Vietnam Fintech in a Flash — Part III: Innovated Banking
NOTE: If you haven’t read Parts I and II, please read up here:
Part II: https://medium.com/@longpham91/vietnam-fintech-in-a-flash-part-ii-digital-payment-1a49bd155add
A true digital bank is built on the value proposition that most products and services are delivered digitally. Its customers expect to use digital channels for their day-to-day banking activities. The digital bank’s infrastructure is optimized for real-time digital interactions and its culture embraces the rapid change of digital technologies. — “Designing a sustainable digital bank — Learning from the digital pioneers,” IBM
Banking is one of the oldest professions in human history. The root of modern banking that is still used today originated from Italy during medieval times, with the first bank established in Venice in ca. 1157.
In Vietnam, the banking system began with the French colonization. The Banque de l’Indochine served as the central bank for the entire French-ruled Indochina, including modern-day Vietnam, Laos, and Cambodia. In 1951, the Vietnam National Bank was established to develop an independent and autonomous monetary and credit system for Vietnam. Following the reunification in 1975, between 1975–85, the banking sector’s primary function was to serve as a budgetary mechanism to create a single banknote for a unified Vietnam. Only until the 1990s, along with the Reformation movement by the government, that the creation of the two-tier banking system was complete. The State Bank of Vietnam (SBV) would function as a central bank, while the commercial banks and credit institutions carry out currency trading, credit, payment, foreign exchange, and banking services in line with the law.
Today, the commercial banking system in Vietnam comprises of 100 banks, the majority of which are local banks and representative offices of foreign banks and financial institutions.
Foreign banks’ presence in Vietnam also rose to new heights. After two consecutive years of scaling down in 2016–2017, mostly through divestments from local private banks, Vietnam’s banking sector witnessed the approval for banking licenses by the State Bank of Vietnam (SBV) for several foreign banks, such as United Overseas Bank (Singapore) and Woori Bank (South Korea). Public Bank (Malaysia) and Shinhan Bank (South Korea) also expanded their networks of transaction offices and branches. Shinhan, with over 30 branches and auto-banking locations (called “Shinhan Digital Hub”), is the largest foreign bank in Vietnam.
Current Scenario
As mentioned in Part I of this series, the level of banking penetration in Vietnam only reached 59%. This level pales even in comparison with local ASEAN peers, such as Thailand (86%) and Malaysia (92%). Furthermore, according to World Bank data, the number of ATMs and bank branches per 100 thousand adults in Vietnam are at 24.3 and 3.4, respectively, indicating a lower level of penetration of traditional banking services in comparison with peers.
Meanwhile, per the Digital 2019 report by WeAreSocial, the number of Internet users in Vietnam has reached 64 million at the end of 2018; the mobile penetration rate has also reached 97% of the adult population for any mobile devices and 72% for smartphones only. This heightened adoption creates more opportunities for digital banking growth in Vietnam.
Finally, the rise of fintechs, especially in digital payment, in recent years has posed significant threats to traditional banking in Vietnam. In response to this challenge, these traditional banks must quickly adapt their strategy and products, gearing toward the Digital Banking mechanisms to serve the market better.
From Digital Transformation…
In Vietnam, Digital Banking has become a cornerstone of the financial development agenda. As claimed by Vietcombank, 94 percent of banks in Vietnam are investing in digitization, and 42 percent of them consider digital baking a top priority. Banks are stepping up their digital transformation to better serve their customers and improve overall banking experiences.
In online banking, the growth has been remarkable. Ninety-five percent of banks offering Internet & mobile banking services, according to Dr. Nguyen Thi Thanh Van from the Vietnam Banking Academy’s International Business Faculty. In terms of transaction volumes, Internet banking in Q3–2019 reached 226 million transactions, valuing at 10.9 trillion VND; mobile banking reached 202 million transactions, equivalent to 2.09 trillion VND in gross value, at 155,3% year-over-year growth. (SBV announced these statistics on Oct 1st, 2019 in Hanoi.)
However, traditional banks are not start-ups, in the sense that they are not in a position to embrace the lean, fast-moving advantage that nascent startups often enjoy. Customarily, they come with legacy infrastructure, back-office systems, and existing distribution channels (such as branches, ATMs, employees) that are programmed in the traditional way of banking. These resources have been built over the past few decades, and it would be a waste to not leverage them. Most use cases of digital banking in Vietnam, consequently, fall into Model A or B.
Model A: Digital Bank Brand
Most commonly, the traditional banks would launch a new Digital Bank, with its own banking products and dedicated sale and marketing channels. This new Digital Bank would still share some of the old brand’s features and leverage the available resources from their legacy infrastructure, back-office, and distribution channels. This was the case for OCB OMNI, TPBank LiveBank, and VIB.
Model B: Digital Bank Channel
For certain use cases, traditional banks develop an entirely new Digital Bank, which is entirely different from their current branding, creating a new distribution channel for its banking products. The most prominent pioneering bank in this model is VPBank with its digital banks YOLO and Timo. Viettel, the country’s №1 telecom giant, has also ventured into digital banking with its mobile-based service ViettelPay, which links with Military Bank (MB) to offer banking services.
These two models are most preferred for traditional banks because it doesn’t require intensive capital and human resource investments. Digital Transformation is hard to achieve with limited capital and budget, as well as significant investment and application of new solutions and technologies. Only a few banks have made significant investments in this field, whereas the rest is still exploring.
…to New Operating Models for Banking
In both models, Digital Banks often attempt to reach beyond their parent bank’s existing products and services. Most often, they would become a distribution hub for other financial services, such as insurance, investment, bill payment, etc. They can do this by leveraging APIs (Application Programming Interface), which are sets of definitions and protocols for building and integrating with other application software, without having to know how they’re implemented internally. This can simplify application development, saving time and money, which is suitable for Digital Banking development and experimentation. As stated by VNUHCM-IBT, most commercial banks have already developed API connections with fintechs. The leading banks in this trend are Vietcombank (APIs with 30 companies), VietinBank, MB (26 companies), VIB, Sacombank, VPBank (25 companies).
Other traditional banks who decide to bypass these models and digitize themselves also take a similar approach. They would develop their own APIs to work with third-party providers, effectively opening up their infrastructure and resources for other companies. Asia Commercial Bank (ACB) is one of the first banks in Vietnam that has developed a functional set of APIs, which can be found on their Developer Portal. In doing so, not only can they enrich their product/service offerings to their users, but they also become infrastructure powerhouse for other fintechs or financial institutions.
…heading towards a fully Digital-only Bank
A digital-only bank provides banking facilities exclusively through digital platforms, such as mobile, tablets, and the Internet. It offers basic services in the most simplified manner, with the help of electronic documentation, real-time data, and automated processes. — Infosys, “Digital-Only Banking — A Soaring Wave in Consumer Banking”
The journey towards a Digital-only Bank, or Digital Native Bank as IBM put it, still have some distances to cover. There are a number of obstacles, including cybersecurity, consumer preference towards cash usage, and lack of infrastructure and regulatory framework.
Cybersecurity
Cybersecurity risk remains a top challenge for digital banking. As Le Anh Dung, deputy head of Payment at the SBV, succinctly said, “In Viet Nam, security risks such as fraud, customer fraud, network attacks on bank infrastructure, and user data leakage are rising.” Ernst & Young Vietnam reported that in 2018, 8,319 cybersecurity attacks targeted banks and 560,000 computers were affected by malware capable of stealing bank account information.
Do Anh Tuan, deputy director of Vietnam’s Department of Cyber Security and Hi-Tech Crime Prevention, also shared at the Security World 2019 conference that stealing card information and counterfeiting cards (skimming) are becoming more serious in Vietnam, given the number of 70 million domestic cards vulnerable to cybercriminals. The criminals would “use fake cards to conduct fraudulent transactions and pay bills/services via point-of-sale (POS) machines, stealing hundreds of millions of dollars,” said Tuan.
Vietnam’s Government Cipher Commission also reported that in the near future, the cybersecurity situation in Vietnam will become even more complicated since cyber attacks will use AI technology and focus more on banks to steal users’ confidential information.
Cash-usage consumption behavior
In Vietnam, the use of cash in the consumer market, especially in daily spending, remains high. A recent report by Standard Chartered points out that cash transactions remain highly popular in Vietnam compared to other ASEAN countries. For instance, in 2017, Vietnam posted the highest rate of cash on delivery for internet purchase at 90.17%, significantly higher than the second-ranked Indonesia of 65.30%. Also according to this report, the high level of cash use is mainly due to a lack of understanding of how digital payment methods work and how to start using them.
Inadequate Infrastructure and Regulatory Frameworks
The lack of digital infrastructure poses another challenge for the growth of Digital Banking. In order to have a Digital Native bank, there have to be sufficient e-KYC (Know Your Customer) processes and opening of Application Programming Interfaces (APIs) that work seamlessly with the core banking system.
Insufficient legal regulations are also a big challenge. In the past few years, the digital banking segment has grown rapidly with technology advances, but domestic legal regulations are lagging behind, making banks reluctant to apply new technologies and services. For example, Vietnam does not have a legal framework for sharing, exploiting and storing data, so banks have not been able to apply cloud computing or blockchain widely in their operations.
Current Solutions
Realizing these hurdles standing in the way of Digital Banking growth, the responsible parties, namely the government and private banks, have both taken actionable steps towards amending the lackluster areas as well as creating new frameworks.
The creation of the National Payment Corporation of Vietnam (NAPAS) was such a pioneering initiative. A state-owned company (with its largest shareholder being the State Bank of Vietnam), NAPAS have developed and completed the national retail payment infrastructure since 2014, in order to provide financial switching services and electronic clearing services in Vietnam. Beyond that, NAPAS has also worked with traditional banks to improve the digital banking infrastructure and security.
The government itself has also been very active in the growth of fintechs in general and especially Digital Banking. In 2017, the government established a steering committee to improve the ecosystem for the fintech sector. In 2019, the SBV was also the first authority to propose the government to set up a sandbox for regulatory testing. Nghiem Thanh Son, director of the Payment Department of SBV, shared about how this sandbox will function, “We set the requirements and scope to meet certain criteria, the management agency will monitor the profile of businesses that apply to control risks as well as avoid impacts to the last users.”
The commercial banks have also taken active steps to edge closer towards a fully Digital-only Bank. Vietcombank, the country’s largest bank with the market capitalization of $13 billion as of September 2019, launched its first two Digital Labs in Hanoi and Ho Chi Minh City in 2016, as part of the larger Digital Transformation scheme. Sharing with Forbes Vietnam, Mr. Nghiem Xuan Thanh, Chairman of Vietcombank, disclosed that they will be investing heavily in its Mobile Ecosystem by working with fintechs in the near future.
Key players
NAPAS
NAPAS, short for the National Payment Corporation of Vietnam, was established in 2004. Originally named Banknet, the company merged with Smartlink in 2016 to create “a unified card switching center under the direction of the Prime Minister and the State Bank of Vietnam.”
NAPAS administers and operates a switching system connecting more than 18,600 ATMs, 261,000 POS machines, and 300 electronic payment companies, serving over 100 million cardholders in Vietnam, as stated on its website.
Aside from this mission, NAPAS also commits to strengthening the national banking infrastructure. In May 2019, NAPAS has partnered with the Vietnam Bank Card Association (VBCA) to launch the first local debit card with a built-in security chip, with 7 pilot banks. NAPAS has also been coordinating with banks, partners, and international switching organizations, such as Discover Financial Services (DFS), Network for Electronic Transfers (NETS), to provide payment products and services applying the most advanced digital technology like Blockchain, QR Code solutions.
Timo
Founded in 2015 as a joint venture between VinaCapital and other partners, including VPBank, Timo is the first Digital Bank experiment in Vietnam. Timo claimed that it has over 250,000 customers and four branches, which it brands “Hangouts,” across Vietnam.
Timo operates by leveraging the official banking license from VPBank. Through its web and mobile applications, Timo provides a wide range of financial products and services to its users, from a basic checking/saving account to bill payments, life insurance, mutual fund investment, hotel/flight booking. The bank also offers a free NAPAS debit card that comes with every checking account, as well as a Mastercard credit card for regular Timo users with minimal requirements for credit approval.
ViettelPay
ViettelPay is the mobile banking arm of Viettel, Vietnam’s largest telecommunication network. Aside from providing certain functions similar to an e-wallet, it also allows users to access banking products and services through its partnership with Military Bank (MB) (also partly owned by Viettel). ViettelPay users can request a free MB debit card within the ViettelPay mobile application, use their ViettelPay account as a checking account (receive/send/deposit money, request bank statements, etc). The physical KYC process for new users can be completed at any Viettel transaction point nearby with a national ID card or passport.
After 1 year since its launch in 2018, ViettelPay already has 6 million users, grossing 50 trillion VND (~US$2.2 billion) in monthly transaction volume, per its PR data. Aiming forward, ViettelPay targets the mass consumer markets, especially in rural areas where mobile and digital adoption is still low. By leverage Mobile Money framework (money-related services distributed via telco networks), ViettelPay can target the entire network of mobile service users, regardless of their device or carrier.
The Mobile Money model has become increasingly promising, given the fact that there are 143.3 million mobile subscriptions in Vietnam, but only 72% of mobile users are using smartphones, according to WeAreSocial. This model has also been proven globally, with about 90 countries in the world, providing access to banking and financial services for 866 million registered accounts and grossing USD 1.3 billion in transactions every day, as claimed by GSMA Ecosystem. With the launch of Mobile Money in Vietnam, the country might soon witness its financial inclusion flourish, replicating the success of Sub-Saharan Africa. Also according to GSMA, more than 60% of this region’s adult population has a mobile money account.
TPBank — LiveBank
TPBank, formerly Tien Phong Bank, was founded in 2008 by FPT Corporation, MobiFone and Vietnam National Reinsurance Corporation (VINARE). After 5 years of inefficient operations, in 2012, Tien Phong Bank received investment from DOJI Gold & Gems Group by Mr. Do Minh Phu and rebranded to TPBank. Followed by this change of leadership was a period of restructuring and digital transformation, marked by the launch of its LiveBank service in 2017.
LiveBank is a 24/7 banking facility that provides all basic services that a bank office would offer, including opening a checking account, register an ATM card, deposit/withdraw money, etc. The KYC process for registering a new banking account can be completed via Video Calling with an online bank teller via the LED screen installed into the LiveBank. LiveBank also allows biometric verification (voice and fingerprint recognition) for transactions.
TPBank’s statistics showed that after 3 years since launch, in November 2019, the number of LiveBanks nationwide has reached 150 locations and served 2 million customers. Thanks to its after-hours accessibility, about 60% of the transactions occurred outside of normal banking hours.
This fast growth was credited to the low investment costs and ease of opening procedure for LiveBanks versus for traditional bank branches: TPBank Digital’s CEO, Tran Hoai Nam, analyzed that on average, a traditional bank can only open 4–6 new branches with certain operational hours, whereas LiveBank has no such limitation. LiveBank also results in better unit economics for TPBank: For a traditional bank branch, the cost per transaction is roughly 23.000 VND, but for LiveBank, this number is only 11.000 VND, equivalent to 50% cost saving.
The Future in a Flash
In November 2019, the SBV has released the new regulatory draft for a new decree on non-cash payment. In this document, Mobile Money, for the first time, has been defined by legal language, creating a pathway to its wider usage. Digital Transformation will help traditional banks become part of this initiative, instead of getting sidelined by it.
Fintechs will continuously become more impactful towards the growth of Digital Banking, by offering an opportunity for traditional banks to look at their operations and reevaluate where they stand. Based on that, banks can decide what to do with fintechs: co-develop with it, depend on it or acquire it. In any case, the growth of Vietnamese fintechs will change the banking experience in Vietnam for the better.
Up next: Part IV: Alternative Lending as New Frontiers (coming soon)
