Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Asia-PacificApril 1 2019

Digital shake-up alters Thailand's banking landscape

Digitalisation is shaking up Thailand’s banking landscape, leading to branch closures and a wider gap opening between the 'big five' lenders and the rest. Peter Janssen reports on the positives and negatives stemming from this movement.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
SCB

When Siam Commercial Bank decided to waive all service fees on digital banking channels in March 2018, it ushered a new era for the Thai banking industry. “We came out [with the policy] first but within 48 hours all the big banks in Thailand followed,” says Siam Commercial Bank president Arak Sutivong. 

Kasikornbank (KBank) announced the fee waiver almost simultaneously, followed quickly by other large banks.

Survival of the biggest

Digitalisation is arguably shaking up the Thai banking environment to a greater extent than even the 1997 Asian financial crisis. Though that meltdown wiped out about 100 Thai finance companies and forced the mergers of some smaller banks, the big brands survived – albeit with some foreign equity input – and have continued to dominate the Thai financial system ever since. 

“I think [digitalisation] is something that is potentially shaping the Thai banking sector now,” says Parson Singha, Fitch Credit Ratings’ banking sector expert in Thailand. 

Historically, the Thai banking industry had been characterised as three-tiered: the four big banks (Siam Commercial Bank, KBank, Bangkok Bank  and Krung Thai Bank), three medium-sized banks (Bank of Ayudhya, TMB Bank and Thanachart) and a handful of smaller banks. Ayudhya, which was bought out by Japan’s Mitsubishi UFJ Financial Group (MUFG) in December 2014, has since graduated to the top tier, making up a ‘big five’. 

Thai banks

A looming TMB Bank-Thanachart merger (expected later in 2019) promises to alter the banking picture further. “If this merger goes ahead, the banking system will be down to two tiers – there will be six big banks and then everybody else will be much, much smaller,” says Mr Singha.

While the merger was partly prompted by a cabinet ruling in April 2018 offering tax deductions and exemptions to merged banks to encourage consolidation within the system, digitalisation also played a crucial role. “One of the rationales for the merger is that these technological requirements and cyber requirements will use up a lot of money,” says Mr Singha.

Going mobile 

Going digital is not cheap. Siam Commercial Bank, one of the first Thai banks to invest heavily in creating a digital platform, allocated Bt40bn ($1.26bn) between 2016 and 2018 to do so. Its key platform is a mobile banking app, SCB Easy, which built on its cyber-banking services already in place. One of the main reasons the bank jumped the gun on fee waivers in 2018 was to encourage customers to move away from traditional banking and onto their mobile banking platform. “We thought we needed to do something more drastic in order to create a new environment for customers to go digital,” says Mr Sutivong. 

Siam Commercial’s move was also motivated by the launch of the Thai finance ministry’s own digital platform, PromptPay, launched in January 2017 as part of initiatives to create a cashless economy. This e-payment platform was initially based on national ID cards or mobile phones, rather than bank account numbers, and drastically cut transaction fees (to zero for small sums and less than Bt5 for larger amounts). This compares with banks’ fixed fees of up to Bt25.

The central bank supported the scheme as a way to force banks to reduce their transaction fees at branches and ATMs. By early 2018, PromptPay was gradually gaining popularity, persuading the banks to cancel those fees. “If you know that everyone will move to PromptPay then in the end you may be earning fees for another six months, but after that the income will be gone as all your customers move to PromptPay,” says Noriaki Goto, CEO of Bank of Ayudhya. “And once two banks [Siam Commercial and KBank] did it, there was no choice – all the other banks had to do it.”

The cost of digitalisation

Bank of Ayudhya plans to invest Bt17.5bn to Bt18bn in technology over the next two years to transform its platform into a full-service digital banking platform by the end of 2020. Mr Goto acknowledges that the digitalisation wave took management by surprise. When MUFG bought out GE Bank’s share of Ayudhya in 2014, digitalisation was not even on the horizon. 

“You were starting to hear the word fintech but it was not something we had put on the table when we were discussing the three-year mid-term plan,” says Mr Goto. “But in 2016, all of a sudden it came to our attention and we started to move our focus on what we planned to do.”

For Bank of Ayudhya, waiving transaction fees was not a huge sacrifice, since its fee income was comparatively small. But for the industry as a whole, this represented a significant loss in income and profitability. “In 2018 we estimated that the Thai banking system lost about Bt20bn in fee revenue from pursuing the national e-payment [policy and introducing] fee waivers. This had contributed about 10% of the Thai banks’ profits,” says Predee Daochai, KBank president and chairman of the Thai Bankers’ Association. 

For KBank, one of Thailand’s leaders in retail banking, the loss of fee income was significant, representing a 9.7% drop year on year for its total service income in 2018. Remarkably, the sacrifice did not play havoc on Thai banks’ bottom line in 2018. In the third quarter of the year, the 11 commercial banks listed on the Securities Exchange of Thailand posted a 14.7% year-on-year increase in aggregated net profit for the three-month period. Thai banks in general are in good shape and have been cautious and well regulated by the central bank since the 1997 crash. “All the Thai banks have very high capital/equity ratios,” says Mr Daochai. “The thing that is making things change is technology.”

Gaining mobile share 

Like Siam Commercial Bank, KBank has been preparing for digitalisation for almost a decade and was one of the first Thai banks to offer mobile phone banking through a project now called KPlus. “KPlus started about 10 years ago,” says Mr Daochai. “Now we have more than 10 million users. We have tried to build up KPlus as the platform of choice for our customers – both retail and corporate. You can apply for a loan, go shopping; it is all on KPlus. According to the figures, our market share is about 50% of the number of transactions.”

Indeed, Thailand’s digital banking landscape is drawing some global attention. The Annual Global Digital Report 2019, compiled by Hootsuite and We Are Social, found that 74% of Thailand’s internet users accessed banking services via mobile devices, ranking the country number one in the world in this particular category. In other forms of e-commerce, the country lags its south-eastern neighbours Singapore, Malaysia and Indonesia, but in digital banking it has taken the regional lead. “Overall e-payment transactions increased by 41% from 2017 to 2018, mainly driven by a growth of mobile banking usage of 98%,” says Ronadol Numnonda, Bank of Thailand deputy governor in charge of financial institutions stability.

Digitalisation has led to some collateral damage, however. Thai banks are closing many bricks-and-mortar branches as customers shift to electronic or mobile banking methods. The total number of branches in the country has fallen from 6955 at the end of 2016 to 6492 at the end of 2018, a 7.2% drop over a two-year period. More are expected to be closed in the coming years.

SCB, which had 1153 traditional branches at the end of 2017, closed 140 in 2018 and plans to shut another 100 to 150 in 2019. At the same time it will be expanding its SCB Express outlets, smaller branches specialising in lending and other bank services where face-to-face interaction remains the preferred method of conducting business. 

But the physical closures still seem somewhat inevitable. “Two years ago mobile banking for us was less than 20% [of transactions], branches were 25% and ATM the rest. But right now the mobile banking is almost 60% and branches are 5%” says Mr Sutivong. 

Network rethink

Most banks have had to consider restructuring their networks in light of digitalisation. Bank of Ayudhya, for example, has slowed down its branch expansion and is likely to let its network peak at about 700 nationwide. And within the existing branches, management will take a flexible approach to services provided, depending on location. “Half of our branch network is in metropolitan areas, and half up-country. I think it is good if we have fewer in Bangkok, and put more up-country,” says Mr Goto.

In closing branches, Thai banks are having to be wary of the central bank’s goal of promoting financial inclusion, especially in the more impoverished rural areas of the country where mobile banking is not as widespread as in the capital. Banks are also having to tread carefully when it comes to cutting staff, another seemingly inevitable casualty of digitalisation. A lot of retraining is in order, which is another added expense. “I’m telling people: don’t worry about your employment but what you are doing right now may change,” says Mr Goto. “That’s why all the CEOs are struggling. It’s not just about catching up with those technologies but at the same time you have to work very hard to change the way people think.”

While digitalisation has already had an impact on retail banking in Thailand, it is less clear how it will impact lending, specifically to small and medium-sized enterprises (SMEs), which account for about 99% of Thailand’s corporate sector. In theory, having more customers online with their transactions recorded in ‘big data’ bases will make it easier for banks to distinguish between good risks and less good risks among the smaller end of SMEs, but otherwise banks will still need to resort to more traditional ways of assessing risk. 

One benefit from the fairly rapid adaptation of digitalisation has been the undermining of any threat potentially posed by non-bank fintechs. “Two years ago the banks might have seen fintech firms as potential competitors,” says Bank of Thailand’s Mr Numnonda. “Such concerns have been somewhat alleviated. We have seen a lot of partnerships between banks and fintech companies.”

Embracing fintech 

The Bank of Thailand set up a sandbox in 2016 to encourage banks and non-bank entities to devise fintech services in a controlled and regulated environment. There have been some successes, such as KBank’s QR programme, now used by more than 3000 merchant outlets. In March 2019, Bank of Ayudhya launched Thailand’s first facial recognition identity verification service at all bank branches, after utilising the sandbox for more than a year, during which time it experimented with the system at two branches. KBank has also partnered with the Grab taxi service to handle payments.

The digitalisation revolution is largely about keeping customers happy – or just keeping customers. Thai banks enjoy relatively high net interest margins, which account for much of their revenue, so it is particularly important to them to keep their depositors happy, even if it requires waiving service fees. 

“If interest rates are rising then the most important thing for the banks is the transactional accounts, which some of these banks, such as Siam Commercial and KBank, are very good at,” says Fitch’s Mr Singha. “At KBank more than 70% of the deposits are current and savings accounts, so if interest rates rise its funding costs remain very low.” Interest rates at Thai banks’ savings accounts are now about 0.25%, while lending ranges between 4% and 28%.

Since Siam Commercial Bank and KBank already have huge customer bases, it makes sense that these two banks have been the leaders in digitalisation. “Last year we maintained our net interest margin and kept net interest income growing,” says KBank’s Mr Daochai. “Even if our fee income was hit substantially, the other income was growing. Net interest margin accounts for more than 60%.”

The other big banks might be a little less worried about their retail activities. Bangkok Bank, for instance, is strong in corporate lending and trade finance, and boasts the most extensive overseas branch network of all Thai banks. The partly government-owned Krung Thai Bank benefits from civil servant accounts and lending to government projects. Bank of Ayudhya has its connections to corporate Japan, and a strong auto-hire purchase arm.  

“You have to have compelling value propositions for the customer,” says Siam Commercial Bank’s Mr Sutivong. “All the banks will need to come up with these value propositions. Those that don’t have scale and don’t have value propositions, I don’t think will survive. For the large banks, the propositions are comprehensive and they have the ability to go digital – but even among the ‘big five’ I think there will only be two that have really large and engaged customer bases, banking-wise.” 

Was this article helpful?

Thank you for your feedback!

Read more about:  Regulations , Asia-Pacific , Thailand