As Singapore embraces the concept of a cashless payment system, local banks are in for a treat, with their profits potentially growing by 9 percent over the next two years as the said technology gains traction.
Citing Maybank Kim Eng analyst Ng Li Hiang, the Straits Times reported that the adoption of cashless payments would lead to an increase in credit card usage, which eventually benefits banking revenues.
The analyst said that should 40 to 70 percent of expenditure in Singapore be done cashless, banks can expect at least 3 to 9 percent profit increase until 2019.
It is interesting to note that most payment platforms adopted by retailers in Singapore, as the analyst explained, are linked to the banks of consumers.
A good testament to this is the Euromonitor data which shows that local banks had a combined 66 percent share of card payment transactions in 2016.
"Our channel checks suggest that the bulk of banks' card fees come from merchant discount rates and net interchange fees," the analyst said, noting that a merchant discount rate is a rate charged to a merchant by a bank for providing debit and credit card services.
On the other hand, interchange fees are transaction fees the merchant's bank account should pay whenever a consumer uses their cards to avail or purchase at their store.
"If we assume 70 to 90 percent of banks' card fees in Singapore are related to such fees, we estimate Singapore banks earned between S$77 million and S$388 million in 2016 (from these fees)," Ng noted.
From this, a profit margin of between 0.6 and 1.5 percent can be expected.
However, the analyst explained that this could pan out differently should other trends arise. For instance, the growing adoption of fintech could spell a different story for banks.
"This paper only looks at cards' fees but a potential disruption in the payments space can have wider negative implications to banks. We do not know the shape and form of payment disruptions from emerging fintech/e-commerce competitors," she explained.
She concluded that banks could actually see their profits shrink if the adoption of cashless payments through bank transfers or banking accounts gains steam. These methods do not incur additional charges for both merchants and consumers.