Singapore banks DBS Group (SGX: D05), United Overseas Bank (SGX: U11) or UOB, and OCBC Ltd (SGX: O39) are widely known to many Singaporeans.
Together, their latest reported deposit base of over S$1.27 trillion constitutes the majority of total deposits in Singapore.
Recently, a new contender has announced its intention to challenge the trio.
Trust Bank, or Trust for short, is a 60%/40% partnership between Standard Chartered (LSE: STAN) and FairPrice Group.
Trust was launched as a Singapore digital bank back in September last year.
Eight months in, the partnership became the fourth largest retail bank in Singapore, attracting over S$1 billion in deposits from half a million customers.
CEO Dwaipayan Sadhu also articulated the digital bank’s aim to breakeven by 2025.
We dig deeper to find out if this up-and-coming digital bank can eventually qualify as one of the top three banks in Singapore.
Lower customer acquisition cost
As the name suggests, digital banks differ from traditional banks by providing banking services solely through your mobile phone instead of operating via physical branches.
A key challenge that instantly comes to mind is the adoption rate of Trust’s services given the country’s ageing population.
A large proportion of younger adults still preferred having neighbourhood branches.
In determining whether Trust can pose a threat to the three incumbent local banks, it is imperative to examine their customer acquisition strategy, particularly among the elderly.
The digital bank managed to onboard nearly a tenth of the population within half a year through a range of clever strategies.
Referrals form the bedrock of these initiatives as 70% of new signups came from recommendations by family or friends.
Another tactic to draw senior citizens in is to leverage on the customer base of FairPrice group.
Dishing out incentives such as free meals and groceries may arguably appeal much better to this demographic.
Instead of attracting potential customers with exorbitant gifts and offers, Trust bank positioned itself as a useful resource to help its customers reap savings to better cope with inflation and higher living costs.
Other ways to expand its reach include tapping on the country’s digital initiatives to bridge the banking divide for the older generation as well as enlarging its suite of offerings to cater to a wider audience.
All these moves allowed the bank to have a customer acquisition cost that is seven times lower than its competitors.
Impact on traditional banks
We now turn our attention to the impact that digital banks have on local banks.
The Monetary Authority of Singapore (MAS) announced that 21 applicants applied for digital bank licences in January 2020.
Successful applicants were announced on 4 December 2020.
In the one day before and after these two dates, the share prices of DBS, UOB, and OCBC barely budged, indicating that investors were not concerned about the impact of these digital bank aspirants.
Moving onto the effect of deposits, Trust’s S$1 billion does not even amount to 0.3% of OCBC, which has the smallest deposit base of the trio.
Trust does not divulge its net interest margin (NIM), but a simple comparison of the latest reported net interest income (NII) revealed that the digital bank’s S$4.9 million is a far cry from the S$2 billion to S$4 billion NII range for the traditional banks.
This is to be expected given the gap in customer deposits, which was observed to be more than 13 times between traditional and digital banks in developed Asia Pacific (APAC) markets.
This, in turn, posts a major challenge to monetisation opportunities for the latter.
On the qualitative front, pundits acknowledged the difficulty that digital banks faced in succeeding in the Singapore retail banking space as traditional players also served up robust digital offerings.
Such offerings make it difficult for Trust to effectively differentiate itself.
Digital banks may fare better by targeting emerging Southeast Asian economies with a larger unbanked population and fast-growing internet accessibility.
At this juncture, it appears that the beloved trio will not lose their upper hand anytime soon.
Nonetheless, it is worthwhile to analyse if Trust’s 2025 breakeven ambition is realistic.
Local banks are unlikely to be threatened
Past case studies revealed that digital banks focused on the retail market in the APAC region struggled to breakeven.
Hong Kong has regularly been compared against Singapore, drawing parallels between their financial systems due to uncanny similarities.
Unfortunately, digital banks in the gateway to China have been loss-making across the board.
Among successful case studies, those that managed a turnaround to profitability have adopted several approaches.
These include improvement of user interface and experience, leveraging the deeper network and capabilities of a parent company, product diversification, risk modelling, and streamlining costs.
Out of these strategies, Trust has already been enacting many of them.
For example, Trust Bank has come up with the Budget Buddies feature – visualisation tools that provide spending insights to users – along with new product releases such as credit and supplementary cards that offer enhanced control and transparency.
The digital bank is also capitalising on FairPrice Group’s ecosystem and has done away with a physical footprint, helping to reduce expenses associated with maintaining branches and ATMs.
Moreover, the average duration a digital bank takes to turn profitable is approximately four to five years, which may prove to be challenging given Trust was only launched in late 2022.
However, it does not mean that 2025 is an unrealistic goal.
Regardless of whether Trust is able to meet its desired timeline, the trio of DBS, UOB, and OCBC remains comfortably ahead in the foreseeable future.
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Disclaimer: Tan Ke Xuan does not own shares in any of the companies mentioned.