New payments technologies will continue to disrupt ASEAN banks

Along with my colleagues Mark Goodridge and Mulya Chandra from Morgan Stanley’s ASEAN equity research department, I have been writing about the potential disruption to ASEAN banks from new payments technologies for much of the last year. We believe it is one of the key structural themes for equity investors in banks to understand as they think about future earnings and dividend streams.

It is important to understand why this is an issue today. In a report we published last July, ‘Who will win in e-payments – banks, independents or telcos?’ we identified the main changes that were taking place to stimulate the growth of non-cash payments.

We believe that there are three main enablers. The first is the development of e-commerce – after all, it is difficult to make an online purchase in cash! In addition to this, we are seeing the rapid adoption of new payments technologies, such as the mobile phone (along with increased data coverage, speed and reliability), or the common QR code, which enables traditional merchants to accept cashless payments at low cost. Finally, and often with some encouragement from regulators, we are seeing the introduction of cheap and almost instantaneous money transfers, making e-payments as frictionless as possible.

In addition to these enablers, we see four incentives for adoption. For governments there is the prospect of greater GDP growth from productivity improvements, as well as the potential for increased financial inclusion (especially in the Philippines and Indonesia). For incumbents, there is a need to come up with better products to head off competitive threats from new entrants such as Go-jek or Alipay or even other banks looking to expand into new markets, such as UOB’s forays into Thailand with TMRW, CIMB’s move into the Philippines and Vietnam, and DBS’s Digibank rollout in India and Indonesia. Finally, for both incumbents and new entrants there is the prospect of new revenue streams as they look to monetise the data that e-payments generate.

These enablers and incentives are driving big changes in the way that payments are being made. For example, in Thailand, we are seeing big growth in interbank internet and mobile transactions (+215% YoY in 3Q18), whilst ATM and counter transactions are falling. Mulya Chandra, my Jakarta-based colleague, pointed out in a recent report, ‘Indonesian Banks: Fintech continues to lead digital payment market’, that e-money transactions in Indonesia quadrupled in 2018 to US$3.4b, and now account for 7.3% market share.

This is beginning to impact bank revenues. For example, the popularity of PromptPay (a cheap and real-time money transfer capability promoted by the Bank of Thailand and the Ministry of Finance) led to Thai banks waiving fees on mobile, internet and ATM transactions in 2018, pressuring fee income. We expect revenue pressure elsewhere, for example in Indonesia or the Philippines, where banks still charge for many retail transactions, or in new product areas such as retail forex, as competition expands from vanilla domestic payments. In addition to direct impacts, there are knock-on effects. For example, we expect increased rivalry in wealth management and mass-market consumer lending in Thailand as the large banks look to develop new businesses to offset lost revenue streams.

In our July report, we estimated that ASEAN banks would lose US$13.1-15.5b of value as a result just of lost payment income by 2022. We thought US$6.4-9.3b of value would accrue to new entrants (mainly fintechs), with US$2.0-2.9b going to telcos. The balance would accrue to the consumer through lower costs. Of course revenue loss is just one side of the coin; what will also matter is whether or not banks lose market position, which could open them up to more revenue pressure further down the road, and what they can save in costs.

On the market share point, we think the risks will vary by country, with the existing state of the market and regulatory reaction being the main deciding factors. In Singapore, Thailand and Malaysia, incumbent banks have reacted quickly to customer demands for low-cost and convenient solutions, shutting down the space for new entrants, but in Indonesia and the Philippines this process is taking longer, and with added opportunities for increased financial inclusion, new entrants are more likely to take share. In the Philippines, we believe that the telcos are the likely winners, and in particular Mynt, which is owned by Globe Telecom. In Indonesia, we have undertaken a survey that shows fintechs lead, and this is likely to sustain – 20% of survey respondents prefer fintech e-money as a method of payment, compared to 6% each for e-money from banks, telcos and e-commerce.

Costs could be the silver lining for banks as we expect they will be able to generate significant savings as they digitise their business. We see local banks generating cost savings valued at US$20-24b by 2022. Singapore banks are best placed to benefit (gaining US$5.2-6.4b of net value), followed by those in Malaysia and Thailand.

For bank managements and equity investors alike, the growth of e-payments throws up many challenges. How managements pace investment over the next few years to defend market share, minimize revenue declines in some traditional areas, and expand into new areas of revenue whilst keeping costs under control and maintaining returns will determine the longer-term success of the organisation and investor returns.