Vietnamese society is changing shape rapidly. Generation Z now make up 25% of the country’s 15 million-strong workforce, and the figure is growing.
But what does this mean for the country and its economy? This group has had access to technology and the internet since their early years - along with greater exposure to international ideas and cultural values than their older counterparts, large digital networks and a penchant for spending disposable income on activities such as eating out. And Vietnam’s banking system is starting to shift to reflect these values, behaviours and ideals.
Figures from the State Bank of Vietnam reveal that just 20% of the country’s citizens currently have a bank account, while just 3% own a credit card. However, with 53% of the population now owning a smartphone (the global average is 59%), Vietnam is one of the fastest growing markets when it comes to smartphone usage.
And there are already new banks capitalising on the opportunities that this combination of technological and demographic change offers.
The rise of retail banking in Vietnam
Public confidence in Vietnam’s banking sector is growing. In 2012, the government implemented a restructuring plan that saw state- and commercially-owned banks take over smaller, struggling banks, with the aim of creating one or two state-owned banks to fly the flag for the country’s financial sector. In addition, ten banks are set to adopt Basel II by 2020 (with Vietcombank and VIB already having applied the standards), giving Vietnam’s banking sector a fresh boost.
As public confidence grew, so did Vietnam’s focus on retail banking. Rather than focusing on traditional banking, the country’s first neobank - Timo - opened “hangouts” which blend banking facilities with coffee shops. As well as offering an environment where young professionals can socialise and grab a drink, Timo also allows them to open a bank account within just 10 minutes. From there on in, bill payments, money transfers and other activities can be managed via Timo’s mobile app.
Timo itself, however, is not a bank - while the company provides the tech, the regulated banking services are the responsibility of Vietnam’s VPBank. VPBank run KYC checks and are responsible for overdraft risk, with profits shared with Timo. It’s a partnership that gives VPBank access to this burgeoning retail banking sector, and allows Timo to compete, backed by an industry heavyweight.
Elsewhere, commercial bank BIDV was recognised as the Best Retail Bank at January’s Annual Vietnam Country Awards, organised by The Asian Banker. The country’s top bank by net income, BIDV now holds 17% of the country’s retail deposits, with customer numbers growing at a rate of 11% per year. This rapid growth is down to the bank’s focus on digital transformation: not only is BIDV open to partnering with new fintechs, they were also one of the first banks to introduce virtual cards, and have created a digital lab that has reduced transaction processing time from 42 minutes to just seven.
It’s not just bank accounts that are experiencing this transformation, but credit products, too. VPBank’s digital-only bank, Yolo, launched in late 2018 to help “youngsters and other active people experience a new digital lifestyle”. Its services including payments, lending and Mastercard - and connectivity to lifestyle services providers, encourage customers to spend.
Meanwhile at Standard Chartered Bank Vietnam, the country’s increase in CNP payments and e-commerce has led to the development of a virtual credit card. Reflecting an increased consumer preference for digital rather than plastic-based payments, the bank’s Head of Retail Banking, Harmander Mahal, says, “In line with our digital strategy, we have recently launched a virtual credit card for our clients. Here clients can instantly start shopping online with their virtual credit cards and enjoy special online promotions offered by the bank. The client feedback on virtual credit technology has been very encouraging and we plan to keep building on our virtual credit card platform.”
But while an increased appetite for unsecured lending offers plenty of opportunity and increased profits for Vietnam’s retail banking sector, it could also spell another financial crisis for the country if not carefully managed.
The risks of retail banking in Vietnam
For Vietnam’s state and commercially owned banks, success in the retail banking sector will require investment in new technologies, an overhaul of existing customer databases, and the ability to offer top quality customer service. This banking revolution is taking place in a country where bank loyalty is low: a 2014 survey by Ernst & Young revealed that Vietnam had the highest percentage of bank customers looking to switch of the entire APAC region, with 65-77% ready to shut their bank account and move to another bank.
While a focus on customer service would help to tie retail bank customers in, the country’s financial institutions are also focusing on the increased hunger for credit of Vietnam’s population to make a profit.
Digitalisation makes it easier than ever for consumers to apply for and manage credit products online. As a result, total outstanding loans for consumer lending account for 19.4% of Vietnam’s total outstanding loans, up from 3.8% in 2008.
Vietnam’s consumer finance market is set to be worth $44bn by 2020, making it unsurprising that consumer lending is on the up. CEO of Vietnam’s FE Credit, Kalidas Ghose, says, “Rising incomes and growing aspirations among the population also give impetus to the higher demand for financial products and services, especially those that support consumption”.
For the country’s retail banks, it’s the chance to experience a huge jump in profitability - especially with the consumer credit sector set to grow by 30% each year between 2018 and 2020. But can that credit be managed without the risk of delinquency sending the entire sector crashing down?
In China, the outstanding balance of online consumer loans increased around fivefold between 2015 and 2017, driven by innovative new lending platforms and relaxed consumer lending regulations. However, this has now left some of the country’s lenders with a bad loan rate of over 40%, causing widespread concern.
With Vietnam seeing a similar surge in interest in consumer credit, how can the country avoid a similar predicament?
Debt and debt collections
The answer is not to shun unsecured lending altogether, but to ensure that there is a solid strategy in place that is equipped to deal with a potentially sizeable increase in NPL numbers and values.
It's clear that Vietnam's banking present and future are digitally led, with younger generations of bank customers preferring to use mobile devices and online solutions rather than visiting bank branches or dealing with bank staff face to face or over the phone. With this in mind, it stands to reason that technology should underpin the debt collections process, too - both from a customer-facing point of view, as well as internally.
For customers, the ability to access their credit accounts and manage repayments via a self-service portal would cement a retail bank’s brand image as being forward-thinking and customer-centric. With customer choice and flexibility at the heart of such a system, it could also significantly reduce the likelihood of a customer spiralling into delinquency.
But it’s not just the customers that technology can better serve - it’s the retail banks themselves, too. With the right collections system in place, a bank can create models that highlight when a customer is exhibiting behaviours that could lead to bad debt or trial different collections tactics for different demographic groups, as well as helping to boost collections performance in a huge number of ways.
For existing banks and challengers alike, Vietnam’s retail banking explosion has the potential to be a very good thing indeed. A focus on targeting the younger demographic that’s hungry for a different approach could bring with it not only a new target audience and increased profitability, but also a potential improvement in banking customer loyalty.
However, without a solid collections strategy in place to manage the country’s increasing number of credit customers, Vietnam’s hard work to reverse the effects of its 2012 banking crisis could all be undone, spiralling the country into significant debt.
Vietnamese banks may be hungry for change - but are they truly ready?