DBS: A FinTech Bank?

Piqued by DBS CEO’s Statement

As a shareholder of DBS a while ago, it came to me as a surprise when its CEO Piyush Gupta said, “We have twice as many engineers as bankers”¹ in an interview recently.

So I thought, if that is the case, just as an exercise, why don’t we price it against an actual FinTech company, say, Square Inc?

Of course, this will mean we have to suspend disbelief and ignore how NASDAQ vs. SGX tickers have inherently different price multiples, due to differences between market sizes and perceptions. So for these calculations, we are going to pretend as if we’re all super optimistic Americans.

A simple valuation by making a rough analysis of the today’s market capitalisation by its revenue for both gives comparison of how both companies relate to each other:

Given the figures above, we can assume that DBS is lagging behind by 7.58 / 4.78 = 1.58x of Square. So if we make a wishful extrapolation, the price of DBS should really be SDG$29 * 1.58 = SGD$45.82 today.

But that is only if we think DBS is going to grow as rapidly as Square. But DBS isn’t Square, and here’s one of the reasons why:

DBS’s Trailing Revenue Growth

One thing, is that we are assuming is DBS growing at the same revenue trajectory of Square, which isn’t correct:

If we look at the revenue growth, especially during the COVID years, the trend between the 2 companies look starkly different.

In a way, it is impressive that Square has accelerated its revenue growth through the COVID period, and suggests some inherent strength in its business model.

Maybe (or not) DBS will become a Unicorn

There are differences between the 2 companies that makes it difficult for DBS to grow as quickly as Square, namely the lack of a sizable total addressable market. USA has a population of 332M compared to Singapore’s 5.8M. Without having to venture overseas and be subjected to varying regulatory controls, issues with political and economic stability, gives Square a homeground advantage in terms of circumstances, even before we compare the strength and weaknesses of either company.

That said, DBS has been making moves that I see as positives, such as:

• starting an exchange for digital assets⁴ and digitizing/tokenizing bonds;
• buying up a bank in India⁵;
• buying a stake in a Chinese bank⁶, and getting a brokerage license in China⁷.

DBS isn’t staying still, and is venturing into the 2 largest markets in the world, which is gutsy, but necessary from how I see it.

There isn’t much room left to grow within the domestic market and the only way to do so is out. No doubt these moves are risky, and pose challenges, such as legal challenges from the acquisition of Lakshmi Vilas Bank, but I hope and believe that Piyush and DBS do have what it takes to succeed, given previous years of experience in establishing itself in both countries.

For India, perhaps DBS is still ahead in their digital strategy as an early mover to establish a beachhead, if they are able to navigate through India’s somewhat haphazard regulatory policies. But for China, it is another ballgame, with tough competition against established incumbents such as Ant Financial and Tencent, not to mention the gigantic native Chinese banks.

Not that DBS has to be the top bank in order to succeed in these economies. As long as they are innovating and be able to capture a sliver of either of these markets for a start, it should be a sufficient first step for scaling up after with their FinTech in place to grow their market share. Remember, a sliver of a very big pie is still a lot of pie.

Getting the Stick for not being Innovative Enough

I’m not entirely sure how local Singaporeans get an impression that the digital offerings of DBS suck, but that is the feeling I get when I tune in to the local chatter. As far as I know, in terms of service reliability, I mostly have no issues with its Internet banking services, aside from its sluggishness in its early years (it has somewhat improved since, but there’s still some of that if I pay close attention).

Granted a few wrinkles here and there, I can’t say my experience with DBS’s offerings is any better or worse than my experience with N26, Revolut or TransferWise, all of which are the modern day ‘Challenger Banks’ that’s supposed to transform my banking experience. But I think experience is a very misleading indication of what people want to get out of banking.

When you’re dealing with money, digital or not, trust and safety should be on the top of the list of things you’re concerned with.

That is to say that if you’re expecting a transfer to come through, you’ll have the certainty that it will be done, or if not, that the bank you are dealing with will set it right, that you won’t be suffering a loss, with only an AI for redress at the other side of the line. In that regard, N26 probably comes closest, not because I trust the company, but rather that I trust Germany’s banking regulatory muscle to make them do the right thing.

Trust is a fragile thing. I have known of so many stories with Revolut from friends directly and from 3rd parties that it remains as an almost 0-value account that its only use is to shield transactions on the Internet from my real accounts.

Without trust, the company is going to have a hard time growing assets under management if people can’t even trust it enough to put 10EUR without fearing if it is going to disappear, or if a large wire transfer gets stuck in limbo and both sides of the the transaction pointing the problem at each other, or that you’ll end up having to do some extraordinary ‘know your customer’ checks before the funds can be considered for release.

With TransferWise, I have to say, despite the fact that it is based in Estonia (not saying that it’s bad, but rather that I generally have little awareness about that country), it has proved to be a very useful service and is competitive in terms of its cost, speed, and trust. So far, I have never had any issues with them, and money transferred has always landed on the other side instantly. They are able to do so because there’s no actual Forex transfer occurring. Loosely explained, they are maintaining a ledger of other people holding the currency you want to exchange into, and matching the amounts, and directly debiting the sums received from both sides from their custodian bank to you and your counterparty. And if you happen to be exchanging into Singapore dollars, guess what? Their custodian bank is DBS.

If there’s anything that DBS itself can improve on its digital offering for the masses, I’d like to see it emulate something along the lines of TransferWise, although I’m guessing they will balk at that, given it means eating into their Forex margins.

What about other Singapore-based FinTech challengers?

From the Internet chatter again, there is another portion of investors who believe that the sky is falling down on DBS, with the introduction of the new digital banking licence.

Yes, this means more competition in general, but I’ve yet to be convinced that any of these challengers pose any near-term threats. 6 months has passed since MAS has announced the 4 digital banking licencees, but it seems like their operations wouldn’t even begin until 2022⁸.

But, doesn’t that mean that DBS will be in trouble once these 4 digital banks start running? Again, I’m not too sure about that either; when I was reading through the details of what the digital banks are allowed to do, I’m actually feeling that the incumbents wouldn’t really be challenged much by the new entrants at all.

Here’s why: one requirement from MAS stood out to me: the full digital bank can only hold a cap of $75K per person for an individual’s personal account.

This is kind of laughable; why would a digital bank be subject to this limit, and what kind of customers will it be attracting? This implies that the digital banks will have to scale out (of Singapore) in order to be successful, and it seems like this rule is there to ensure it does not affect local retail banking.

From somewhere that I had read, a sizable number of Singaporeans don’t even have 10K in their accounts. For a thought exercise, let us assume this to be 80% of people. So out of a population of 5.8M, the addressable market would be 4.6M. Excluding the people who wouldn’t have an account (infants, migrant workers, etc), let’s guess another 80%, gives us 3.7M to work with. Assuming with the higher end that each of these accounts did have 10K, we come to the total addressable market of 37B.

Let’s say the digital banks did very well, and each took 50% of the entire market, which gives us 18.5B. If we have to divide it equally by the 2 digital banks, it would be maybe 9B of revenue each? Furthermore, assume that they are so technologically great that their profit margin is 20%, which results in a profit of 1.8B each.

Is that a lot of profit? Yes. But is that also a lot to assume for the digital banks' execution to go perfect? And that the well-established incumbents are going to stay idle while their lunches are being eaten? No. And as I’ve said earlier, there is also no advantage for me to trade something I already trust for something unestablished.

This is why I’m not even sure if these new digital banking challengers would succeed in the first place, let alone move the needle.

If you look at the same landscape, be it from Europe or Hong Kong, most of the virtual banks today are still loss making while trying to establish economies of scale⁹. No doubt, 1 or 2 of these survivors will be successful and potentially corner the market. And it is my belief that this has to be the case, as only a ‘winner takes all’ scenario will allow the surviving digital banks to skim sufficient margins. But in the meantime, you will have to hope they have deep pockets or fervent shareholders to keep funding them for the ride.