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1 Potential Source of Growth for Singapore’s Banks That Could Be a Big Threat Too

Banks

With a population of just 5.4 million in Singapore last year, it’s easy to see why local banks might have problems trying to grow here.

As such, it’s only logical for them to explore foreign shores and that is why we see three of Singapore’s largest banks all having significant presence outside of Singapore; in 2013, the banks – DBS Group Holdings (SGX: D05), Oversea-Chinese Banking Corporation (SGX: O39), and United Overseas Bank (SGX: U11) – derived 37%, 38%, and 44% of their revenues internationally.

But despite the banks’ keen interest overseas, there might still be an area of growth within Singapore that they’ve not started exploring.

Since the advent of the internet age began in the late 1990s, it has changed the landscape for many industries. For instance, in the retail industry, it’s probably not a secret to find that e-commerce is now one of the fastest growing sectors within. Pure-play online retail giants such as Amazon (NYSE: AMZN), Alibaba, and ASOS (LON:ASC) (from the USA, China, and UK, respectively), are forcing many brick and mortar retailers to re-examine their business models in order to stay relevant.

In the payments space, companies that deal with online payment, such as Paypal, Square, and Alipay, are giving traditional cashless payment service providers, such as Visa (NYSE: V) and MasterCard (NYSE: MA), a run for their money.

With the banking industry however, online banking is still mainly just a service that traditional banks have added-on for convenience’s sake. But, that’s where big opportunities for the banks can be found. In Singapore, banks still build brick and mortar branches to service their clients even though most banking customers are able to meet most of their banking needs through the internet.

And, that’s an issue to be addressed because brick and mortar branches cost money – a big chunk of money. For instance, OCBC actually just launched a new branch in Orchard Road which cost the bank S$5 million to build. S$5 million might seem tiny compared with OCBC’s annual revenue of S$6.6 billion, but a million here, and a million there… it adds up.

Will we see the banks setup subsidiaries or operations that allows it to service its clients purely through the internet? In this way, the banks might be able to save costs that come naturally with running bank branches. Depositors can benefit too – with lower costs weighing the banks down, they might be able to offer more attractive interest rates on deposits. I might not be able to speak for everyone, but I know I would be happier if OCBC would raise its interest rates on my deposits rather than let me enjoy a S$5 million dollar branch in Orchard Road

In China, technology companies like Alibaba and Tencent have already launched online money market funds that offer much higher interest rates as compared to traditional banks in the country in a bid to offer an alternative to traditional banking. That move has been a great success: Alibaba’s money market funds attracted more than 80 million ‘depositors’ in less than a year since its inception last June. The monetary amounts involved aren’t trivial either with Alibaba cashing in US$90 billion in deposits between June 2013 and March 2014.

There’s nothing of the scale of Alibaba’s financial product yet in Singapore. But, it’s something the local banks might want to take seriously: It could be a great engine for growth and at the same time, help prevent fresh start-ups from threatening the traditional banking landscape.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.