DBS Reckons Digital Push Can Bring Fintech-Sized Returns

All banks hire techies to manage back-end applications. However, the transformation at Singapore's DBS is both customer-centric and increasingly material for investors. The return on equity from traditional, brick-and-mortar banking customers is 18 percent, while it's 27 percent for digital, according to a presentation by DBS CFO Chng Sok Hui at a Credit Suisse investment conference.

Boosting the share of digital customers in its consumer and small-business segments in Singapore and Hong Kong to between 50 and 60 percent, from 39 percent last year, would raise the group's return on equity to as much as 14.5 percent -- a level Credit Suisse described as unprecedented in DBS's history.

The math is simple. DBS says it can earn income of S$1,300 ($993) from each digital customer, double the S$600 it makes from a user of traditional banking services. Meanwhile, it costs only 36 percent of S$1,300, or S$468, to give the digital client what she wants; the cost-to-income ratio for legacy business is 58 percent, or S$348.

So each digital customer is three times as valuable to the bottom line. As more users go digital, the previous peak of 12.9 percent ROE could well be exceeded.

CEO Piyush Gupta has bet big on technology. DBS has the largest application programming interface platform for third-party developers of any bank in the world. That API is being used by McDonald's Corp. to speed up payment for meals, to cite one example.

As I've written before, by fashioning itself as Singapore's answer to Ant Financial, the banking affiliate of Alibaba Group Holding Ltd., DBS could one day be offering third-party solutions that compete with its in-house offerings. It might even want to own a part of such successful rivals.

Setting aside for now the data-privacy concerns at Facebook Inc., API sharing and open banking are here to stay. The rapidly expanding multipurpose platforms built by China's BAT trinity -- Baidu Inc., Alibaba and Tencent Holdings Ltd. -- are making Singapore lenders take note of both the threat to their business from fintech and the opportunity to do some of this stuff themselves.

United Overseas Bank Ltd., the smallest of Singapore's three homegrown lenders, announced this week an online travel marketplace to link its card customers with booking platforms like Agoda Co. and Expedia Inc., as well as with deals from other travel partners.

DBS's current ROE of 9.5 percent is slightly worse than the median among banks with more than $50 billion market capitalization. A range of 13.5 to 14.5 percent would put the Singapore lender firmly in the league of Australian, Canadian and Hong Kong peers.

If fintech pays off for DBS, don't expect the shareholders to be complaining.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners. Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and To contact the author of this story: Andy Mukherjee in Hong Kong at amukherjee@bloomberg.net. ©2018 Bloomberg L.P.