Thailand courts the digital generation

Tan Choon Hin knows a thing or two about Thailand’s millennials, or the “digital generation” as he likes to call them.

“Thailand’s millennials are mobile-first,” the president and chief executive of UOB (Thai) tells Asiamoney. “They expect an effortless and engaging digital experience. They want their banks to be simple and intuitive. And they appreciate an element of fun; more so than the older generation.”

Which is why Tan and his team took their inspiration from social media companies when they launched Thailand’s first mobile digital bank – which, needless to say, targets millennials.

“Every customer gets to see a customized interface when they log into the TMRW app, similar to how Facebook serves its users a newsfeed relevant to the user,” he says.

TMRW (pronounced ‘tomorrow’) was unveiled in March 2019 and uses features ranging from next-generation artificial intelligence and machine-learning data analytics to the latest facial recognition technology.

Tan will not disclose the exact number of customers, but it is already clear that the opportunities are huge for UOB and for other banks making a digital push. Millennials account for a third of Thailand’s 69 million-strong population and will play an important role in the country’s economic development in future.

Most banks take a gradual approach to digital banking, either by encouraging customers in their physical branches to increase their use of mobile apps, or by introducing smart branches that reduce the need for human interaction. But TMRW has no physical branches.

“TMRW allowed us to reach a new segment of the market that we were not able to target before,” says Tan. “We are a medium-sized bank in Thailand, with 155 branches. This is considerably less than the big local banks.”

The bank has about Bt614 billion ($19.6 billion) of assets in Thailand – so it is less than a fifth of the size of market leader KasikornBank, which has Bt3.5 trillion – but it is part of a quiet revolution of banks and tech companies trying to change the way that banking is done in the country.

The new generation includes fintech companies such as TrueMoney, which is a regional payment platform owned by Ascend Group, a subsidiary of Thailand’s Charoen Pokphand Group. TrueMoney’s e-wallet app is used by 30 million people in Thailand, Cambodia, Myanmar, Vietnam, Indonesia and the Philippines.

Then there is J Fintech, a personal loan provider and collector of bad debt; in April, it announced that it was selling a 51% controlling stake to KB Kookmin Card, the Seoul-based consumer loan provider, subject to government approvals.

“Change is happening very quickly,” says Talublugkhana Thanadhidhasuwanna, senior analyst at Krungsri Research in Bangkok.

“Banks are being forced to transform their businesses and to shift as rapidly as possible from their older models of business organization to one in which they too are platform businesses.”

Talublugkhana, who previously worked as a senior economist at the Bank of Thailand and as a consultant at the World Bank, spent almost three months putting together a report that specifically focuses on payment systems. She concludes that banks must either “collaborate with tech companies to acquire new platforms that can deliver financial services cheaply and efficiently, or plough huge amounts of money into developing their own platforms.”

Her findings are perhaps most relevant to the retail banking business, which is easier to shake up than corporate and investment banking businesses founded on longstanding and important personal relationships. But retail banking is also the area that appears most ripe for disruption.

“For the past 10 or 15 years, Thai banks have generated lucrative fee income from the middle class,” says one industry insider. “But this market is being cannibalized by the roll-out of digital platforms. How can the big banks compete with tech companies who are producing third-generation apps? I don’t believe they can.”

Banks around the world are moving away from legacy systems and embracing quicker, better and cheaper technology. But why has it taken so long for Thailand to take a step in this direction?

By some measures, Thais are enthusiastic users of technology. There are 93 million mobile subscribers in Thailand, according to the Global Digital Report (2020) conducted by social media management platform Hootsuite and WeAreSocial. That’s equivalent to 134% of the total population. Then there is the fact that Thailand has 52 million internet users. On average, Thais spend nine hours a day on the internet via their various devices.

But when it comes to payment systems, Thailand is way behind the curve. Whereas almost two thirds of total payments in Singapore go via payments systems such as cards, digital wallets or other forms of e-payment, in the case of Thailand, the latest official figure from the central bank is below 10%.

An important caveat is that this figure dates back to late 2017. An arguably even more important caveat is that in the wake of the Covid-19 pandemic, the use of digital banking services is likely to have increased dramatically. But Thailand is still well behind where market participants say it should be.

Suchart Techaposai, head of research at CLSA (Thailand), says part of the reason is the country’s rural-urban divide.

“The majority of Thai people who live outside of Bangkok and the neighbouring cities are still cash-based,” he says. “Only urban people rely on online banking or e-payments.”

Suchart thinks this will change as more banks expand their digital banking capabilities and as people in rural areas “become more familiar with e-payments and mobile banking applications.”

But there are other factors to consider. Kongkiat Opaswongkarn, chief executive of securities house Asia Plus Group, points to the unique culture at the Thai commercial banks.

“You have to look at their CEOs,” he says. “They come from conventional banking backgrounds. It is very difficult for them to make a judgement about digital transformation as an urgent matter.”

Kongkiat also points out that competition in the banking industry has been low relative to, say, Singapore or Hong Kong. Thai banks enjoy net interest margins that are among the highest in the region so there has been little incentive for them to spend heavily on technology innovation.

“With the exception of a couple of banks, I don’t think they can catch up fast with the digital revolution,” he says. “They have been left behind.”

Such issues can be addressed when consumers and executives wake up to the potential of digital banking, but there is a more problematic disincentive – tax.

“The only thing more popular than soccer in Thailand is avoiding tax,” says one senior foreign banker in Bangkok. “We have one of the worst tax payment systems in the world. How many people in Thailand actually pay tax? The Revenue Department used to hand out awards to the top tax payers.”

According to the Asia Foundation, just three million Thais out of a population of 69 million regularly pay income tax, while a study by the World Bank shows that Thailand’s tax revenue as a percentage of GDP was just 14.9% in 2018, well below the UK, with 25.5%, and Sweden, with 27.9%.

“Digital transactions leave a record, so why raise a red flag with the tax authorities?”

This is clearly a sensitive issue if you are a bank looking to invest in a digital network.

“Can you erradicate cash in Thailand?” asks the foreign banker. “I don’t think you can. So if you are a bank, why spend large sums of money to provide a service that many people do not want? The environment will change. But at this moment, it is not a necessity.”

However, in some countries such as Sweden and the Netherlands, governments have discouraged the use of cash so that the bulk of transactions are done electronically and are more visible to the tax authorities.

Despite considerable political instability in Thailand over the last decade, the government has managed to push a digital banking agenda. Two important events have certainly raised the digital flag.

In 2015, a year after the military seized power in one of its periodic coups, prime minister Prayut Chan-ocha and his team announced ‘Thailand: 4.0’, a bold, 20-year strategy to transform the economy from one reliant on manufacturing products to one driven by innovation, research and development.

Key to the plan’s success was digitalization. This includes the expansion of e-commerce, the development of a national electronic payment infrastructure and the roll-out of more flexible data systems to boost productivity, efficiency and financial inclusion.

In late 2016, the government launched PromptPay, the first national digital payment system, which links Thai national ID cards and mobile phone numbers to a personal bank account number. Against all the odds, its roll-out went well.

“Very few payment systems around the world have been adopted so successfully,” says Chris Suradejvibul, a partner at PwC in Bangkok. “This shows how open the authorities are to fostering innovation and development.”

PromptPay “raised the quality of the national payment infrastructure,” says Talublugkhana at Krungsri Research.

“Demand for electronic payment options will increase through the next three years, with the consequence that the economy will move to having a lower level of cash in circulation,” she adds.

Part of the attraction of PromptPay was the fact that transfers were free for transactions up to Bt5,000; from Bt5,001 to Bt30,000 transfers cost Bt2; from Bt30,001-Bt100,000 they cost no more than Bt5; while those exceeding Bt100,000 cost a maximum of Bt10. Previously, commercial banks had charged between Bt25-Bt35 per transaction for cross-bank electronic fund transfers.

It took time but the new scheme started to change how banks operate. Local banks migrated their mobile and internet transactions to the PromptPay platform. In March 2018, in a move led by SCB, they waived all electronic payment fees on mobile applications including credit transfers and bill payments.

There have been glitches. In one high-profile computer fault at the end of 2017, transactions between banks were frozen for up to 8 hours because of a problem with formatting the calendar.

Many users have also complained of the cumbersome demands of registering to use the system. “People did not trust PromptPay because it is a government system and the government’s IT systems are not renowned for cutting edge technology,” says one banker.

But the men and women behind the scheme deserve credit. At the end of 2019, PromptPay registrations comprising National ID numbers, mobile numbers and e-wallet ID reached 49.7 million, up from 46.5 million in December 2018. The volume of daily transactions averaged 9.6 million, up from 4.5 million transactions in 2018.

And while many customers still prefer to fly under the tax radar by limiting the number and size of transactions, the fact that PromptPay has flourished at all is something of a miracle.

With Thailand’s generals pushing hard on the digital front and PromptPay showing that despite all the obstacles it really could be done, the local banks finally woke up.

First to act was KasikornBank. Under the direction of Banthoon Lamsam, considered by local executives to be one of the most visionary Thai bankers of his generation, KBank set up a technology arm whose sole role was to partner with fintech firms and tech startups to boost innovation and competitiveness.

Progress has been striking. Although Banthoon retired from the bank in April this year, KBank has continued to advance on many fronts. Its mobile banking app K Plus is used by 12.7 million customers, making it by far the biggest in the industry.

The bank has established partnerships with a host of big names, including instant communications app Line and ride-hailing app Grab, to roll out money transfer, payment and digital lending services to a new market.

Talublugkhana at Krungsri Research views KBank’s collaboration with Line as especially shrewd, given that Line has 44 million users in Thailand.

Vatcharut Vacharawongsith, an analyst at RHB Securities in Bangkok, also praises KBank’s strategy.

“Although there are no clear winners among the banks at the moment, we think KBank and SCB stand to benefit the most from the digital transformation in the long term, as both make the most effort to develop innovative products and respond to customer needs, compared to their peers,” he notes in a report.

KBank was the first of the big local banks to see the potential of technology, but it was SCB who took digital disruption to another level.

Launched by CEO Arthid Nanthawithaya in the middle of 2016, SCB’s ‘going upside down’ strategy was an unprecedented assault on the old model of banking. The plan envisaged a mass culling of its branch network from 1,153 to 400 over the next four years, as well as a reduction in the number of employees from 27,000 to 15,000.

Bangkok’s close-knit financial community was stunned.

“If you are a virtual cartel, there is not a huge incentive to change,” says one observer. “Yet to their absolute credit, Siam Commercial Bank grasped the importance of digital transformation.”

Perhaps the biggest indicator of how SCB sees the future came in January this year when Arthid unveiled a restructuring plan in which the bank would spin off its tech subsidiaries into SCB 10X, a wholly owned tech investment holding company.

SCB says this is part of efforts “to enhance the bank’s competitiveness in the long run by focusing on creating business through new capabilities such as blockchain solutions, AI service and 5G service; investing in new technologies and business models; and leveraging relationships with strategic partners that can enhance the bank’s potential.”

There are compelling reasons why banks such as SCB have moved to embrace technology as quickly as they can. SCB’s return on equity plunged from 20% in 2014 to 10.3% in the quarter ending March 31. Other local commercial banks have fared little better.

Narrower spreads on corporate and retail lending and declines in other bread-and-butter activities are largely to blame. To earn higher returns, banks are going to have to work a lot harder.

“The medium- to long-term strategy is for banks to expand their digital banking operations to take advantage of new growth opportunities or a new customer base,” says Weerapat Wonk-urai, banks analyst at CLSA in Bangkok.

“For example, they may target customers who have never used a bank before or small SME operators.”

Dennis Trawnitschek, digital banking leader southeast Asia at PwC, goes a step further.

“In future, banks will have to work more closely with fintech,” he says. “They will have to embed fintech into their operations. There is a symbiosis that we see going forward.”

The Covid-19 pandemic may have done more to promote the attractions of digital banking than all the high-profile marketing efforts of the local banks put together.

During the nationwide lockdown from April 3 to June 12, the number of transactions conducted through mobile banking apps soared by as much as 80% on some days, according to Krung Thai Bank.

The Bank of Thailand reported that the number of PromptPay transactions in March jumped to 11 million per day, up from 5.7 million a year earlier.

Riddhi Dutta, regional director for Asia at fintech software provider Backbase, expects the growth of digital banking to continue now that the vast majority of bank customers have discovered the ease and security with which they can conduct online transactions.

“Thailand has the potential to be among the leaders in modern banking, as banks and fintech firms have demonstrated repeatability and scalability of their digital capabilities,” he says.

The other welcome news for banks is that this latest crisis was not caused by financial markets, meaning it should be easier for bank executives to contain – and they don’t have to worry about severe reputational damage.

“The impact of Covid-19 has been unprecedented,” says Tan at UOB. “Every sector of the economy has been affected, including the banks. But unlike many previous crises where banks were to a certain extent blamed, this time around they are being seen as part of the solution.”

In the case of UOB, one way it has responded to the crisis is by relaxing loan repayment terms for corporate clients in order to ease cash flow pressure. Another has been to assist SMEs with digital transformation by offering online courses. It’s a programme that is supported by The Fin Lab, an innovation accelerator joint venture between UOB and SGInnovate, a company which is wholly owned by the Singapore Government.

“There is a huge urgency for SMEs to realize that with the shutdown of the economy, digitalization has become more important than ever,” says Tan.

However, the banks themselves are likely to face increasing problems thanks to Thailand’s dire economic outlook. Even before the crisis forced companies into lockdown, economic activity was slowing. The IMF expects GDP to contract by 6.7% this year, the worst performance of any economy in the Asean region. Tourism and exports, the twin motors of the Thai economy, are both in sharp decline. Foreign tourist arrivals are expected to plunge 80% from 40 million to 8.2 million for the year and export earnings to fall by at least 10%.

Bank earnings will fall 40% to 50% in 2020, UBS Securities predicts, on the back of a contraction of net interest margins, weak fee income and higher loan-loss provisions. Bank shares have declined more than 30% year on year, driven by fears of rising bad loans. Many analysts say there could be worse to come.

Can the banks justify spending billions of baht on digital transformations at a time when the economy is falling off a cliff?

For financial year 2019, SCB’s cost-to-income ratio was 42.5%. That was down from 46.8% in 2018, but it is still a big number.

Moody’s puts SCB’s total cost of digital transformation somewhere in the region of $1.2 billion. At KBank, the figure being bandied around is as high as Bt70 billion.

RHB Securities expects the cost-to-income ratio at the banks to peak in 2022 before falling. It says the sector’s operating efficiency should then improve as banks “can reduce expenses related to physical branches and new customer acquisitions via a new digital platform.”

But even in an optimistic scenario, investment in digital transformation is likely to remain staggeringly high for the foreseeable future.

“The big problem banks face is that to be successful in digital banking you need serious amounts of cash,” says one finance chief. “But this is not an environment in which banks have surplus cash. The problem is only going to be exacerbated against a background of rising non-performing loans.”

What comes next for digital banking in Thailand? The most pressing issue is whether to follow Hong Kong and Singapore’s lead by issuing new standalone digital banking licences.

Veerathai Santiprabhob, governor of Bank of Thailand, said in January the central bank was looking into the matter of digital banks, but that first the authorities must ensure that data from non-financial sources, an electronic identification system and suitable regulatory framework reach international standards.

“The Bank of Thailand has been overly protective of the domestic banks,” says Kongkiat at Asia Plus Group. “They don’t want to see too much competition in the market, but at the end of the day, they can’t go against the global trend.”

Wajeetip Pongpech, who runs the central bank’s Financial Institutions Policy Group, admitted as much in an interview with Asiamoney in June last year.

“Competition is coming not only from foreign bank branches but in the form of credit companies and fintech companies,” she told Asiamoney. “Thai commercial banks are trying to sharpen their competitive edge in the digital world. The competition is coming with or without our carefully designed policies. Every bank is now running.”

It is easy to see the benefits of digital banking licences in a country with such disparity in wealth. The latest World Bank figures show that 18% of Thais do not have access to a bank account. Digital banks could help to fill the gap by targeting the unbanked segment of the population. Better still, they could do so at a fraction of the cost of the legacy banks.

When Sethaput Suthiwart-Narueput, an economist with a wealth of experience including a stint at the World Bank, takes over as governor of the central bank on October 1, he will have to decide which route to take.