Global Courant 2023-05-15 14:14:48
The digital banking ecosystem among Southeast Asia’s approximately 687 million residents is diverse.
Some ASEAN members, including the more developed ASEAN-5 economies and Brunei, have well-consolidated financial services sectors, while others – especially in their rural areas – have large unbanked populations. Traditional banks and fintech startups are increasingly turning to digital banking to solve this problem, but several issues require more regulatory oversight.
Digital banks have proliferated in Southeast Asia and financial authorities in Singapore, Malaysia and the Philippines are trying to spur financial innovation by supporting fintech growth without compromising financial stability. Some of these initiatives include digital wallet rules, peer-to-peer lending, application programming interfaces, digital banking licensing frameworks, and regulatory sandboxes.
Digital banking adoption is influenced by many factors, including unmet customer needs, technology adoption, talent and national identification systems. The World Bank estimated that the region’s connectivity rate of 133% contrasts with only 27% of the population having a bank account. It’s estimated that 80% of Indonesia, the Philippines and Vietnam, and 30% of Malaysia and Thailand are unbanked.
Traditional banks such as the United Overseas Bank and Commerce International Merchant Banks are increasingly using technology to compete with online banks and fintech startups. But with increasing mobile connectivity, monetary authorities – including the Monetary Authority in Singapore – tend to license digital-only banks and incentivize fintech startups to compete with traditional banks.
The number of fintechs in Southeast Asia increased from 34 to 1,254 between 2000 and 2022. Southeast Asian fintechs have a cumulative total of US$4.8 billion in equity funding – the bulk of these start-ups are based in Singapore.
Singapore’s position as a financial center and the region’s leading digital economy for technology-driven innovation make it one ideal choice to observe the motivations and challenges for technology transformation in financial services.
In December 2020, the Singapore Monetary Authority awarded digital full banking licenses to Mari Bank from GXS Bank and Sea Limited and gave significantly entrenched foreign banking privileges to Trust Bank to create competition for traditional incumbents and encourage financial innovation and digital banking.
These initiatives prompted the three largest traditional banks in Singapore – namely the Development Bank of Singapore (DBS), Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank (UOB) – to accelerate their transformation processes. With high overheads, traditional banks need to transform to compete with fintechs on costs, products and services.
DBS approached this challenge in its journey to become a technology-focused company by partnering with cloud computing provider Amazon Web Services to retrain its workforce in digital tools, artificial intelligence (AI) and machine learning. More than 3,000 DBS employees — including senior executives — were trained in innovative technologies.
DBS distinguished itself by developing 85% of its technology in-house – rather than outsourcing – during the transition of the cloud-based technical infrastructure. Data is used for personalized intelligence and analytics to enable a better understanding of customer needs and expectations. DBS industrializes the use of AI and machine learning to enable differentiated customer experiences.
Essentially, DBS had to operate like a start-up and embed an appropriate start-up organizational culture – a particular challenge for established banks moving into the tech space. By leveraging a hybrid multi-cloud infrastructure, DBS aims to reduce infrastructure costs by adapting its architecture to the cloud and reshaping its processes to be customer-centric.
In this context, Singapore’s Smart Nation Initiative “Singpass”, a digital identification framework, could play a key role in enrollment and authentication. DBS has become a technology company, allowing flexibility to experiment and make changes faster and integrate with customer systems.
For example, DBS and GovTech are teaming up to test Singpass facial authentication technology for faster digital banking signups among seniors aged 62 and older.
During Singapore’s post-Covid-19 economic transition, DBS created the DBS Digital Exchange to manage its integrated digital ecosystem. Self-directed trading is possible via the digibank app. DBS and JPMorgan also co-founded “Partior” as a blockchain-based cross-border clearing and settlement provider that uses smart contracts to transform the future of payments.
Before experimenting with intelligent banking, DBS built its own AI machines using an integrated approach. This combines predictive analytics, AI and machine learning, and customer-centric design to turn data into hyper-personalized nudges to help customers make informed decisions.
Because DBS provides “insights” and “nudges” for customers on its digibank app, the technology must be consistent and reliable. But despite spending billions on technology, training, contracting from reputable suppliers, and using proven technology, DBS still ran into technical difficulties along its digitization journey.
On May 5, 2023, DBS online banking and payment services were disrupted for the second time in two months. Earlier, on March 29, 2023, DBS lost power, disrupting digital services for 10 hours. These two outages come 16 months after a November 2021 outage that lasted two days and caused access problems to the bank’s checking servers.
The DBS Digital Exchange is 10% owned by the SGX exchange in Singapore. Image: Twitter
Before the 2021 outage, the Monetary Authority required DBS to apply a multiplier of 1.5 times to its risk-weighted assets for operational risk, representing $700 million in regulatory capital to ensure adequate liquidity.
As traditional banks like DBS digitize and embrace technology, they must have robust business recovery and continuity capabilities built into their digital frameworks. Regulators such as the Monetary Authority have pushed digital transformation, emphasizing the need for banks to continuously review their digital banking infrastructure.
But regulators also need to monitor and oversee the digital processes and transformation models.
Dr. Faizal Bin Yahya is a Senior Research Fellow at the Department of Governance and Economy, Institute of Policy Studies, National University of Singapore.
This article was originally published by East Asia Forum and has been republished under a Creative Commons license.
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