Financial Institutions Performance Survey FIPS December 2017 Quarterly Results Higher NPAT 1.56% 1 increase in NPAT Lower net interest margin 2 4bps drop in NIM Slow lending growth Slightly higher costs 0.90% 3 4.50% increase in gross rise in operating lending expenses 6 4 Continued improvement Higher write-offs in loan quality 1.67% 5 70.02% increase in loan reduction in provisions impairments 2 | KPMG | FIPS Quarterly Results December 2017 Industry update This quarter’s publication Some notable awards winners and Empowered entrepreneurs their ideas are discussed below: builds on a few of the key Another Polish bank received the themes (namely innovation, Farming on tap through an app New Business Ecosystems award for its “mPower Business Starter”. This digitisation and conduct risk) The agricultural banking app from package of service offerings integrates which were noted in the Turkey-based DenizBank won the government, bank and accounting award for the Best New Product or “ annual publication released in services to create an easy and intuitive Service. The app was recognised new business customer (entrepreneur) February 2018. In this edition, for demonstrating how “banking user experience”. This suite of services we have also provided a brief can be at the centre of a lifestyle can dramatically reduce the time to ecosystem, going far beyond a establish a new business from ten macroeconomic update. traditional banking application”. Through days to ten minutes. Through using the app, farmers can access insights digital signatures and by bringing from regional farming experts on together separate ‘e-government’ crop rotation, planting, irrigation, services into one suite, such an and fertilisation; and can review and improvement eliminates the need Inventive innovators purchase machinery. In this case, the for separate logins and portals, thus In the last quarter of 2017, the results bank has clearly demonstrated the allowing entrepreneurs to focus of the Efma-Accenture Banking value it can source and bring to the on their innovative ideas rather Innovation awards programme were table to create something that is truly than procedural tasks while not released.1 This programme is an customer-centric. missing out on jumping through any of the necessary regulatory and initiative which aims to identify and All aboard the banking train award the most innovative projects operational hoops. in the retail banking sector at a global Idea Bank, which is based in Poland, level. This programme is in its fifth won an innovation award for its ‘Idea Accessible advertising year and aims to share worldwide Hub Express’ train service. This service DBS Singapore won the Digital best practices in the retail banking is geared towards its niche market of Marketing award for its DBS Sparks distribution and marketing arenas. small to medium-sized entities (SME) mini-series which was distributed Innovations in ten categories are business owners travelling cross- through the YouTube platform. recognised, including two overarching country on business trips and basically By using the real stories of actual awards for Global Innovator of offers a fully-functional co-working customers and employees, “there the Year. A total of 183 financial space similar to that of a business was authenticity that was not possible institutions from 59 countries class airport lounge – except that it is in a traditional ad”. The taglines used submitted 467 innovations. The three available during one’s journey rather in promoting the content are “There criteria used for evaluation included: than before it. The train carriages are are TV shows about lawyers, doctors fitted out with desks, chairs, Wi-Fi – originality; and detectives. But there aren’t any connections, charging points, printers about bankers and banking. Inspired – strategic capacity to generate long- and scanners. There is even a coffee by true stories, SPARKS is a mini- term competitive edge and return machine to give one’s entrepreneurial series by DBS which follows a group 2 on investment; and flair a caffeinated kick-start. of bankers as they navigate work – adaptability for use in other markets and their personal lives. A smart and and countries. sassy portrayal of how the power of purpose and having the right banking partner enables everyone to get a lot more out of life – and a lot more joy from banking.” © 2018 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. FIPS Quarterly Results December 2017 | KPMG | 3 The concept works as follows: The Although most of these ‘Challenger’ This marketing format may be consumer browses around the store and ‘Neo’ banks are based in the UK, just the thing to make inroads and scans the barcodes of the items where the market is not dominated into unbanked and underbanked they wish to purchase as they select by an oligopoly, unlike countries such markets. the desired items from the shelves. as the US and New Zealand, there Once done, they click on ‘checkout’. are other examples of these new-age This action initiates an ‘invisible’ and disruptors in Asia. These disruptor In analysing the viewing data, DBS ‘plastic-free’ payment which is routed Asian banks are often linked to or realised that the format resonated with via the previously stored credit or debit funded by well-known companies – customers in the bank’s developing card details which are housed in a for instance, MyBank and WeBank, markets (Indonesia, China and Taiwan), secure database. which are both based in China and are thus suggesting that this marketing backed by Alibaba Group and Tencent format may be just what is needed Challenger banks: Holdings, respectively. to make inroads into unbanked Throwing down the digital ‘Challenger’ and ‘Neo’ banks are and underbanked markets where generally focused on servicing niche banks are not necessarily seen as gauntlet segments of the retail banking value trustworthy yet.3 So-called ‘Challenger’ and ‘Neo’ banks have recently made business chain rather than providing a full suite The pocket-sized porta-till headlines – usually connected with of services. An advantage of this large swaths of venture capital (VC) model is that the regulatory yoke is Barclaycard was the winner in the funding5 British banks Atom Bank and less burdensome. Recent changes in Wallets and Payments category with Monzo raised over US$120 million legislation around open banking in the their ‘Grab+Go’ app. This innovative each in their 2017 rounds of financing. European region have also played well app turns the consumer’s smartphone The VC financiers, who are intent into the hands of those operating non- into a portable scanner and checkout on sniffing out profitable business traditional banks. Furthermore, while till point, thus eliminating all the strategies, can see the value that non- those operating traditional banks have mindless tedium of waiting in a long traditional banking models may be able historically treated digital offerings as queue and the requirement to make to create. Even Sir Richard Branson, an afterthought, digital only banks have casual small talk with the cashier the well-known creator of the Virgin the advantage of being mobile app first about the weather. In addition, this brand, is getting into the game with and foremost. app also prevents the kids sneakily a Virgin Money digital bank that “will grabbing a couple of the strategically- On the other hand, traditional players be underpinned by next generation placed chocolate bars.4 not only have the advantage of technology and architecture.”6 economies of scale that comes with So, what is a ‘Challenger’ bank? a large customer base but also tend This innovative app turns the And are ‘Neo’ banks simply fintech to have well-known brands that are consumer’s smartphone into a start-ups? A ‘Challenger’ bank is trusted by potential customers. More portable scanner and checkout likely an established mid-sized or and more traditional banks are also till point. specialist bank that is seeking to seeking to zone in on the mind of the compete with larger institutions. millennial by funding innovation labs ‘Neo’ banks are purely digital and and embarking on partnerships with mobile-based. However, since both fintech start-ups. ‘Challenger’ and ‘Neo’ banks are unhindered by the burdens of legacy systems, they are more agile and adaptable than conventional banks – and can easily spell ‘disruption’ for traditional banking models. © 2018 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 4 | KPMG | FIPS Quarterly Results December 2017 Nevertheless, regardless of how Dotting the ‘i’s and The next step involves developing steady a traditional bank’s position crossing the ‘t’s measurable and relevant metrics appears to be, those operating and actually measuring whether ‘Challenger’ and ‘Neo’ banks, with Recently, the Harvard Business the goals have been achieved. The their solid fintech value propositions, Review Journal (HBR) released an article provides an example of how will most likely continue to examine article discussing the efficacy of to go about doing this in the case of 7 how to disrupt the industry and companies’ compliance efforts. Banks a confidential whistle-blower hotline; possibly drive a new wave of who are subject to a plethora of rules, that is to say, the company should innovation in this age-old industry. regulations and statutes are obliged to test whether the hotline works, and essentially comply or die. determine based on usage data Considering the pool of registered whether it is actually being used, banks in New Zealand and their The article scathingly states that, what it is being used for, when and operating models, we have not really despite companies spending in what manner the allegations are seen any clear VC funded disruptors ’staggering‘ amounts on investigated, and how the results such as ‘Challenger’ or ‘Neo’ banks compliance efforts which include of the investigations are reported emerge.