DBS – Preparing for a digital future
DBS Group’s retail and wealth business has been accelerating income generation since 2013. However, the bank continues to face an uphill struggle with some of its overseas retail markets.
- DBS has a 49% market share of online and mobile channel users in Singapore
- The bank has become more technology intensive since 2013
- DBS aims to adopt a customer ecosystem approach, which integrates banking into the daily lives of its customers
DBS serves over 4.6 million retail customers, under its five franchises - DBS, POSB, DBS Treasures, DBS Treasures Private Client and DBS Private Bank. The whole group caters to the banking needs of the mass market, affluent, and private banking customers. It is the largest retail banking group in Singapore with total group retail and wealth assets of $67 billion (S$ 91 billion). DBS is widely recognised as the largest bank in Southeast Asia with total assets of $333 billion (S$ 451 billion) as of the first half of 2016. Total regional retail banking income increased by 72% since 2010, driven mainly by its affluent and private banking business (Figures 1 and 2).
Increased focus on retail and wealth management
Source: Asian Banker Research.
DBS has been a market leader in retail savings accounts with a 53% market share, propelled mainly by its POSB franchise. It is also the number one bank in terms of mortgages with a market share of 25%. Based on annual premium equivalent, DBS had the largest market share in bancassurance at 35% in 2015, toppling the long-time incumbent OCBC.
DBS has also led the push on digital transformation and fintech collaboration, accumulating a 49% market share of online and mobile channel users in Singapore. Group retail and wealth contributed 31% of total loans and 33% of total income in 2015.
Since 2010, the bank has undergone significant transformation which brought unprecedented changes in terms of service, infrastructure, and organisational structure. The bank honed its strategy, implementing a platform renewal under its current chief executive officer, Piyush Gupta, who was appointed in 2009.
Thereafter, DBS began improving in areas where its franchise was hit the most - operational stability, processes, and front-line sales - the latter two are still on-going, in particular the creation of a unified service culture; a process which the bank started in 2014. DBS had also notched up its efforts on innovation focusing on three big ideas: increasing digitisation to further enhance efficiency; making the customer experience more interactive and intuitive; and leveraging on “Big Data” analytics, of both structured and unstructured data.
Currently, DBS operates in over 280 branches across 18 markets. Retail banking services are offered markets, including Hong Kong, Indonesia, India, Malaysia and China.
11,000 (52%) of DBS’ 21,000 total workforce, are based outside Singapore, as of 2015 – primarily in Hong Kong, China, Taiwan, and Indonesia, with India, as its main expansion market (Figure 2).
DBS hardly moved up the ante in further overseas expansion between 2010 and 2015
Source: Asian Banker Research.
Singapore is DBS’ largest market for retail banking and wealth management. It has consolidated and gained market share in almost all business lines, especially in areas where other local peers find it challenging to operate such as mortgages and car loans. DBS’ share in car loans in Singapore rose from below 22% to over 26% between 2011 and 2015. And despite a deteriorating operating environment, the bank has been able to manage well its retail loan delinquency, which is materially below industry average.
Furthermore, DBS has been the most cautious bank in terms of mortgage business during the Singapore housing boom, rebalancing its retail loan structure since 2010 in favour of higher yielding loans such as consumer finance, and reducing its mortgage asset book from close to 78% to below 66% between 2010 and 2015.
Yet, the bank continues to face an uphill struggle with some of its overseas retail markets. DBS Hong Kong’s market share in retail banking revenue and profit is below 2%. While the industry average on retail loans grew by 59% between 2007 and 2013, the bank’s retail and wealth business achieved a negative growth of 5% in the same period. Its mortgage book also shrank by 26% between 2011 and 2014.
In addition, DBS tried to acquire Bank Danamon in Indonesia - without success. In 2013, it failed to win a final regulatory approval to gain majority control of Indonesia’s sixth-largest bank by assets, which could have become a major step towards a diversification of the bank’s franchise in Southeast Asia.
Since 2014, the bank turned its focus on India after a failed entry into the retail lending space through Cholamandalam DBS Finance (CDFL) from 2006 to 2010. A growing liability base and cost control has made DBS confident of turning a profit for its retail banking business in India as early as FY2016.
DBS is further making a bigger bet on emerging markets since April 2016 by launching India’s first mobile-only bank. It aims to tap on the 200 million-strong fast growing, smartphone users’ middle-class market. DBS has abandoned a key paradigm in overseas retail banking expansion, that is to catch up with large local banks physical networks The bank does not see any advantage in opening an Indian banking subsidiary to expand its branch network, as branches are no longer major determinants of competitive success in a digital age. Instead, DBS aims to scale up its retail banking presence in China, India and Indonesia using a digital platform called Digibank.
Ultimately, India will be the bank’s primary testbed for branchless banking in overseas markets where DBS has limited footprint and often face unprecedented regulatory limits for expansion. The success of Digibank India will impact DBS decision-making process on how to proceed with its market expansion efforts. The bank is targeting five billion bank accounts in India with Digibank and wallet services in the next 2-3 years. The bank has currently 12 branches in India and plans to operate around 70 branches until 2020.
Regional wealth management expansion
DBS Treasures Private Client business, launched in 2011, caters to customers with investible assets between $0.7-1 million (S$1.5-5 million). Its rollout came amidst a rapid wealth creation growth in Asia. It also marked the start of an aggressive expansion by DBS to build a regional wealth management franchise.
The bank has tripled its income from wealth management between 2009 and 2015 and the business has become more technology intensive since 2013 . With the rise of internet finance and wealth management in China, DBS began redirecting its own wealth business towards an information loop between the bank and its clients that was more timely, relevant and increasingly digital at the front end. Compared to its global peers, DBS’ wealth business had a younger, more technologically savvy wealthy client base who are more receptive for a focused digital strategy. By 2014, the bank had created a single wealth management platform across its entire wealth segment and introduced the iWealth as well as its all-in-one digital wealth management capability that allowed the bank to acquire more than 30% of wealth customers online.
In 2014, DBS deployed IBM Watson, a cloud-based service, to deliver better customer advisory. Watson is a probabilistic system which assists relationship managers (RMs) in widening the scope of perspectives but is limited to product recommendations and advice. It doesn’t provide solutions but aims at supporting RMs’ decisions and advisory capabilities. All DBS relationship managers have access to Watson though this is not yet voice controlled.
Watson was not initially build to operate exclusively in financial services as it is an optionality box for broadbased topics engagement rather than smart wealth management advice. This limits its functionalities when it comes to deep and specific investment decision making. Those options that Watson churns out still have to be processed through the advisory cycle before it reaches the clients.
Accelerating growth and performance
DBS’ retail banking performance, in terms of top and bottom line growth and sales productivity, has been on the rise since 2013 (Figure 3). The bank is transforming its branches from being service and transaction centres into sales outlets to boost its low branch sales conversion ratios. It introduced a new branch operating model, which resulted in greater efficiency for customers. The bank also encouraged its managers to “own” their branches, including revenues and expenses.
Efforts in transforming its branches are key in growing DBS’ retail and wealth business
Source: Asian Banker Research.
Retail profitability or return-onassets (ROA) has bottomed out and rose to 1.3%. The bank’s retail portfolio growth is driven by mortgages and consumer finance while its key profit drivers include the deposit business. Despite a property slowdown in Singapore, DBS’ mortgage business grew relatively well due to the bank’s increased focus on competitive pricing and public housing buyers. Because of these factors, DBS Singapore achieved an above industry annual growth in 2014 and 2015 of 10.1% and 10.8%, respectively (Figures 4 and 5).
DBS reduced its dependency on mortgages and diversified into personal loans
Source: Asian Banker Research.
DBS’ retail profitability is driven by mortgages and consumer finance
Source: Asian Banker Research.
As new fintech startups enter the retail financial services markets and customers change their purchasing behaviour, incumbent financial institutions are forced to alter the way they operate.
The two classic competitive advantages – capital and physical presence – are proportionally becoming less relevant. The bank knows it needs to capture, demonstrate, or create value in the digital space – a field which requires a new kind of leverage and capabilities beyond the account-centric banking relationship. DBS believes that harnessing the digital opportunity not only help protect its position in core markets such as Singapore and Hong Kong, but can be a game changer to extend its reach into larger geographies.
Besides improving existing products to make them faster, cheaper and easier, DBS aims to adopt a customer ecosystem approach which integrates banking into the customers’ daily lives. This requires digital transformation on an institutional scale.
For example, DBS’ Home Connect app provides a holistic service to homebuyers. The app is designed to answer clients’ questions when they purchase a home. It also allows users to check property prices in a particular area, based on recent property transactions and their location, while providing information on different neighbourhoods and details on financing options.
DBS journey towards digital adoption involves a greater number of services and products, which can be purchased online. Recently launched digital banking services include the iWealth wealth management platform, DBS PayLah! for peer-to-peer (P2P) fund transfers, DirectRemit, and virtual opening of accounts for SMEs.
In Singapore, close to 38% of customer acquisitions are done digitally. The bank gets 18% of its wealth customers and more than 50% of its SME customers via digital channels. Cost per credit card digital acquisition is just one-third of the traditional channels, and the cost per account maintenance is 10% compared to the traditional ones.
The bank will also invest $200 million into digital technologies until 2017; on top of its existing spend on information technology. It will accelerate its spending in newer technologies to replace existing legacy systems. DBS plans to keep total IT spending between $800 million to $900 million annually.
Other ground breaking projects include Digibank, India’s first mobile-only bank, uses artificial intelligence technology from US-based Kasisto, that also takes advantage of government infrastructure in India. The security systems are not based on one-time passwords sent as an SMS, but based on a dynamic inbuilt security around the Aadhaar card that includes a 12-digit identification number using facial features, iris and fingerprint scans which is being assigned to every resident in India. Digibank is expected to sign-on more than half a million users by end of 2016.
In November 2016, the bank plans to open DBS Asia X, a 16,000 sq ft innovation space for up to 100 people. It is designed to create a “fintech-like” workforce that focuses on disrupting and redesigning the customer experience. The bank aims to gather its employees to design, develop, and work closely with start-ups and the broader fintech community. Changing the DNA of DBS, however, can be difficult since traditional banking is a conservative business, and the Singapore government owns 30% of shares.
Digitally transforming the entire bank might create significant impact on profitability. According to DBS Asian Insights, the group research arm of DBS, retail banks that are not able to adopt a digital model may experience a drop in return-on-equity (ROE) by around 18% over a five-year timeframe, mainly due to pressure from fintech firms and progressive banks. However, the ROE of retail banks that are able to reinvent might substantially increase by around 18%, due to lower cost of serving customers. In addition, cost-to-income will remain stable at 45% in 2020 for a non-digital bank while it could drop to 35% in 2020 for a digital bank.
Recognising the need to change
Preparing for a digital future is the greatest challenge for DBS. The bank not only needs to reinvent the way its employees work and think, but also improve on its digital offerings and customer servicing. DBS has already recognised the need to change. Implementing the necessary changes would be a remarkable achievement for a bank that was on the brink of irrelevance after the global financial crisis.
Keywords: DBS, POSB, IBM Watson, Retail Banking, Wealth Management, Retail Lending, ROA, Mortgages, Mobile Banking, SME