly in fintech firms.

While banks may not have the risk appetite for direct investments in fintech start-ups, nor meaningful expertise to develop some technologies in-house, they could still capture the benefits of the fintech revolution by selectively acquiring or partnering matured fintech firms that have successfully created innovative financial technology that is aligned with their long-term strategy.

This opportunistic approach would narrow the gap with fintech firms, and also equip banks with new technologies that could offer customers better services and products.


In order to cope with the rapid developments in technology and regulations, banks will need talented and skilled employees across multiple areas of specialisation.

These include technology architects to drive the digitalisation of services; relationship managers to individualise products for the customers' needs; corporate planners to efficiently allocate and deploy financial resources in the new regulatory regime; and particularly, visionary leaders to navigate an evolving environment.

The rise of digitalisation has resulted in banks no longer competing only with other financial institutions for talent, but also with technology companies as both industries demand similar sets of skills.

This fierce competition has resulted in talent scarcity - the ability to attract and retain talent has grown in importance.

Despite operating in a mature industry that is relatively averse to risky ventures, banks must alter their approach to talent management by going beyond providing better compensation packages.

In addition to financial rewards, banks could start by building a recognisable employer brand that appeals to talent.

Key components of this framework might include an organisation culture supportive of collaboration; providing opportunities to engage employees intellectually; and developing and communicating career progression paths for high-performance employees.

Ultimately, every organisation is only as strong as the sum of its talents; banks must be committed to rolling out initiatives that will allow them to attract and retain the talent pool needed to remain relevant in the dynamic financial services landscape.

•Darren Tan is the chief financial officer of OCBC Bank.

A version of this article appeared in the print edition of The Straits Times on July 31, 2017, with the headline 'Navigating the 'new world' of banking'. Print Edition | Subscribe