I am being asked a lot lately about Singapore’s DBS Bank. I have been very reluctant to write the following opinion and postponed it as much as I could, but my assessment of why DBS is not the “best bank in the world” that it claims to be is important, not just for DBS but for the industry as a whole.
I must start by saying very clearly that I do not like or dislike DBS, or any bank for that matter, in any way. I am happy to be corrected in my assessment. But I do believe that the banking industry in general has been developing a hubris about itself, and definitely DBS. Ten years after the global banking crisis, this is the “Great Gatsby” period of the banking industry, beneficiaries of the digital dividend through fiat, and the industry is generally over-paid, drunk and invincible. Some of these are embodied in the assertions that DBS makes about itself, more than other banks. Since DBS wants to promote itself as the “world’s best bank” let’s tackle it from there.
Firstly, the whole idea of “best bank” in the world has to be defined for the period we are in today, and has to be tracked over a period of time. It’s a reflection of poor journalism when it’s DBS one year and Bank of America in the US the following year with one of the publications that gives out these awards. The airline industry rankings do not replace a Singapore Airlines one year with a United Airline the next randomly and completely without context. Criteria are very specific, measurable and tracked consistently over a period of time.
Publications who make these awards must (1) pre-publish their criteria, which even if weak, would tell us what they are looking for (2) have a good governance process by which assessments of researchers are validated by independent industry people (3) quantify as much as possible, even the most qualitative of criteria, so that we can do things with them – find gaps, rank them, track over time etc (4) actually do interviews, site visits and not just regurgitate public relations material from the identified institutions (5) publish and present the findings, including comparisons between shortlisted institutions. Done this way, all of these are helpful to the industry and not just a vanity exercise. I know this, because I set very high standards on my own staff, subject myself to scrutiny and stand corrected when I am wrong, so I don’t understand those who don’t.
For publications like The Banker, I am acquainted with Brian Caplan and others in his organisation and I have considerable respect for the work he does in actually visiting all of the different players. From his writings I can see that he has, inside his head, a running critical assessment on all players relative to each other, and so an award such as this from The Banker is usually well deserved. As for the other publications, all I can say is that it reflects poorly on a bank to even negotiate with a publication just because it has the word “global” in its name.
Having said all that, the industry needs to define what constitutes the “best bank”, and the criteria changes over the years. There was a time when simply being the “largest bank” in the world was equivalent to being the best. Even to this day, the CEOs of the largest banks in any number of countries would open The Banker’s 1000 to show me where they rank in size, like boys in the men’s room. So, in 2002, I introduced the world’s first ranking of the “Strongest Banks in Asia”, based on a scorecard I developed and tested with different analysts and top bankers. It was primarily to distinguish ourselves from The Bankers 1000 ranking by size, which was the only criteria at that time, but also because I thought that the balance sheet tells us how “strong” a bank is rather than simply how “big”.
Our world’s first “Strongest Bank” ranking was based on a scorecard entirely crafted around the balance sheet and juggling between capital adequacy, profitability, deposit and loans growth versus non-performing loans, liquidity, cost-to-income and other downside risks. So, a bank may be very profitable in one year, but in our scorecard, we balanced it against the NPLs it was accumulating or at what cost that cancelled each other out to tell the story of how sustainable a bank really was from a balance sheet perspective. We still run this ranking today for banks across Asia Pacific, the Middle East, Africa and along the Silk Route http://www.theasianbanker.com/ab500/2018-2019/strongest-banks-asia-pacific. OCBC tended to come up tops in our ranking for Singapore and I was very gratified to have our model validated when in 2007 or so, Bloomberg copied my model but with fewer and simplified data points, and also found OCBC’s balance sheet the strongest, not just in Asia but in the world, alongside CIBC in Canada. All good.
For many years, we used to follow the Bank for International Settlements (BIS) as it evolved in its own understanding on liquidity and then mark-to-market assets to align our own focus to theirs as to what constitutes the “best” banks. But balance sheet is static, historical and does not take into consideration the non-tangible elements that makes for the “best” banks in the world. It needed to be augmented with an assessment of other less tangible criteria that morphed over time.
Now, 10 years after the US inspired global banking crisis of 2008, regulators have ringfenced their domestic banking business from their international trading book risks. The banking industry is on a journey out of traditional capital intensive, asset acquisitive model into an asset light, fee-based universe, just like any other business. The industry is also assailed by alternative digital competitors. The BIS is itself clueless on what to make of the risks that the new digital revolution represents, being practiced in the art of defining the industry only after a huge crisis, so that editors and analysts are left on their own to define what “best” should be.
In my view, the character that best defines finance is the way in which it is integrating into the digital economy as a whole. I believe that banking and in fact, entire economies, have to be assessed by their contribution to the sustenance of society at a local level – does finance take from or contribute to all other economic activity in society, from funding the economy to facilitating credit, payments and other necessities in the digital ecosystem of society. It is a moving target, but a bank is only “good” if it is relevant to its local economy.
In this context, I have difficulty with banks like DBS parading itself as the “best bank in the world”, for the following reasons:
- Banks like DBS are some of the most “Net Interest Margin (NIM) banks” in the world. In other words, they operate in markets, like Singapore and Hong Kong, where the regulator does not regulate NIM, and so profit from this just because they are licenced to do so, and others are not. In markets where NIM is not regulated, banking is a no-brainer that even a totally dysfunctional bank like HSBC can be immensely profitable in Hong Kong (82% of its total profit from one city, Hong Kong) even as it fails in the UK and everywhere. Even if DBS does a bad job in managing its own NIM in its home market of Singapore, it is still >60% of its total income, and it has Hong Kong, where it’s acquisition of Dao Heng is fully paid up. In markets where NIM is totally controlled by the state and even if it is totally profitable to banks, there is a quid pro quo for banks to lend to targeted institutions and state-owned institutions, and rake up high NPLs, so that they redirect their profit back into society in a backhanded sort of way.
- In addition, DBS also enjoys government subsidies in Singapore for various activities such as (i) skills training (ii) automation and computerisation (iii) for overseas work experience for native Singaporeans (the government actually pays the salary of Singaporean bankers sent abroad for work experience) (iv) even the very “innovation” programmes that DBS boasts about. These are not subsidies that it passes down to customers, but subsidies that it uses to fund its on expenses, pay its employees and retain the profits created.Even though DBS is highly well capitalised, well-regulated and well run to world standards, subsidy is bad word in finance. In many other countries, every time the banking industry goes bust, it has to be bailed out using taxpayers money with no consequences on bad behaviour on the part of the bankers themselves. To be fair, some of the subsidies that DBS Bank enjoys are subsidies that are enjoyed by all industries in Singapore, and they probably don’t feature at all as significant in the bank’s balance sheets. Subsidies are the way in which the Singapore government focuses the economy and workforce for the next global trend and so on in a way that no other government does. But still.
I would argue that banking should be specifically excluded entirely from subsidies because it has a licence that no other business has. Also, in many countries banks are required by law to set aside funds for their own staff training without any subsidies. Singapore banks are unique in the whole world in that no quid pro quo is required. DBS Bank has the luxury of choosing to be a for-profit company that makes all decisions commercially, even for the philanthropic activities it participates in. In Europe and many parts of the world, governments cannot be seen to be in love with their banks, and so no subsidies there. So, how do we compare these different types of institutions?
- On top of that, some banks, like ING in Europe which is a very good and well-motivated bank, have had a longer history of creating and exporting innovation in finance across many more countries than DBS, but the plethora of regulatory capital, fees, caps on profiteering, fines and other costs thrown on it by its own regulators makes it nearly impossible for such banks to be recognised for the work they do, even if the success of its ING Direct model is well recognised.
Against all these conflicting regimes that banks in different countries operate, we have to find that common ground on identifying the “world’s best bank.” We have to craft an idea of what we want to encourage. I want to encourage the fact that at the end of the day the “World’s Best Banks” today are more domestic than we imagine, closer to their own societies. There is no need for a bank to boast about how it is run at a global level because it is not possible to judge them across markets. But it is possible to take each bank and compare them on the basis of their relevance to their respective societies on commonly understood themes like sustainable society.
In my view, the world’s best banks are those (1) that are very sustainable pillar of their local economies in their home countries, (2) that can be seen to actively contribute to wealth creation and wealth distribution in their local communities and (3) that are embedded in an increasingly digital supply chain life of society. In this context, the “world’s best bank” might just be a very unassuming local bank that gets these qualities right. So, I would take a look at a an Acela Bank in Cambodia, or an Umpqua Bank, a community bank in the US, as much as I would the mighty cockerels that a DBS, an ING or a Bank of America flaunt themselves to be.
There are ways to create criteria to quantify each of the elements I have described above. For example, I would study the salaries of bank employees, and check against the gini coefficient of the country. The most expensive part of financial intermediation cost is no longer the technology, but it is bank salaries. Bank salaries should not be more than in the rest of society because, as in the words of Piyush Gupta, the CEO of DBS himself, banking should become “invisible” which means the importance of a bank employee today needs to be negligible. The coefficients can be compared across economies of different sizes.
Here, the S$1.2 billion that the insurance company, Manulife, paid to DBS upfront in 2016 to sell its life insurance products to DBS customers over a ten year period, violates a sustainable banking business on several fronts. It is to me a financial incentive that has nothing to do with the interest of the customers. If an insurance company is able to pay a bank S$1.2 billion upfront marketing costs for a product to be sold in a tiny market of 5 million customers (population of Singapore), it should tell you how profitable old fashioned, traditional, opaque insurance is. DBS is paid a further bonus for every sale closed over the life of the contract. This does not include the third party administrator costs that the insurance company pays out when there is an actual claim. This should tell customers the mind boggling profitability of insurance products in Singapore to the institutions that sell them. Insurance is an opaque, totally inefficient, intensely manual and not-digital industry, resisting change, and banks like DBS participates in the profitability of this opportunity while claiming to be a customer caring institution.
More importantly, operationally, the effect this Manulife deal has on a bank like DBS is that it requires the bank to set up an aggressive old fashioned sales team (sometimes also called financial advisors and other names). Despite any protest that the bank might make that it cares for the customer, the sales team will naturally be incentivised to sell the more profitable product, and for the next ten years, regardless of the customer’s need. There is nothing wrong with this, it is just that on this front, DBS is just an old fashioned bank, profiting from the inefficiencies of the financial system and not from all of its wonderful commitments to the digital economy. I am also curious here the Singapore regulator’s position on the dangers of misselling and profiteering that such a product presents. I wonder if the banks recognise income of this nature only when the premiums are fully paid or realised as it does for other forms of investments.
- reducing the cost of their products by digitising the entire process,
- reducing the intermediaries required to process products, and
- passing on the savings to customers
and still be profitable. There are new insurance products that does wonders with the data they collect on customers and reward them for keeping healthy through totally new business models, making the Manulife products look really exploitative and old fashioned.
- DBS has a “Venture Debt Financing” product that charges a usury interest rate on “loans” to start ups that have secured equity from “verified” venture capitalists. Which venture capitalist in his right mind would want to fund a start-up only to have it pay 8-12% interest rate to DBS on a loan it does not need? On top of that, the credit profile of a bank loan is linked directly to the poor entrepreneur’s personal credit bureau record, which really makes all the speeches about “it’s okay to fail” as an entrepreneur technically not really true in Singapore. There is nothing entrepreneurial in this loan. There is nothing wrong with being gimmicky. Clearly, if Piyush was an ice cream vendor, he would say that his business is to bring happiness to children. Since he is a banker, he is really saying that the best thing an SME needs is another bank loan. DBS consciously rejected the opportunity to really reinvent itself by participating more more intimately with the local entrepreneurs by setting up its own private equity or venture funding business. It decided to stick to its good old fashioned lending business and make the government take over the high risk business of funding startups using taxpayers money, almost all of which is run at a loss. Piyush is entitled to make his own business decisions, but he has no business lecturing his western counterparts that he knows how to be relevant to entrepreneurs in his own country. It is at these points that he enters the realm of hubris. There is no shortage of writers, “analysts” and amateurs writing books praising DBS for “innovation” A drunken party that has nothing to do with the real transformation it should be working on.
- A bank’s SME business is not only measured by the loans it gives out as a business but the way in which it treats SMEs and start-ups as suppliers. DBS procurement managers are known to squeeze SME suppliers on costs as far as they can (although it’s not their own money). Suppliers are often asked for steep discounts on the premise that “to have DBS as your client is a matter of prestige”, often by DBS managers whose own outsized salaries are part of the real costs for the jobs they do. On top of this, DBS applies for government subsidies wherever it can to minimise its own costs further.
- Activities like imagining that employees are a “22,000 strong start up” is total fiction. The average employee at banks is paid more in salary than they would be able to command if they actually stepped out of the bank. When these employees try to exchange their uninspiring bank jobs for that of the entrepreneur sitting in front of them, they find that they can’t make the leap because the bank job salaries are just too high for the skills they actually possess. So they stay, and bloat. The larger the finance industry is as part of the real economy, the more skewered the gini coefficient of that country.
- I don’t really understand DBS Foundation, which is supposed to help social enterprises. It dishes out about S$1m a year, less than one senior banker’s salary, but it claims to have reached out to more than 54,000 budding social entrepreneurs and nurtured over 300 SEs across Asia. These large numbers don’t make sense to me. It then spends a lot of money on great videos, media and advertising to promote the fact that it does these activities to its employees and customers. Just as with the fintech hackatons it runs, the publicity DBS gains is worth more than the value the social enterprises actually receive. When a bank then spends similar amounts on really expensive fancy training programmes like “Singularity University” on its own staff, the combination of plastic philanthropy and righteous self-indulgence engenders a generation of employees with a distorted sense of genius that is not replicated in any other industry. I do not condemn any one of these activities in their own right. Businesses should be free to do whatever they want, but from their own pocket to know what it cost and not lose the plot.
The real innovations in SME finance are being driven in countries like China where something like 25,000 SMEs are being financed everyday through new platforms like Peer-to-Peer lending in a charged up version of “venture capital gone viral”. Although the innovations are going through their early days, and are becoming increasingly regulated to weed out fraud in the system, the process is being continually perfected as lenders plug into manufacturing and distribution supply chains, or through the “geek economy” of ride hailing or food delivery drivers to fund, reward and build sustainable ecosystems. Banks around the world need to aspire to these levels of integration with SMEs and DBS is simply off-the-mark in setting the stage on this.
If a DBS customer has less than $500 in his/her bank account, he has to pay S$2 per month, which is an onerous bank charge for those who cannot maintain even that amount. When asked why DBS still charges a “minimum balance” the answers I got were:
- Because it is the customers fault, setting up too many accounts since childhood.
- Too many “dormant accounts” cost money.
- The bank claims that it does make concessions to those who are “really poor” who have to show up at the branch and beg for reprieve.
Since when were “dormant accounts” the customers fault? Very patronising to the many poor, the maids and the foreign workers who are not even told that such concessions exist. DBS craves to be praised for spending millions of dollars on highly paid technology, “artificial intelligence”, machine learning and all sorts of analytics engineers to track and maximise dormant customer accounts. I have only one question for these heads of technology, AI engineers and so-called “data scientists” – do you not have any shame at all? Removing just one of their salaries can provide free bank accounts to all Singaporeans, maids and foreign workers who don’t have that $500 to spare every month. This is a country of just five million customers, for goodness sake, how much AI does one need to figure out when a customer is opening his second bank account.
As for the MAS, having mapped a digital payment system that is “bank centric” and then still allowing its banks to deny Singaporeans from having a bank account in a digital economy, for whatever excuse, is as serious as excluding them from tap water. Poor Singaporeans who can’t cite a bank account to complete a cheap air ticket transaction or buy groceries online is a very cruel exclusion indeed. As a matter of policy, the practice of “minimum balance” should be outlawed in today’s economy. The noise of the rhetoric is deafening. It reflects an attitude of entitlement where a bank can insist that we believe its propaganda on technology and innovation but holds the poor customer at fault for its own shortcomings.
DBS Digital Bank projects are not leaders in their respective markets
|In Indonesia||Registered mobile customer accounts|
|1||Bank Rakyat Indonesia||22.7m|
|2||Bank CIMB Niaga||6m|
|3||Jenius, by BTPN||1.2m|
|4||DBS Digibank||460,000 (including 160,000 acquired from ANZ)|
|1||PAYtm||44m (out of 250m payment wallets)|
|3||Yono by State Bank of India||5m|
Source: Asian Banker Research
DBS Digibank numbers suggest that it has practically fallen out of the race in Indonesia. Same for India, except that it incorporated a wholly owned subsidiary to try and scale this forward (so, should we call it a lending business?). But this compounds the risk it is exposing itself to which in DBS CEO Piyush Gupta’s own words is a “poison chalice” because he knows well that no foreign bank ever succeeded in India. It also changes the nature of DBS problems from a digital one into a balance sheet one. On this front DBS becomes victim to the cost of funds wars in these domestic markets which it will never win.
Every award citation I have read on DBS digital banks in India and Indonesia praise the bank without drilling down to a critical assessment of the risks it is taking. To give awards to DBS for its digital activities in India and Indonesia is an insult to the leaders of the banks and disruptors in these respective countries themselves. It is not as if the major commercial banks in these countries have been sitting idle and waiting to learn from the mighty foreigners from Singapore. They are pretty smart people themselves. The smaller the number of customers, the higher the per customer acquisition and management costs.
There are several questions to track here. Firstly, how do these digital banks get entrenched into the new digital ecosystems as ride hailing, food delivery etc arising in India or Indonesia? As a foreign bank, there is no way that a DBS can scale in these countries as it does in its home ground, without plugging into a local ecosystem. Secondly, is what is the residual value of DBS’s Digibank if it is eventually liquidated or sold in the countries it operates in. Thirdly, what value does it create for the bandwidth of talent in its home country if it hires 2000 programmers in another? Maybe Digibank could have been incorporated differently as a collaborative IT project with fintech start-ups incorporated in Singapore instead of as a bank, to soak up the talent in the country. The answers to these questions will be more instructive than any award the bank can aspire to.
- DBS still has the longest queues at its branches of any bank in Singapore. The ATM queues have fallen precipitously after the launch of PayNow and other peer-to-peer payment infrastructure. I need to ask my research staff to give me the actual numbers of DBS customer-branch-ATM ratios, but the simple anecdotes I see tells me that this bank still deals with legacy in its core banking systems more than any other bank in an otherwise small country. Much larger banks, like China Merchants Bank processing 100 million customers as against DBS 5m in Singapore have taken most of their customers off the branch more seamlessly. The problem appears to be also because regulators in Singapore take a more onerous view of what banks can or cannot do, in the area of KYC and so on. But if we drew a table between DBS and a sample of other banks around the world, in the areas that DBS is proud of, it is no different from its peers, and in some areas DBS is still struggling with legacy. It is definitely not a leader.
- DBS API (Application Programming Interfaces) strategy sounds great in its promotional literature but the API strategies of almost all banks around the world are still nowhere near the APIs in the best practice of the cloud players, including Amazon, Microsoft, Salesforce, Huawei and a string of others. Here, banks are limited by their regulators from sharing their data more freely with their partners.
There was a time when banks in general treated their API partners as mere repairmen to solve their legacy antiquated core banking and mainframe hardware problems. DBS was the same, but it appears to have moved to the next level in working with its API vendors to make sense of the data in the bank and find simple functionalities like aggregating useless information. But even here, the API players themselves are assigned to roles that are not ecosystem builders. The real value of APIs is to treat customer data outside the institution as more important than the one inside the institution. Banks around the world should be recognised for their API initiatives only as far as their regulators allow them.
The litmus test of a working API model I set is that of a little 11 year old girl being able or allowed to build an app for her friends on a DBS platform, and at her whim. The regulator will not allow DBS to allow the little girl anywhere near the bank’s platform. Singapore is littered with opportunities where bank APIs can cut short to the real everyday applications, such as fee-collection at schools and condominium apartment managements but there is no evidence that society is changing as a result of the 350 APIs and more than 90 API partners it claims to have.
But DBS marketing is so smooth that it takes a while to figure out its substance. It claims to “partner lifestyle providers and accounting platforms from various sectors including shopping, transport, food and entertainment to embed itself in its customers’ everyday lives.” But even in the few commendable efforts, like integration with loyalty programmes with shopping malls, all the other banks in Singapore and elsewhere do similar things and banks like Citibank are much further down the road with simpler working models that are rolled out on a regional basis. Every single DBS API initiative takes too long, is too labour intensive, expensive and painful to implement, without actually rewarding the API partner, even after they go live.
Banks congratulate themselves too easily on APIs. Banks in general think that APIs are about themselves. Banks still imagine that the data inside the bank is more valuable than the data outside the bank. So they treat every API as a potential data thief, while giving APIs worksheets that are designed to solve technology problems the bank could not be bothered to solve itself.
- If anything, DBS is a fintech killer.
I don’t say this with any disrespect. It is the hundreds of fintechs that knock on DBS’s doors that get it wrong – since when was it the job of any bank to guarantee your survival? DBS, like all banks around the world, assess each innovation for its own survival and dumps the rest. That’s what pro-profit businesses do, and there are days when DBS behaves as a for-profit business. Yet hundreds of starry-eyed amateurs knock on DBS doors every day thinking that association with the bank promises them a great future disintermediating the industry. When I am a judge at fintech competitions, I disqualify these fintech startups before they even finish their first sentence as dodo birds.
At best, “startups” voluntarily absorb and externalise DBS’s operating costs. Generally, the DBS staff evaluating a technology to replace her job is paid more than the entrepreneur’s entire seed capital. At worst, the startups are just a new breed of IT vendors under-pricing their services while they are funded by venture capitalists who are benevolent one day and ruthless the next.
- DBS operates in a marketplace that is stacked in its favour by regulation. Every fintech payment transaction in Singapore must start and end with a bank account, hardwired by the MAS.
- It competes with fintech players on predatory pricing, giving up its own margins to compete on areas like FX. No fintech start up can compete with DBS on market share price wars in areas like FX.
- It hires 2000 programmers in India when the Government of Singapore is inviting Indian start-up entrepreneurs to relocate in Singapore by dangling financial incentives. The math does not add up here.
- The 2000 programmers also suggest that DBS wants to “build” and “own” as much of its infrastructure internally, very expensive, and which means that lower costs were never the issue in the first place. Only 1-2 fintechs have ever been onboarded at DBS. The rest are decimated by zealous DBS employees who are not going to lose their own jobs to a cheaper alternative, and so their first instinct is to suck the ideas out of the fintechs and incorporate them into their jobs before even considering respecting the source.
- DBS does not demonstrate if it subscribes to “open source” practices that can demonstrate how it utilises and contributes to the startup community.
- Neither does it set up any fund to invest in fintechs or start-ups to learn from it. A good cross-section of great banks have start-up investment funds to invest in start-ups and learn from them: ING – ING Ventures, Santander – Santander InnoVentures, Banco Sabadell – InnoCells, ABN AMRO Bank – ABN AMRO Digital Impact Fund, Citigroup – Citi Ventures and Goldman Sachs — Goldman Sachs Strategic Investments. They put their money where their mouth is. They also demonstrate to the rest of society the bets that they are taking on the future.
- Much of DBS innovation programmes and hackathons are run from a marketing budget, not a technology replacement or investment budget. These activities do not result in much more than a marketing exercise to show off that DBS is in the business of innovation, while the startups don’t have a chance of raising funding or scaling to the next level. Even these activities are subsidised.
Also, the APIs of British and European banks do more with partners in the cloud than a DBS does because of permission-based sharing of customer data, which the MAS is putting in place step by step. The MAS does take the lead in very specific operational areas such as the ASEAN payment initiative, but which has dragged on for too long because each of the regulators in this group pursue their own self-interest.
Having said that, it does not mean that not being a “leader” is a bad thing or that Open Banking and PSD2 are going to result in better financial systems. These are still a work-in-progress and open to debate as to the future they are creating. The UK, always appears erudite in promoting liberal, left leaning policies, but as the case of unbridled privatisation showed in the 1980s, the states that took a more measured approach, like Norway and eventually China, were able to construct a considerably more sustainable economic model for their people than the country with the original idea. Although the UK’s Open Banking regulation may have unleashed considerable energy for now, one can argue that much of it has destroyed rather that created value to shareholders and customers in the short term, just like privatisation did in the old days. So the jury is still out whether the “Best Bank” will come out of the UK system or more conservative ones like Singapore.
All of the innovation flaunted by the UK neo-banks appear to be nothing more than digital marketing in on-boarding customers, but they are laggards to Asian players on the product, relationship and ecosystem fronts. For more real transformations, you have to visit Chinese cities like Shenzhen and Hangzhou, where finance is firmly embedded as a subset of functioning ecosystems such as manufacturing, distribution, healthcare and civic society. But still, there are residual initiatives, such as the standardisation of API platforms by the UK Open Banking Consortium, that are instructive. The UK is great in setting standards and structure in finance as in tennis.
The best thing that can be said about regulation and the state in Singapore is that while they are not leaders, they are indeed great followers and even great aggregators of the best trends around the world. It’s just the way this little state works. Whether it is the casinos industry, or the annual F1 race, Singapore’s policymakers used to snigger at these activities in other neighbouring countries until they figured out how to hone them to achieve their own goals, which they executed very well indeed. For this reason, it is worth keeping a watching brief on how Singapore will evolve in finance.
There is however an important overarching trend that the MAS has been stealthily pursuing and that should be discussed extensively in regulatory and policy makers circles. If the MAS had its own way, the entire economy would be “bank-centric”. This tendency of regulators to try and hardwire an entire digital economy around their own architecture of the world is not well appreciated because whenever a regulatory agency throws around inane phrases like “innovation” and “liberalisation” we imagine that they mean what the phrases intend them to mean. It is my view that the MAS means exactly the opposite. They mean “control” and a “bank-centric” eco-system.
At first glance, the “bank centric” approach does not come across very clearly, because the MAS treats the securities, banking and insurance industries slightly differently from each other for historical reasons:
- the securities industry appears more “liberal” in Singapore, because the original intention was to shake off traditional “remisiers” to the regulated exchanges with electronic channels. Any fintech players that can aggregate, users and/or trades are welcome. The exchanges themselves are regulated entities, so they are not in any danger of being disintermediated. In fact, real innovation in the national central depository, where the records of all trading accounts are kept in old fashioned silos, is still a work in progress.
- the core businesses of payments and credit in the banking industry are where all new players are tightly orchestrated by the MAS to be increasingly “bank centric”. This has some unintended consequences that affects our perception of what is a “Best Bank” in a digital economy, because the legacy banks and their partners benefit regardless of the innovations introduced.
- Innovations in the insurance, wealth management and other data centric industries, are still in their early days, but which can potentially also become “bank centric” as the banks themselves have been aggressive, to dominate the role of distributors of financial services. With greater digitisation and transparency, insurance and wealth do not have to be expensive products and can even be self-directed. But the local banks are encroaching into this arena, to capture a role for themselves, although I must say that this area is playing out to be more equitable because the non-banks have been pushing back.
It is my view that if the MAS had its way, one or several of the three local banks would become the all-encompassing Google, Alibaba or WeChats of Singapore. In 2017, obviously concerned about the overwhelming success of Alipay and WeChat as all-encompassing platforms in China, the MAS actually tried encouraging the local Singaporean banks to set up retail e-commerce platforms themselves.
When the fintech company, TransferWise, introduced a remittance product in Singapore this year, it could only originate customers who already had a bank account. TransferWise does not need a bank account in Europe, the UK and several other jurisdiction. It was founded on its original model of swapping foreign exchange on its own float in the different countries it operates in without the need for banks. But in Singapore, the final transaction cost of a TransferWise transaction adds that of the bank account or Visa/Mastercard.
Players accepted into the MAS “sandbox” for payments are mapped to originate or complete their transactions from banks, The point is that the original innovation is then killed, and it adds cost to the transaction while generating a new revenue stream for the traditional banks that they did not have before. The recent Payments Act 2019 simply demonstrates that they are not leaving anything to chance that as soon as any value of exchange, or worse, digital wallets, come into being, they will be assigned to an entity the MAS can regulate. The MAS is not alone in this. Around the world, every regulator wants control, and it comes with several unintended consequences.
The first is that it keeps alive a whole string of legacy players who should have been disintermediated by now. I am truly surprised how every single innovation in payments, remittances and money exchanges ends up having legacy Visa and Mastercard as “beneficiaries” at the back-end just because they are the payments rails for the Singapore banks. The money exchange app, YouTrip, can work just fine without having to link up with Mastercard. In fact, the linkages with Transitlink, the commuter payment platform, gives it the critical mass YouTrip needs to scale in Singapore. In fact, its MasterCard affiliation is a distraction. But somehow these new players are led to believe that having Visa or Mastercard is good for them, and helps them go-global. This is totally not true if we study how gaming tokens are becoming currency today, and so Singapore is potentially rejecting possible outcomes that may be more relevant to the digital economy as it evolves by making e-commerce more “bank centric”.
Legacy players like Visa and Mastercard are not just more expensive, they are broken. There was no way that Alibaba’s “Singles Day” e-commerce digital shopping spree in China could have achieved $38b in sales in one day to 500m customers at 90,000 transactions per second using the Visa/Mastercard platforms that runs at a mere 20,000-30,000 transactions per second with self-imposed friction for online transactions. The operating mechanism here is not payments, but the digital social eco-system that needs to exist in all future digital economies for new social phenomenon to be created.
But Visa/MasterCard still loom large in the global payments system today by whispering into the regulator’s ears everywhere they operate. In the 1990s, they promoted PIN-based debit cards, just to internationalise their European infrastructure. All regulators believed them. In the 2000s, they changed to promote signature-based debit cards as being just as safe as PIN-based, to support their consolidation of credit and debit transactions into one platform, and both at the same transaction price. Regulators believed them again. It was Visa and Mastercard that discredited the use of QR codes many years ago by claiming these were insecure, promoting their own Near Field Communication (NFC) technology from Japan instead, prolonging their own existence at the Point of Sale (POS). Regulators ate out of their hands on this. Today, they promote NFC contactless cards and suddenly the physical card is safe without the signature or pin they promoted before. In a huge battle of East versus West in finance, it took the sheer size of China to demonstrate that there was nothing wrong with the QR code and that a whole new world that facilitated entire digital ecosystems deep into society could emerge without the need for banks in the transaction.
But the influence these card companies sway on some regulators continues. They are always there, at fintech festivals, appearing that there is no difference between them and the disruptors who have technologies that invalidate them. In the US, Visa and MasterCard continue to hold a stranglehold on the economy, and new, more sensible players like Venmo are barely able to break through profitably precisely because of the hold that local banks have on digital payments. As in Singapore, the more digital the US economy, the more ‘bank centric” it becomes. Visa/Mastercard benefit as digital transactions get routed through them. PayPal plays it safe by supporting only the banks and the card companies, thus extending the life of the US archaic payments industry into the digital age and eschewing all of the innovations that the US sees taking place in other countries.
Similarly, the Singapore banks use their position in the “bank-centric” economy, by promoting the more profitable Visa/MasterCard than their own NETS (the consortium that processes the on-us ATM and POS transactions of its member banks) or local companies like Transitlink or other innovators who could have easily evolved the payments processing game faster, cheaper and further by either inventing or buying new technology. Even public transport in Singapore was persuaded to accept the use of Visa/Mastercard NFC cards before domestic debit cards, oblivious to the consumer that they were more expensive. Because of the distortions that legacy players present, I think that neither Singapore nor the US are the countries where you will find the “world’s best bank”.
The second unintended consequence is that banking regulators in general and not just Singapore, appear to be taking the approach that digital finance has to reach a desired state that they will define before the rest of society can function. This slows down everybody else, including other agencies tasked with regulating and promoting a whole range of social infrastructure, supply chain, distribution, healthcare and government services. We will see this as new technologies arise in AI and 5G, where the evolution of society will be more fluid, and the banking regulators have to change their desired states yet again and yet again. They will not be able to cope with the speed of continuous change.
There are glimpses of the inefficiencies these create, even now. Singapore still uses an embarrassing 1980s vehicle toll-gate payment system called ERP (what it means does not matter) where smart cards are still uploaded manually at ATMs when in Dubai, France, Sweden, Hong Kong and other territories, payment tokens and devices are routinely uploaded with money automatically. This affects the MAS working relationship with other government agencies, as they would have had to wait for the MAS to get its payments infrastructure right before they could move on areas such as Smart City, healthcare, logistics and digital government.
Also, as Singapore has just one regulator overseeing everything from the Singapore dollar to digital banking, one can only imagine the tremendous strain it creates within the regulatory organisation itself, tearing it in every direction, instead of making the journey to building a digital society a collegiate one. There is almost no discussion on many of these important areas in the future of regulation itself – or at least, not couched in the way I have outlined above. The regulator wants to transform the world, but who will transform the regulator?
So far, the Singapore banks got nowhere on this “bank-centric” approach, because if they did, it would have emboldened the MAS to put finance in the front and centre of the digital economy. Alibaba would have been invented by a Singaporean bank. Google would have been invented by a Singaporean bank. In blockchain and everything else, bankers have been trying very hard to keep their own roles central to the transaction, and thankfully neither the banks nor the regulators have anything to show for it except POCs. But the people who want to get on with permission-less supply chain, the manufacturers and distributors, need finance to be the seamless last mile that nobody worries about.
In a supply-side industry like banking, the word “customer” does not refer to any real person. Many bankers have never met one. It is a bogeyman hurled around by bosses to get the intended responses from an audience or a subordinate. At the end of the day, there are only three simple things that the real “customer” needs to know about the so-called revolution in finance:
That the fintech revolution destroys prices – the utility cost of everything, including finance, tends towards zero (new age institutions prove that they can destroy prices and still be profitable)
That the fintech revolution destroys intermediaries and makes finance ubiquitous – available to everyone and everywhere in the digital world (financial inclusion falls under this category).
That the fintech revolution makes finance serve seamlessly into the digital economy, and not define it. DBS CEO Piyush Gupta’s mantra of “less banking, more living” that he repeats to all his staff and in his speeches is absolutely spot on. Many delegates at banking conferences are inspired when he articulates visions of this “customer centric” world. But I don’t think he can imagine a world where DBS is not central to the transaction. Like Moses, he is the man who gets the concept right, but he is not the man to bring the industry into its promised land.
Against this background, for all his limitations, I would still say that Piyush Gupta, the CEO of DBS, has to be recognised as a man of his time. A leader who has made the most of his role in a highly regulated industry. We cannot take it away from him, that DBS is the culmination of an esteemed career, honed by a great instinct for a very technical industry that is unmatched. Under his leadership, DBS key bottomline indicators as a business, its profitability ratios and its share price, are amongst the highest for banks anywhere in the world. If there is an objective, quantifiable ranking for the “world’s best banker” in my estimation, he would rank highly. I do not say any of this frivolously.
The fact that I am able to discuss the issues I have identified here at a very high level of sophistication is possible precisely because Piyush has raised the bar, at least in the rhetoric. Piyush may not be the person to make some of his own beliefs a reality, but he is the one who has put those issues on the table so that the institution and even the country as a whole can carry those beliefs into the next generation. He also had the sublime support of a chairman whom I respect deeply as I am familiar with his own professional journey. It will be sad to watch him discredit his real achievements by craving for meaningless “awards”.
His own constituents, his customers, still don’t recognise him, despite the awards. Singaporeans may still have not forgiven that JP Morgan imposter, John Olds, who had never run a commercial bank in his life, but who was presented to them as the “foreign talent” they must all aspire to. But without leaders like Piyush, DBS Bank would be a moribund backwater company, the laughing stock of the developed world. Singapore is very fortunate to have him, but they don’t know that. That ranking in the HBR’s 100 top CEOs for 2019 at position 83 is well deserved.
But just to put this whole assessment of leadership in context, I would also venture to say that on the same metrics, the former Singaporean civil servant, Liew Mun Leong, would also belong in that HBR list, as he scaled the assets of Capitaland from almost nothing into a $80b world class property management company, and with much less “sweat” than DBS, given that it is also an operationally intensive business. Capitaland is an asset management, capital market, property management, retail, cities building behemoth – as complex as any bank. DBS sweats too much, spending millions nursing legacy technology while at the same time trying to march an army of employees into the 21st century. It can move faster with fewer employees doing simpler things.
But Mun Leong probably didn’t hobnob with US corporate titans in the Business Roundtable or sign climate change commitments to be noticed. China PingAn’s Peter Ma Mingzhe, also belongs to such a list of great bank leaders, except that he does not speak enough English to explain what deliberately transforming a financial institution with 500 million insurance and 200m banking customers (as opposed to DBS meagre 5m) feels like. There are leaders out there who are making transformational change on a totally different scale, and even I wonder how their minds work, how their organisation moves so seamlessly.
But exactly in that same HBR ranking is another world class CEO of Indian descent whose leadership in transforming his business into the cloud business model is particularly instructive to Singapore. Shantanu Narayen, at no 6, was one of the first CEOs in the software world to transform his Adobe from a software sales company into a subscription-based ecosystem. He was one of the first of the software players to take his organisation through the grueling and frightening shift from destroying a perfectly functional product sales focus to a new world driven by a subscription-based community that the new cloud world required. Microsoft followed much later. It is this change that Piyush did not manage to achieve with DBS. I would have had more regard for Piyush if he had taken the bank on a similar journey, eschewing the Manulife relationship for example, and recreating the balance sheet for the future while the going was good. That for DBS will be another chapter in the future, Piyush can only set the stage.
So while Shantanu reflects the future of his industry, Piyush’s leadership reflects the glorious past of finance. I always tell the story of Kodak, which is instructive here. It was Kodak that perfected the digital film in about 1992, just like DBS can claim to have actually absorbed the digital revolution today. For seven good years, Kodak’s share price continued to rise as it pursued a dual strategy of selling its digital technology to one category of customers and selling its old fashioned 35mm physical film to the masses, just like DBS talks digital and its share price continues to rise while benefiting from old fashioned NIM at the same time. When the decimation came for Kodak, it came with a vengeance as its share price spiralled down from 2000 to bankruptcy in 2010 as everything from Sony digital cameras to Facebook, YouTube, the iPhone and Instagram transformed the digital film industry.
On the day that Piyush leaves DBS, nothing will happen on the digital front – nothing at all. It will still be just the largest mortgage player in Singapore, its position on the day it inherited the POSB franchise in 1994. The NIM from its domestic and Hong Kong businesses fund everything else on its balance sheet– all the scary trade loans to Chinese corporations and all the brilliant loans to India and Indonesia even as it tried to tie them to the “supply chain” story – they are all just loans. We will all realise then that in substance, DBS was only a good old fashioned trade loan business masquerading as digital.
Piyush did bring it so far as to make his employees and Singaporeans in general to think about digital, but the balance sheet never made that journey. In some areas, such as pioneering supply chain financing, he is ahead of his employees. The younger ones will only realise what he was trying to teach them long after the DBS story is over and they are reinventing themselves in new ways in new organisations in the future. In all things digital, DBS really looks no different from the bank next door. Many banks can claim to have achieved what DBS has.
In this regard, it is not just DBS, but Singapore as a digital economy as a whole that needs a total and brave deconstruction in order to ride the future. Singapore’s government-linked corporations, of which, DBS is the last bastion of profitability, are missing the chance of truly reinventing themselves from the institution-centric model into a networked one that absorbs the talent that exists in this country’s amazing people.
Singapore as an economy did really well in the 1970s when attracting multi-nationals MNCs was the formula to follow. Then as the MNCs themselves morphed, fragmented into even greater specialisation and moved to cheaper locations, they stopped giving Singapore’s Economic Development Board (EDB) the kind of headline numbers it so craved. Then there was a focus in externalising the GLCs. For a short time, companies like Keppel Corporation and Sembawang became world leaders in the maritime industry. Today, corporations of all kinds all around the world are struggling to be the profitable behemoths they once were, not just because of the Chinese threat, but because profits elude entire industries unless they disintegrate into nimble communities that can respond to shifting opportunities without having the cost overhang of an institution. When a GLC monopolises all the talent in an industry and institutionalises them, it reduces a whole nation of professionals into mere employees, and the very wealth it seeks to generate eludes it because the networked economy today punishes the institutions and empowers the individual.
This is why my assessment of any bank’s relevance to its domestic economy is important. Licenced monopolies like DBS still behave as if the corporation is stronger than the community. Within the context of a protected industry, Piyush has pampered the DBS employee to imagine that they are indeed competent, creative and able to survive the onslaught that is to come, when all that they are is a cost to the company, while the truly talented sit just outside his swanky offices, foolishly carrying DBS’s operational costs on their own laps voluntarily. Many DBS employees need to be told unequivocally that they deserve to have their jobs and their salaries decimated by the smarter, hungrier fintech entrepreneurs they just said “no” to at the negotiation table, if not for the protection of the MAS.
Piyush’s tapped successor, Tan Shu Shan, through no fault of her own, is a consummate professional whose career has been honed in her area of specialisation. All bankers are. This poor lady struggles every day to keep up with Piyush’s own mental orientation in transaction banking, but keeps falling back into her own bias, where the solution to every problem is a private banking one. A private banker running a transaction bank is likely to rake up per transaction cost, very simple. But we also live in a world where one billionaire can chase the global venture capital industry up and then down the valuation slide riding his own stupidity, as Masayoshi Son did recently, and his brother is rumoured to live in Singapore. The unicorns themselves are mostly imported from larger neighbouring countries. So, there is a place yet for Shu Shan’s view of the world.
It’s just that nobody in Singapore appears to be tracking the country’s own transition to understand where or how its next business leaders should come from or what they will be faced with in the future. If DBS is truly convinced that data, not money is its true asset in the future, then it should be looking at people like Tan Sin Ying, as its natural successor to take DBS to the next level, given her hardnosed experience at the helm of 500m Ping An, and no, she is not the result of the MAS useless foreign-country-work-experience salary subsidy programme. The best people are not created that way. They should discontinue this programme because it is unfair to the rest of society. Also, well paid professionals should look after their own careers.
At the moment, DBS needs a candidate of world class skill to take the baton from Piyush to the next phase of change, from traditional balance sheet lending business to a lower capital intensive, fee-based power house built into the social fibre of society. The real future leader of DBS is probably an irreverent millennial minded recalcitrant from the technology industry who has no love for banking, and who will annoy the MAS to death (no, I am not talking about Tan Min Liang, cute as he is).
The nicest thing I can say about Razer when it does receive that first digital banking licence (notice, how the MAS response to “innovation” is to licence still more banks only they can regulate) for Singapore is that it comes with the condition that it will not use its start-up capital to compete on existing product price wars. There are already examples of new “products” in finance that comes from the digital world that are too long to elaborate here, but people like Min Liang will figure it out, I am sure, and when he does, he can put Singapore’s next age financial services sector ahead of the US for sure, and definitely the UK in its current rhetoric.
I can see now, even as I write this, how Singapore has a way of absorbing a multitude of distracting ideas, muddling through imperfect processes, involving a host of annoying, egoistical and imperfect people, to rise to the occasion when the time comes. But the universe it creates is one that revolves around institutions like DBS, as opposed to one around its people, and this the networked economy will not allow.
In the meantime, the negative interest rates that we read about in Europe, and eventually in the US, will slowly start creeping into Singapore’s banking industry. It will end the NIM addiction that helps fuel the illusion of superiority that the finance industry enjoys today over the ordinary people and the struggling entrepreneur. Only then will we come to realise that the heights of DBS that it celebrates today are not its future but a picture perfect model of banking in its past, while the “best banks” in the world are quietly, unassumingly, disappearing themselves into the fibres of the networked society.