MOST banks gush about digital technology, fearing all the while that some born-digital usurper, large or small, will do to them what Amazon has done to retailers, Uber to taxi-drivers and Airbnb to hoteliers. Some have reorganised themselves to become nimbler, copying startups by forming small teams to generate, test, reject and improve ideas at speed. Apps are improving, new products are appearing and online marketplaces are being built. Only a few are turning enthusiasm into money. One of those is DBS.
Singapore’s (and South-East Asia’s) biggest bank is a stockmarket darling. Its share price has roughly doubled in the past two years, outstripping the gains of Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank (UOB), its main local rivals (see chart). The price exceeds DBS’s net book value per share by 50%. That owes something to the city-state’s buoyant economy—GDP rose by 3.6% last year, the most since 2014—and recovering housing market, and to the doubling of the dividend when DBS reported fourth-quarter results on February 8th. But it owes something, too, to optimism about the bank’s digital prowess.
That prowess is plainest in DBS’s retail banks in Singapore and Hong Kong, which account for 44% of revenue, up from 38% in 2015 and expected to climb. Piyush Gupta, the chief executive, explains that DBS divides customers into “traditional” and “digital” types, who deal with the bank mainly online. It then follows “the breadcrumbs, all the way from what we are doing to shareholder returns”.
Customers qualify as digital if more than half of their dealings with DBS—checking their balance, making payments, buying foreign currency—take place remotely. Of its 5.9m retail and small-business customers in the two cities, DBS counts 2.3m as digital, up from 1.9m in 2015. It costs more, per person, to serve them than to serve the traditional ones: each group soaks up S$1.1bn ($840m). But the digitals bring in more revenue, S$3.1bn against S$2bn, and hence account for two-thirds of the bank’s gross profit of S$2.9bn. DBS reckons the cost-income ratio for digital customers is just 34%, against 55% for traditional ones. A typical bank would be delighted with 50%. The return on equity from digital customers is a whopping 27%. Banks are often glad of double digits.
“If you can digitally engage people, they tend to do more. That’s the bare bones of our thesis,” Mr Gupta says. Balance inquiries, which digital types carry out four times daily, of course bring in nothing. But DBS is earning 3.4 times more on mortgages, and 2.6 times more on credit cards, from such clients than it does from the traditional sort. Scrapping fees for an online platform for small businesses cost S$7m-8m a year, but that was recouped in three months.
DBS’s overall return on equity last year was 9.7%: nothing special. Both OCBC and UOB did better. Profits rose by 3%, to S$4.4bn, but were dented by a provision for soured loans to oil-and-gas service companies in the third quarter. Yet Aakash Rawat of UBS, a Swiss bank, believes that within 12-18 months the shift to digital banking, aided by favourable macroeconomic winds, could easily lift DBS’s return on equity above 13%, higher than it was before the financial crisis of 2007-08.
In November DBS unveiled a technology platform in Singapore to which about 70 partners have connected over 150 applications. DBS customers eyeing a home on PropertyGuru, an online estate-agency, can check their eligibility for a loan and start applying. At Homage, which provides care for the old, you can redeem DBS credit-card reward points for an assessment of needs. Neal Cross, DBS’s chief innovation officer, calls this a “standard tech-company model”, following the examples of Amazon, Alibaba and the rest. But most banks still only aspire to creating such a platform. DBS says its one is the biggest anywhere.
Yet expansion at home will hit a limit. Just about every Singaporean has an account with DBS—founded 50 years ago, as Development Bank of Singapore, to nurture the newly independent country’s economy—so growing means grabbing market share. Mr Gupta says that in the past three to four years DBS’s share of life-insurance policies sold through banks has climbed from 16% to 32%, pulling it level with OCBC, hitherto the market leader. Its share of mortgages has clambered back to over 30%. The new platform should tie customers in more tightly. But eventually, on small, rich islands, you run out of room.
No wonder, then, that DBS has been heading abroad. In 2016 it launched digibank, an online retail operation, in India, where it has just 12 branches. Digibank has quickly acquired 2m customers, helped by the recruitment of Sachin Tendulkar, a cricketing near-deity, to its marketing campaign. It is run on a shoestring, with “60-70 people”, Mr Gupta says; chatbots answer 85% of customers’ queries. Granted, it is not yet in profit, India’s middle class may not turn out to be the gold mine many expect, and other banks and tech giants will have similar plans. But Mr Gupta responds that in “mega markets” like India, Indonesia and China even a share of 2-3% “would really move the needle for DBS”.
August saw the launch of digibank in Indonesia, taking “half the time and a fourth of the cost” of the launch in India. By the end of 2017, 70,000 accounts had been opened. Interest-rate margins there are fatter, promising profit sooner. Next may be Vietnam, Hong Kong and mainland China. DBS reckons that in five years “growth” markets could contribute 10% of revenue.
The lessons of DBS’s progress may be hard to copy. One is to start early. DBS began overhauling its processes and computer systems in 2009, before starting to build a “digital bank” in earnest in 2014. Already, half its computing power is in the cloud, rather than in-house. Another is to resist complacency. It might have been tempting to be satisfied with being the biggest bank in a small, rich economy. Tempting, but dangerous. Banks elsewhere, of any shape or size, will have to adapt, and fast.