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Siam Commercial Bank is replacing some of its traditional retail branches with unmanned outlets called SCB Express, such as this one at a mall in Bangkok. (Photo by Yukako Ono)
Company in focus

Thailand's oldest lender's mantra: Go digital

Siam Commercial Bank braces for competition against China's Alipay and WeChat Pay

YUKAKO ONO, Nikkei staff writer | China

BANGKOK -- Siam Commercial Bank sent shockwaves through Thailand's banking industry in March when it said it would scrap nearly all fees for money transfers and bill payments conducted on its mobile banking app.

Less than two hours after the announcement, Krung Thai Bank, another major Thai lender, sent out a hastily prepared press release detailing similar cuts. By the end of the day, the remaining two of the big four banks -- Bangkok Bank and Kasikornbank -- had also followed suit.

"The speed that they followed us was quite a surprise," Arak Sutivong, Siam Commercial Bank's chief strategy officer, told the Nikkei Asian Review. "Other banks probably would have wanted to wait a little more until they saw customers' behaviors [were shifting toward mobile banking], but we wanted to accelerate the change."

The reason: As financial institutions rush toward digital services, they are eager to collect data on their customers for growth, and Siam Commercial Bank wants to be at the forefront of that initiative.

The other driver behind its push for transformation is the threat posed by Chinese digital payment systems, led by internet conglomerates Alibaba Group Holding and Tencent Holdings, which is increasing along with the stampede of mainland Chinese tourists traveling to Thailand. While these integrated services -- e-payments, retail, ride-sharing, lending and social media -- primarily serve customers from China, they could eventually cater to Thai customers.

The recent moves by Siam Commercial Bank, the country's third-largest bank by assets, and others to reinvent themselves show just how determined they are to stay in the digitization race. As smartphone penetration in Thailand expands, the value of monthly bank transactions through mobile phones has also grown, reaching 1.049 trillion baht ($32.64 billion) in December, a near sevenfold increase from three years earlier, according to the central bank.

The rise of nonbank players in mobile payments is also putting pressure on conventional financial institutions to speed up their shift to digital services. Siam Commercial Bank has made it clear that it wants to take the lead in the competition.

Earlier this year, the bank's president and CEO, Arthid Nanthawithaya, stunned rivals by announcing plans to slash the number of branches by two-thirds to 400 from 1,200 in three years, and to nearly halve the number of employees to 15,000 from 27,000.

Among the four big banks, Siam Commercial Bank boasted the largest workforce at the end of last year. Half of its staff were stationed at branches with an average of 10 employees per branch. Arthid promised there would be no layoffs, saying the annual organic attrition rate is 3,000 and that branch employees would be trained to provide more value-added services to clients.

"Our staff will no longer be humans processing documents," Arthid said at the January announcement. "They will be relationship managers who help enhance the customers' capability of their business execution and wealth management."

Traditional retail branches will be replaced with business-investment centers and wealth-management consultation offices, as well as a new unmanned outlet called SCB Express. The new format will house machines that allow clients to pay bills, deposit checks and open accounts without the help of tellers. Pilot outlets are now being set up -- with plans to open as many as 200 by the end of the year.

A customer uses an ATM at an unmanned branch of Siam Commercial Bank in Bangkok, which is working to expand its customer base. (Photo by Yukako Ono)

"We think that stand-alone branches are likely to disappear in the future anyway," Arak, the chief strategy officer, told Nikkei. Already, over-the-counter transactions account for less than 10% of the overall retail transaction volume, he said, as more people are using ATMs and mobile banking.

Moreover, traditional stand-alone branches, which at Siam Commercial Bank account for roughly half of the total, are becoming less attractive compared with those operating in shopping malls, which have longer hours and are open on holidays. "We have to give people reasons to move from physical branches to mobile," Arak said, adding that if there are fewer branches, customers will have to turn to their smartphones.

The removal of transaction fees for mobile banking will put the bank on par with nonbank players, which provide those services at no charge. 

Siam Commercial Bank’s mobile banking app, SCB Easy, has roughly 6.5 million users. It hopes to have 10 million by the end of this year.   © Reuters

The motivation behind Siam Commercial Bank's aggressive push for digitization goes beyond cost-cutting and healthier profit margins. It wants to accumulate customer data, such as spending habits, through mobile banking to tap into a new customer base.

Along with the plan to shutter branches, CEO Arthid mapped out a strategy to strengthen financing to consumers and small enterprises, or so-called unsecured lending. That type of lending is considered high risk, compared with loans to large or midsize companies, but carry higher margins.

However, by utilizing client data, the bank's risk can be mitigated. It plans to offer tailor-made loan products to cater to a wider range of customers' needs and repayment capabilities.

"Instead of talking face to face over the counter to understand their needs, we learn from their behavior," Arak told Nikkei. The company's mobile banking app, SCB Easy, has roughly 6.5 million users, while Kasikornbank's K Plus boasts more than 8 million. Both banks hope to reach 10 million this year.

Organic growth for Thailand's big banks had been limited over the past several years, especially as companies pulled back on investments and individuals have refrained from buying homes and automobiles amid a slow economic recovery. Total lending of the four big banks grew just 4% last year, and a rise in nonperforming loans has forced banks to tighten screening for new lending.

Also, the aging society weighs heavy on the country's future economic growth. "If we continue with the traditional way of doing things, the loan growth will only be stable and eventually decline," Arthid said in January.

Behind the bank's drastic transformation is the rising threat of nonbank players.

"It's a real concern for us," Arak said. He is most wary of Chinese digital platform players in the Thai mobile payment market. Alibaba's Alipay and Tencent's Wechat Pay are already available at most convenience stores, retailers and many restaurants to cater to the millions of Chinese tourists that visit Thailand every year.

"These companies come with the whole eco-system," Arak said, referring to their diverse services of online chat, shopping and consumer lending. "They engage with customers on many fronts ... and that is why it is important for us to build customer engagement, too," he said, while noting that Thailand's banking regulations pose many restrictions on full-fledged banks from diversifying.

But that is changing as the central bank moves toward deregulation. It recently allowed banks to operate e-marketplaces, which means that mobile banking apps can become an online platform for retailers to sell merchandise and services to the banks' clients.

Siam Commercial Bank was the first to respond. Through a partnership with SF Group, a major cinema operator, movie tickets are available on its SCB Easy app. "We try to reimagine and redefine ourselves as more of a digital platform company," Arak said.

Diversification into services that require high financial expertise will also be important. In March, the bank announced a joint venture with Swiss private bank Julius Baer. Previously, high net-worth individuals chose to manage their assets offshore because Thai banks lacked "sophisticated" offerings, Arak said. "Julius Baer brings along the global capability."

Siam Commercial Bank is the oldest lender in Thailand and was established by a member of the royal family in 1906. The royal links remain strong with the Crown Property Bureau, the entity that manages the monarchy's assets, holding an 18.14% stake. Last year, the bureau transferred part of its shares to King Maha Vajiralongkorn Bodindradebayavarangkun, who assumed the throne in 2016. The king personally controls a 3.33% stake.

So far, the market has responded negatively to the ongoing transformation. Since the beginning of the year, the bank's shares have slumped 12% compared with a 1.3% decline for the benchmark Stock Exchange of Thailand index.

The hefty $1.2 billion to $1.5 billion investment earmarked for digital banking upgrades over three years will weigh on the bank's profit. In the first quarter of 2018, net profit declined 4.6% from a year earlier.

The cut in transaction fees could result in a 2% decline in total income this year, said Tanawat Ruenbanterng, an analyst at Maybank Kim Eng Securities (Thailand). But the impact would be smaller than rival banks, he said, especially Kasikornbank, which has greater exposure to fee income.

Shares of other banks, except Bangkok Bank, which is more focused on large corporate clients, have also dipped by double digits since the beginning of the year.

Longer term, profitability could improve if the portion of unsecured lending, which tends to have higher net interest margins, increases within the bank's loan portfolio from 5% to 20% in two to three years' time, as planned. Currently, the bank's net interest margin stands at close to 3%.

The cost-cutting effect from the branch closures, which no other bank has announced, could also boost the bottom line. But there could be adverse effects. "A drastic reduction in branches could be beneficial for the other big banks as some people will still prefer going to branches for face-to-face transactions," said Usanee Liurut, executive vice president at Asia Plus Securities, especially in rural areas where smartphone penetration is not as high as in Bangkok.

Meanwhile, the government and the central bank are encouraging banks to consolidate as they prepare for greater competition in the domestic market, as well as larger regional rivals. Tax incentives for bank mergers were recently approved by the Cabinet.

Arak played down the need for consolidation.

Size does matter in the digital era, especially in terms of customer base, but now is not the time, he said. All banks are trying to slim their operations and "combining two giants will mean that you will have twice the headache of trying to reduce the size."

As for overseas expansion, in which Siam Commercial Bank has lagged behind its rivals, consolidation may no longer make sense, Arak said. The bank does not want to be a full-service bank in foreign markets but instead would choose to expand in selective segments, such as wealth management.

"You don't need much infrastructure, just the capability," he said. Still, the priority will be to secure a foothold in the domestic market. "We can't fight too many fronts in the same time."

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