Chart of the Week: Singapore's virtual banks can't rely on the branchless advantage for long

Facilities costs as a proportion of incumbent lenders' assets is only 7bps compared to 103bps.

Virtual banks should not rest easy with the cost advantage and returns outlook associated with no physical branch networks. The costs of maintaining these facilities as a percentage of the assets of the city's top three banks is only an average of 7bps compared to 103 bps in ROA, according to Maybank Kim Eng.

"As a result, it is unclear whether branchless costs savings by digital banks will be a sustainable critical advantage over time," Thilan Wickramasinghe, analyst at Maybank Kim Eng said in a report.

Even if the digital newcomers post return of assets that are double the figures by incumbent banks given their lower operating costs, the overall virtual banking sector can only potentially dilute just 1.3% of incumbent bank earnings by 2021, according to Maybank. In an earlier report, Moody's estimated that digital banks can only command around 2% of domestic banking assets once they become fully operational.

Also read: Virtual banks may only account for less than 1% of Singapore loan market by 2022

For consumers, branches still have appeal as Singaporeans still prefer branch access for higher value,advisory linked transactions such as wealth management and mortgages, according to a 2018 survey from Deloitte cited by Maybank.

Big banks have therefore been investing resources into enhancing the branch experience. Wickramasinghe cited UOB, which uses AI and Big Data analytics to offer highly customised services at its flagship Orchard Road branch and Maybank Singapore’s MSpace Branch concept which incorporates lifestyle features such as cafes and special events.

Also read: Is branch banking still relevant as lenders migrate their services online?

The analyst argued that qualified full banks (QFBs) with smaller branch footprints and weaker digital offerings are at higher risk from tech upstarts especially as customers prioritise convenient branch access for their primary accounts. "Customers of banks where branch access is inadequate and the digital offering is limited may choose to switch over to digital banks for more convenience," he warned.

In July, the Monetary Authority of Singapore announced plans to issue up to two full digital banking licenses and three wholesale as part of an effort to liberalise the financial services sector.