In 2016, the National Bank of Canada (NBC) announced a landmark agreement to increase its equity in the Cambodian ABA Bank from 42% to 90%, effectively taking over the bank.
This is just one recent example of the deals done by overseas banks in Southeast Asia in recent years. Many more multinational banks are using smaller retail banks as a route into the burgeoning Southeast Asian consumer banking market. HSBC, for example, is hoping to grow revenue from Asia by at least $1 billion by 2020, after pouring $17 billion into the region.
Regional banks can’t hope to resist the invasion of much larger multinational firms. But they can work to retain their customers and build their value to attract multinational interest. Here’s how.
Why are Western banks moving into Southeast Asia's retail banking sector?
The Southeast Asian region is developing at a steady rate. Indeed, per-capita GDP across the 10-member Association of Southeast Asian Nations region is forecast to rise to more than $9,000 by 2030. Whenever a developing region or country is on an upward trajectory, the international community will look for ways to capitalise on it, often leading to significant economic boosts. Indonesia’s GDP growth is currently forecast to continue at a steady rate of 5%, for example. As a result, many international banks are including the country in their expansion plans.
Large foreign banks have traditionally shied away from the Southeast Asian banking market as it’s been seen as tricky and problematic. If they have invested in the past, it’s often been in the form of conservative bets focusing on existing compatriot companies in the region and larger domestic companies. However, many banks are bucking this trend by focusing on retail and consumer banking. The question is - why?
The move by NBC into Cambodia’s ABA Bank shows that banks in more developed markets are finding that catering for SMEs and individuals is an excellent way to establish a foothold before further expansion. Other examples are seen in the Bank of Ayudhya, which bought a majority stake in Hattha Kaksekar, Cambodia’s fourth largest micro-finance company, which might prove not only a strong entry into the Cambodian market but also to another emerging market - Myanmar.
Meanwhile, in 2010, France’s BRED Banque Populaire bought a 54% stake in Banque Franco Lao (BFL), a joint venture with BCEL, the largest commercial bank in Laos. Guillaume Perdon, BRED’s regional head for Southeast Asia, explained: “We try to grow with the local economy. For us, it is mainly SMEs. Retail also, but the most successful sector is the SME sector, where we can provide a competitive approach.”
Japan’s MUFG has extended its reach into Indonesia through its own corporate banking operations, but it’s also expanded into the retail space through investment in Bank Danamon. This allows MUFG to operate under its own name in the country and focus on its key corporate business. The desire for these major banks to branch out into new areas is fostering growth in the Indonesian banking sector.
As more countries continue to move along the development curve, they are starting to represent a lot of untapped value to multinationals. As we begin to see retail banks in countries such as Indonesia and the Philippines invest more heavily in new forms of payment and general digital transformation, the multinationals are going to start noticing the value that these banks offer.
There are 2000 banks in Indonesia, for example, but many of those banks are so small that they don’t even have a social media presence. These smaller banks will find it exceptionally difficult to prevent multinationals like HSBC, ANZ or Citibank from entering the region. Instead, they should view newcomers as a valuable opportunity: an incentive to build their value, reposition themselves as marketplace pioneers and attract multinational investment.
Beat them? Join them? A third way?
Incumbent banks in the region need to put a primary focus on building value, retaining customers and engaging in digital transformation.
In their ABA takeover, NBC chose the bank due to its strong strategy, effective operations and digital outlook, which has been particularly effective in a country where 75% of the population is under 35. John McGinley, managing partner of Mekong Strategic Partners, a Cambodia-based financial consultancy, said: “Rather than compete with the foreign banks at the top tier of the economic pyramid, ABA decided to go down and bank the SME sector. NBC came in as investors once the ABA strategy was up and running.”
Elsewhere, in Indonesia, the Bank of Central Asia (BCA) has also seen a massive uptick when it comes to digital service use in recent years. Jan Hendra, corporate secretary at BCA, says: “With the ongoing advancement in digital technology, BCA has seen more than 15 million digital transactions per day and transactions through digital channels contributed 98% of BCA’s overall transactions in the first three quarters of 2018.” Both of these examples represent a situation where they built value not only for the buyers, but for the customers too.
The challenge now for incumbent retail banks is to improve their offering to retain customers and market themselves as worthy acquisitions. They can do both by improving their customer experience and investing in digital transformation. 58% of APAC banks already aspire to be ‘digitally mature’ by 2020, which suggests there is positive momentum in the region. But what strategies should local retail banks choose to make themselves more attractive?
- Customer experience can benefit drastically from banks deploying more customer-centric business practices. This can work hand in hand with digital transformation by embracing more online services and investing in AI, as well as more digital infrastructure investment.
- Chatbots are becoming more common as a means for banks to deal with customers. In China, Xiaoi is a major league chatbot with 500 million users and 100 billion conversations to date that has seen widespread adoption across the financial sector. Chatbots are not only more cost-effective than traditional call centres, but for certain tasks, such as debt collections, they are also generally preferred by the consumer.
- The use of end-to-end debt collections software such as the EXUS Financial Suite can streamline debt collections and recovery and make collections not only more efficient, but also can give more detailed insight into strategies and resource efficiency. This is particularly useful in the APAC region, where debt collections is notoriously complicated.
- More local banks are launching their own mobile banking apps that wisely stay within the confines of what customers can already access. Bank Tabungan Pensiunan Nasional launched its mobile banking channel, Jenius, in 2016: essentially an extended version of an online banking account. Slow progress is better than no progress at all.
Riding the wave
With so much to gain, Southeast Asian retail banks shouldn’t be sharpening their knives against tier 1 banks: they should be sharpening their strategies, by improving their customer experience offerings and investing more heavily in digital transformation. Only then will they be able to stand out among the hundreds of other banks waiting to be acquired and transformed.
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