Singapore's Financial Services: Banks and Life insurance companies win,
but not forever. - Oct 25, 2000

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INTRODUCTION: We started out wanting to paint a map for global financial services using Singapore as an example but realized that the situation here is unique because years of strict regulation and protection by the MAS has created a landscape that share few similarities with say the US or Hong Kong. As competition intensifies, and the heat is not at maximum yet, the strengths of the banks will become more obvious. Although the government publicly worry over their survivability in the face of globalization, locally they are likely to absorb or successfully compete against those firms without the product and service flexibility an entity possessing a banking license has. They also start off with more diverse capabilities even if they do not perform all of them equally well. With eyes focused on where the key fights are, it is easy to miss a new group of players that will emerged or am already there but hard to identify. We term them the "Hondas" of the industry. The Japanese motor company Honda is world renown for the quality of their engine design and manufacture. In the face of a rapidly consolidating industry, they remain an unassailable niche player. Adding to their confidence, they are even selling engines to much bigger competitors. Do not sneeze at the niche player. Some niches are huge. They are only labeled as such because they are derived from an even larger market. The Hondas of the financial services sector are niche players, which will only become obvious as the customer base fragments further in which case there are pockets of consumers and businesses which even the most competitive banks cannot win against them. In many cases, the banks after some humbling experience will choose to cooperate with them. Who are these players? They are likely to be among the ranks of 1. Clicks and mortar companies with special capabilities. 2. Unrivaled sales and marketing outfits serving high value niches, e.g., perhaps IFAs or Independent Financial Advisors. 3. Brokers with vision and leadership who have reinvented themselves. They will be very different from their former self, or that part becomes a minor facet of their new personality. They had taken full advantage of their limited license to beat or better co-opt the new comers. Much further down the road, in five to ten years some of them could become very successful and obtain a listing on the exchange. One or two may have the stature of the life insurance companies.	How to Read Maps Maps Investment Maps Business Maps Experts Maps Other Maps Local Interest
(Fig 1) Without doubt financial services firms in Singapore and the rest of the world are under pressure to adapt to the new market place created from the changing needs of customers, and the ability of new entrants using technology and detailed consumer knowledge to challenge the incumbents. Map View These are early days. Although we do not feature any reinforcing loop above, Box 1 is sustained by reinforcing loops that emanates from the driving forces of the New Economy. The customer whose appearance you recognized, her needs are quickly shifting away from the familiar "one size fits all" products and services (box 2a). Competitors are also vying to exploit the shift in preference, and oftentimes even to arouse new wants from the customer (box 2b). Overall, the pressure on financial services firms is increasing (box 3)
(Fig 2) There is an oversupply of products and services leading to a severe price competition e.g., Mortgage loans wars. Industry profitability suffers; a trend that cannot go on indefinitely, leading to two scenarios. Financial firms consolidate in order to achieve economies of scale given that they are not able to increase prices. A handful of firms, with unique capabilities as sustainable competitive advantage can hold their own against the big boys. They are the equivalent of Honda in the motor industry. Map View Besides cost advantages, firms consolidate to achieve multi-role capabilities in order to evolve from products and focused services to providing total and personal solutions (box 4). Marginal players are driven out of the business. In reality, financial firms may not grow bankrupt. They just close down or sell the unprofitable parts of their business (box 4a). The process will continue until the industries achieve acceptable financial performance. One reason why serious stock pickers hate the Singapore market - There are too few attractive companies to invest in. The consolidation is coming very slowly. The handful with unique capabilities, the moral equivalent of Honda ability to make engines for the motor industry can hold their position (box 4b). These are early days, and they are not easily identifiable yet. They could be some dot-com cum IFAs outfit; perhaps some financial sector technology or service providers whose products already constitute most of what is needed to create a service or product to the end consumer. They are likely to be unique content and content packaging companies.
(Fig 3) Although all firms alike stand to gain from exploiting Information Technology, it is the bigger firm that will benefit more. In fact, the large firms can invest in selected technologies, which are beyond the reach of the small guy. The media loves the underdog. There many stories how technology is narrowing the gap between the large and small firms. In reality, the reasons why large firms stumble before smaller ones is because they were inefficient, complacent or worse plagued by corporate sclerosis. So where is the new comer edge? It is innovation, the essence of entrepreneurship. A new way to do the business that is devastatingly superior, just like Honda pioneered new ways in engine design and long before Henry Ford invented the mass assembly line which put almost everyone else afterward out of business. We cannot make the complete list here, but dollarDEX, First Independent, Fundsupermart, Net Research and so on they are examples of ongoing experiments which the incumbents are not attempting. If you consider what technology and business systems the banks can bring to bear against these upstarts, it is a completely unequal match. It would be easy to take on the big boys had they been sleeping, but they are not. Map View On balance, technology (box 5a) rewards the large companies more than the small ones. Using the same technology, the big guy could already often beat the small one. But if the small guy combines it with innovation (box 5b), then the balance of power could eventually favor the new kid, and will provide it the means to become a big player. Such a script has been repeated many times in the IT industry.
(Fig 4) The customer base is fragmenting into smaller niches and some are growing rapidly, e.g., unit trusts subscription. Overall the customer base is shifting towards less loyalty, greater price consciousness and more service and convenience. The consolidated financial services firms will adapt their multi-capabilities to meet the changing market. In fact, consolidation is their response to change. Map View The portion of the map of interest is colored blue signifying that it succeeds the black region and the process is ongoing.
(Fig 5) Banks and leading Life insurance companies possess a security, comfort and brand premium, which no other group owns. The word "bank" is special as we have always taught children that it is the place safer than home to keep money and besides earns an interest. Life insurance companies have been using their field force to build solid personal relationships with their clients. Our previous circumstances have caused us to take the security of the bank for granted. But as competition intensifies, they will pull out all stops and that is the point where their security premium become obvious as a competitive advantage. The valuation gap between banks and non-banks could widen. Map View There will be two levels of consolidation in the financial services sector demarcated by whether a bank is involved. Big banks enjoy a virtuous cycle which say a big stock broker will not enjoy. Banks enjoy a reinforcing loop depicted between blue box 2 and 2a. The bigger they are the more secure they appear to their customers. Beside the economies of scale in an environment of low pricing power does not hurt either. In our small market, some have gotten so large that they appear to have pricing power! As banks become more formidable competitors, the non-bank groups e.g., brokers and finance companies no matter how hard they work at it, could not overcome their liabilities vis--vis the banks. The loop between box 4 and blue box 2 is counterbalancing. Any financial group without a banking license and which fail to differentiate itself successfully against the banks will loose.
(Fig 6) There are too many banks and brokers for this small market. In view that banks are at the top of the food chain, non-banks even if they have size after consolidation, it is only marginally useful, as they must innovate to survive. If they do not like what the future holds, then they must reject and invent the future of their desire. If they can become a "Honda", they will enjoy early success. For some, given the relative immaturity of the local market, they may have to cut their teeth overseas whilst waiting for their home market to catch up. To secure their position against the banks, they will have to take advantage of their nimbleness and "Honda" capabilities to expand globally. Map View If you are thrown out in first round of the competition, you can either retire or seek to change the rules in order to win. The key is innovation - the bold red line from box 4a to 5b. Innovators without a financial background or have not been bruised - at least to learn what not to do have far slimmer chance of success Among this group, the new "Hondas" will emerge (red box 1). They may have to combine their handsome cash resources and capable infrastructure co-opting those with the intellectual property and passion to achieve "Honda" capabilities. The fast moving gazelle companies may discover that the local market is not ready for them. Like Creative Technology before, they will have to go global, typically to the US before returning to the local market. This is very tough work, but it is also the most sensible way to build the depth and girth of the company. The small local market cannot hope to support the reinforcing loop we have drawn between red box 1 and 2. With the world as the base for these new and innovative firms, they will at least reduce the pressure from the banks. In time, with shifts in technology, business models and customer needs, they may even successfully challenge the banks. Not possible? It all begins with a vision and great passion. Have you noticed that the smallest companies have the biggest dreams, often no less than to change the world and the largest firms have the most limited vision. You can only go as far as your vision takes you. We would advise that in looking at these small firms, it is important to see with your mind and not your eyes. .