An Important Investing Lesson From DBS Group Holdings Ltd’s Latest Insurance Deal

Southeast Asia’s largest bank DBS Group Holdings Ltd (SGX: D05) has found a new partner for its bancassurance business.

Yesterday, DBS announced that Manulife Financial Asia will replace Aviva as its exclusive regional partner for life and health insurance products throughout Singapore, Hong Kong, China, and Indonesia.

The deal, which would last for 15 years, would commence on 1 January 2016. Through it, Manulife would be able to distribute its insurance products through DBS’s regional network of over 200 branches.

What’s interesting here are the terms of the deal: Manulife will make an initial payment of US$1.2 billion to DBS upfront (the amount will be amortised over the next 15 years) followed by variable payments that are based on the number of products sold through the bancassurance channel.

No matter how you look at it, the deal is a win for DBS. Besides being able to earn a fixed revenue of around S$107 million a year from it (US$1.2 billion amortised over 15 years), the bank can also use the US$1.2 billion initial payment to generate additional income.

Furthermore, the variable payments part of the deal can also possibly produce more revenue for DBS if Manulife can successfully sell insurance products through the channel.

And DBS has achieved all these without any need for significant capital expenditures. From the way I see it, there doesn’t seem to be any downside at all for DBS no matter how the partnership with Manulife turns out in the future.

So, what I have just described is the important investing lesson: The pricing power that a well-established platform can bring. This is seen in many other businesses.

In the past when newspapers were the main source of information for people, the papers controlled by Singapore Press Holdings Limited (SGX: T39) could flex their pricing-power-muscle over advertisers. That’s because the papers happened to have wide distribution in Singapore.

It is the same for the banking industry. When a bank has built up a large network with a huge customer base, many providers of other types of financial products would love to leverage on the network to distribute their own products and services.

Foolish Summary

The presence of a well-established platform can be an important competitive advantage for a company. When we’re looking out for investing opportunities, we can try to look out for such characteristics.

As DBS’s latest partnership with Manulife shows, a strong platform can help bring in very favourable business deals.

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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 writer Stanley Lim doesn’t own shares in any companies mentioned.