Retail banking in Vietnam: The increase is strong and the need for a suitable debt collection strategy
Vietnam’s retail banking explosion has the potential to be a very good thing for both established banks and challenger banks. Focusing on the younger population, which is hungry for a new approach, could result in not only a new target audience and higher profitability but also a rise in banking client loyalty.
Vietnamese society is rapidly evolving. Generation Z already accounts for 25% of the country’s 15 million-strong workforce, and this number is steadily increasing.
What does this mean for the country’s economy, though? This generation has grown up with access to technology and the internet, as well as higher exposure to worldwide ideas and cultural values than their elders, vast digital networks, and a proclivity for spending discretionary income on things like eating out. In turn, the banking system in Vietnam is beginning to mirror similar beliefs, behaviors, and goals.
According to statistics from the State Bank of Vietnam, only 20% of the country’s citizens have a bank account, and only 3% have a credit card. However, with 53 percent of the population now possessing a smartphone (compared to 59 percent globally), Vietnam is one of the fastest-growing smartphone markets.
And there are already new banks taking advantage of the opportunities presented by the convergence of technological and demographic change.
The rise of retail banking in Vietnam
The financial sector in Vietnam is gaining public trust. In 2012, the government undertook a reorganization plan that saw state- and commercially-owned banks acquire smaller, struggling banks in order to create one or two state-owned banks to serve as the country’s financial sector’s flag bearer. In addition, eleven banks are expected to embrace Basel II by 2020 (with Vietcombank and VIB having already done so), providing a boost to Vietnam’s banking system.
Vietnam’s focus on retail banking developed in tandem with public confidence. Instead of focusing on traditional banking, Timo, the country’s first neobank, developed “hangouts” that combine banking and coffee shops. Timo not only provides a social and drinking environment for young professionals, but it also allows them to obtain a bank account in just 10 minutes. Timo’s mobile app can then be used to manage bill payments, money transfers, and other activities.
Timo, on the other hand, is not a bank; though it supplies the technology, regulated financial services are handled by Vietnam’s VPBank. VPBank performs KYC checks and manages overdraft risk, with profits split with Timo. It’s a collaboration that provides VPBank access to the booming retail banking sector while also allowing Timo to compete with the backing of a major player.
In other news, commercial bank BIDV was named Best Retail Bank at The Asian Banker’s Annual Vietnam Country Awards in January. BIDV, the country’s leading bank in terms of net income, now holds 17 percent of the country’s retail deposits, with client numbers increasing at an annual pace of 11%. The bank’s rapid growth is due to its focus on digital transformation: not only is BIDV open to partnering with new fintechs, but they were also one of the first to introduce virtual cards and have built a digital lab that has reduced transaction processing time from 42 minutes to just seven minutes.
This transition is affecting not only bank accounts but also credit goods. Yolo, VPBank’s digital-only bank, debuted in late 2018 with the goal of assisting “youngsters and other energetic people in experiencing a new digital lifestyle.” Customers are encouraged to spend via its services, which include payments, lending, and Mastercard, as well as access to lifestyle service providers.
Meanwhile, Standard Chartered Bank Vietnam has developed a virtual credit card in response to the country’s growing CNP payments and e-commerce. The bank’s Head of Retail Banking, who reflects a growing consumer preference for digital over plastic-based payments, Harmander Mahal, says, “In line with our digital strategy, we have recently launched a virtual credit card for our clients. Here clients can instantly start shopping online with their virtual credit cards and enjoy special online promotions offered by the bank. The client feedback on virtual credit technology has been very encouraging and we plan to keep building on our virtual credit card platform.”
However, while growing demand for unsecured loans provides opportunities and profits for Vietnam‘s retail banking sector, it might also lead to another financial crisis if not carefully managed.
The risks of retail banking in Vietnam
Success in the retail banking sector will include investment in new technologies, a revamp of existing client databases, and the capacity to provide top-notch customer service for Vietnam’s state and commercially owned banks. This banking revolution is taking place in a country where bank loyalty is low: according to a 2014 poll by Ernst & Young, Vietnam had the highest number of bank clients looking to switch in the entire APAC region, with 65-77 percent willing to close their account and switch to another bank.
While an emphasis on customer service would help to retain retail bank customers, financial institutions in Vietnam are also concentrating on the country’s population’s rising appetite for borrowing in order to make a profit.
Consumers in Vietnam may now apply for and manage credit products online more easily than ever before thanks to digitalisation.
Consumers may now apply for and manage credit products more easily than ever before thanks to digitalisation. As a result, total outstanding consumer loans now account for 19.4% of total outstanding loans in Vietnam, up from 3.8 percent in 2008.
Given that Vietnam’s consumer finance sector is expected to reach $44 billion by 2020, it’s no surprise that consumer lending is on the rise. “Rising wages and expanding ambitions among the population also lend fuel to the greater demand for financial goods and services, especially those that encourage consumption,” says Kalidas Ghose, CEO of FE Credit in Vietnam.
It’s an opportunity for the country’s retail banks to see a significant increase in profitability, especially with the consumer credit sector expected to rise by 30% annually between 2018 and 2020. But can that credit be managed without risking the entire sector collapsing due to delinquency?
Between 2015 and 2017, the outstanding balance of online consumer loans in China surged by about fivefold, owing to creative new lending platforms and looser consumer lending rules. However, as a result, several lenders in the country currently have a bad loan percentage of above 40%, raising public worry.
How can Vietnam avoid a similar situation, given the country’s increased interest in consumer credit?
Debt and debt collections
The solution is not to completely avoid unsecured lending, but to guarantee that a sound strategy is in place to cope with a possibly large increase in NPL numbers and values.
It is evident that digital banking is the way of the future in Vietnam, with younger generations of bank customers preferring to use mobile devices and online solutions over visiting bank branches or dealing with bank staff in person or over the phone. With this in mind, it comes to reason that technology should also underlie the debt collection process, both from a customer-facing and internal perspective.
For customers, the ability to access their credit accounts and manage repayments via a self-service portal would cement a retail bank’s brand image as being forward-thinking and customer-centric. With customer choice and flexibility at the heart of such a system, it could also significantly reduce the likelihood of a customer spiralling into delinquency.
Customers would see a retail bank‘s brand image as forward-thinking and customer-centric if they could access their credit accounts and manage repayments through a self-service portal. With client choice and flexibility at its core, a system like this may greatly lower the chances of a client spiraling into delinquency.