Swiss bank UBS aims to create a digital banking platform that could slash costs and spur growth, but its plan hinges on securing a licence in mainland China to kick-start the project.
Edmund Koh, who heads UBS in the Asia-Pacific region, sees China’s framework digital banking rules in place by June or July. At which point, he hopes that the lender’s application for a nationwide, majority-owned digital bank licence will gain traction.
If UBS succeeds, it will join the likes of Tencent Holdings’ and Alibaba Group Holding’s banking affiliates in providing low-cost financial services online across China, where two new billionaires emerge every week.
“We need scale, and I’m going to get that scale for UBS, working together with the Chinese authorities,” said Koh, who plans to incubate the platform in China, then take it global.
Private banking has been one of the more profitable areas of financial services in recent years, but cost-to-income ratios across the industry have remained stubbornly high, at about 70 per cent to 80 per cent. Digital banks, offering lower-margin products without the expense of maintaining branches, combined with the potential to scale, provide an attractive solution.
Koh estimated it costs roughly US$25,000 to acquire a wealth-management client, which UBS could slash down to as little as US$60 via a digital bank. He has a stretch goal in mind of expanding UBS’s 30,000 customer base in Asia to 200,000 within two years, once he has secured the digital banking licence in mainland China.
China’s regulators are now working on guidelines for a further batch of digital-banking applications from domestic and overseas firms present in China. The country’s regulations for its rapidly evolving digitising financial markets are gradually coalescing. New rules are likely to be stricter than previous iterations, requiring higher reporting standards, capital requirements and clarified regulatory reporting lines. The cost of running a digital financial operation is likely to rise as a result, said industry sources.
China has granted 18 licences for privately run banks since 2014, including those to Tencent-backed WeBank, Alibaba’s affiliate MYbank and aiBank, whose investors include Baidu. These are online-only banks and the new digital banking rules will govern them as well.
China has gradually been opening up to foreign financial institutions, which have ranged from asset managers to insurers. Other global wealth managers are expanding in China too, including BlackRock and French asset manager Amundi, but they plan to sell their products through the distribution networks of Chinese commercial banks.
If a foreign bank is granted a digital banking licence the potential is huge, but they would be competing against formidable technology-enabled incumbents offering a slick user experience. “Digital banks would need to have a superior experience to win the hearts of China’s young customers,” said Alan Zhang at consultancy Accenture. Apart from a silky smooth customer journey, any digital bank in China would need to be data-driven with a modern core-banking system, enabling it to respond swiftly to fast-changing consumer behaviour and appetite for financial services in China, he said.
However, not all can afford to seize this opportunity, as they grapple with soaring bad loans in their home markets.
“A lot of big banks are looking inward to support their core domestic business right now,” said Koh, who is Singaporean. He feels exceptionally well placed among his peers to build on the bank’s growth in China after a record-breaking first quarter in the Asia-Pacific region.
On Koh’s watch, Asia-Pacific contributed 31 per cent of group pre-tax earnings in the first quarter, higher than the roughly 18 per cent to 22 per cent split across recent years. Pre-tax profits in the region hit about US$800 million in the first quarter, up 154 per cent year on year, as its rich clients shuffled their portfolios as the coronavirus pandemic knocked global markets, Koh said.
China is the right place to develop a digital bank platform, he reckons, as the country’s expertise in artificial intelligence (AI) combined with its troves of data are rapidly transforming financial services and risk management.
Once UBS has secured a digital banking licence in China and built its platform employing AI specialists, Koh plans to export the model overseas to other markets with widely dispersed mass affluent populations and rational competition.
To be sure, UBS already has a universal banking model in place in Switzerland, with an online digital platform. But in Asia, UBS has not pursued a mass affluent client base. It plans to serve China’s booming middle class with US$100,000 to US$200,000 to put in the bank, offering them initially a smorgasbord of Chinese securities and mutual funds.
The pilot digital bank will be based in Qianhai, focused initially on the dynamic Greater Bay Area with its population of more than 69 million people and a GDP of about US$1.5 trillion. Its ideal customers will be young entrepreneurs who are reinvesting wealth in their fast-growing businesses, but still want to diversify their savings. In some ways, it would be a digital extension of UBS’s bricks-and-mortar branch in Kowloon, Hong Kong, which caters to local entrepreneurs with businesses in mainland China.
As the nest eggs of China’s mass affluent population grow and they need more tailored advice, Koh sees them transferring to UBS (China) for face-to-face wealth management advice in areas such as succession planning. The Beijing-headquartered business is expanding its suite of product licences.
“Today’s affluent in China will be tomorrow’s high-net-worth individuals and then billionaires,” Koh said.
We learn something every day, and lots of times it’s that what we learned the day before was wrong.