Will digital banks disrupt industry with lower cost-to-serve?

Digital-native neobanks and fintechs are disrupting traditional banks saddled by technical debts from legacy technologies and infrastructures. These challenges are becoming increasingly critical as they hinder innovation and customer experience. 

Digital banks, on the other hand, are more agile and can quickly respond to customer demands due to their scalable and versatile cloud-native technology. 

In Singapore, Trust, a new cloud-native digital bank offered customers the flexibility to choose any day of the month as their credit card repayment date, in addition to a host of features, such as a ‘numberless’ dual function credit-debit card, feeless transactions and an e-voucher for SGD 25 ($18.45) to incentivise sign-up and usage. 

The individualised repayment date option would be unimaginable for banks lumbered with hardcoded legacy systems. 

Trust onboarded 100,000 customers within 10 days of launch in September 2022 and exceeded 450,000 customers with seven million transactions by the end of the year, accounting for an estimated 9% share of the addressable market.

Kevin Lam, the head of TMRW, Singapore-based UOB’s mobile-only banking platform for digital users across Southeast Asia, questioned whether unique features such as individualised credit card repayment dates or interest rate calculation actually add value for customers or if they're just perceived as such. 

He believes that ultimately, the customer's perception of the value proposition is what is sustainable and important, and banks need to take their competition seriously and consider what customers really want.

The power of ecosystems and continuous innovations

Nick Wilde, managing director for Asia Pacific of cloud-native core banking solution provider Thought Machine, doubts if any one feature, whether a credit card repayment date that may be useful to a card revolver, or an SGD 25 e-voucher for a card transactor, is the ‘magic wand’ that makes for the ultimate customer experience. 

Wilde said: “But it is one of the things that, inch by inch, creates a better customer experience.” He argued that having the right partners in an ecosystem and continually innovating to create a financial experience around it is what makes customers want to make the most use of a service.

Trust is a partnership between Standard Chartered and the FairPrice Group, a supermarket chain affiliated with the national labour cooperative in Singapore, the National Trade Union Congress (NTUC). NTUC FairPrice operates an e-retail and e-commerce ecosystem that reportedly generates over a million customer interactions per day. 

Interestingly, Trust operates on an additional full-bank licence granted to Standard Chartered under the Significantly Rooted Foreign Bank framework in Singapore, and not under the Monetary Authority of Singapore’s Digital Full Bank licence that was granted to the Grab-Singtel and SEA Group digital banking consortia. 

Trust is the second cloud-native digital bank that Standard Chartered has introduced in Asia. The first, Mox, was launched exactly a year earlier in September 2021 in Hong Kong in partnership with Hong Kong Telecom, PCCW and Trip.com. 

In its 2022 full year results, Standard Chartered reported that Mox doubled its customer base in 2022 to over 400,000, expanded its card and digital lending services in 2023 and expects to be profitable by 2024.

Vietnam-based digital bank TNEX is able to keep costs low and drive customer-lifetime value with a claimed cost-to-serve of just $2.36 per customer per year and and acquisition cost of $2.76 per customer. 

Its CEO, Bryan Carroll, said his board focuses on metrics around customer experience, cost-to-serve, cost of acquisition, and more traditional revenue indicators. It is heavily focused on personalisation, with many of its staff being data analysts and scientists. 

Addressing the technical debt issue

Wilde believes that new challengers like TNEX, TMRW, Mox and Trust, pose a threat to incumbent banks’ current business operating model and tech stack, and that there is an existential threat on the horizon. Incumbents must create their future or risk being ‘retired’.

The lack of technical debts arising from the irresolvable complexities and unavoidable costs inherited from legacy technology is a key advantage that startup digital banks have over traditional banks, according to Carroll. 

Greater automation, digitalisation and the ability to scale computing and data resources afforded by a cloud-native infrastructure give it a distinct cost competitiveness.

Lam, however, believes that the success of digital-only banks is not solely dependent on having a cloud-native core banking system. Instead, it’s more about the end-to-end digital customer journey being intuitive, instantaneous, and seamless, or designed without operations, which empowers customers. 

Carroll also emphasised the importance of artificial intelligence and data science in risk management. While lending in the underbanked segments may be more difficult, the potential rewards are higher due to the large unbanked population. Despite the challenges of lending to first-time customers, TNEX’s risk portfolio is diversified and loan loss is kept low with the use of advanced data analytics.

Time pressure to respond and adapt

Wilde noted that the threat of competition from the neobanks is causing time pressure for incumbents to innovate and adapt to the changing landscape. He believes that banks need to look to the next five to 10 years and ask if there is indeed an existential threat on the horizon. 

While he acknowledged the advances that incumbents have made in their digitalisation journey, he noted that many still held on to the technical debts. Nevertheless, the threat is not insurmountable. Wilde remarked: “There are smart people in the incumbent banks who, given the right boundaries, can create great things.”