How Singaporean banks can cash in on cashless payments

Profits could jump by up to 9%.

Singapore banks could cash in on cashless payments and have profits rise from 3-9%, Maybank Kim Eng revealed.

According to an analysis, new various initiatives to simplify e-payments, such as a common QR code and unified point-of-sales terminals, could increase cards usage and potentially add to the banks' revenue.

The analysis focused on the impact on card fees should 40-70% of expenditure in Singapore shift from cash to cashless payments.

"Most payment platforms adopted by retailers are currently linked to consumers’ cards and/or bank accounts," said Maybank Kim Eng analyst Ng Li Hiang.

Local banks already have a 66% share of card payment transactions in 2016. Maybank Kim Eng said that the bulk of banks’ cards fees come from merchant discount rates (MDR) and net interchange fees.

If 70-90% of banks' card fees in Singapore are related to such fees, Singaporean banks earned $77m up to as much as $388m in 2016.

"This would translate to 0.6-1.5% margin, with OCBC having a lower margin than peers. We think OCBC’s lower margin may be attributed to lower fees generated from MDR and/or higher interchange fees paid," Hiang said.

Given that $70-123b or 40-70% of total expenditure in Singapore shift from cash to cashless, card fees could increase by $421m to $2b. Consequently, Singapore banks will make $60-600m.

Here's more from Maybank Kim Eng:

As there is a lack of detailed data, our estimates and analysis are based on broad assumptions.

If we assume 40-70% of total expenditure in Singapore is cash payments, this implies that SGD70-123b of expenditure could potentially shift from cash to cashless payments.

Based on Euromonitor data, Singapore banks have the highest share of card payment transactions, at 14-31%.

Out of SGD87b of payment transactions in 2016, we estimate Singapore banks’ payment transactions to be SGD57b. If we assume MDR and net interchange fees form 70-90% of banks’ total cards fees in Singapore, we estimate Singapore banks generated ~SGD77-388m in 2016.

Using card fees related to MDR and net interchange fees over total payment transactions for each bank, we estimate Singapore banks’ margins to be between 0.6-1.5%.

We think there are a few possibilities for OCBC’s lower margins compared to peers: 1) fewer merchants have signed up with OCBC as its merchant bank, hence lower fees earned; and 2) OCBC pays higher interchange fees to other issuer banks (i.e. cardholder’s banks), which may also imply that fewer OCBC cards are adopted by consumers in Singapore.