The intricate art of restructuring

Major companies are becoming service providers, moving on from their traditional businesses by relying on digital technology and strong partners to foster a competitive edge in the hopes of becoming major regional players.

In the latest case of transformation, Siam Commercial Bank (SCB) recently announced a restructuring to achieve an ambitious goal of becoming a major digital platform service provider under its planned new parent — SCB X — as well as a regional financial tech conglomerate by 2025, with a goal of serving 200 million customers.

SCB plans to establish SCB X to own the group’s operating entities, including SCB. The move aims to create flexibility in operations and better service for a diverse set of customers.

SCB chief executive Arthid Nanthawithaya said the company must no longer limit itself to traditional banking, instead taking advantage of its financial strength to accelerate aggressive expansion into other types of financial businesses, build technological capabilities, and manage a large technology platform to keep pace with global players.

He said it is crucial to quickly enter this new arena to survive over the next 3-5 years.

The country’s fourth largest bank by total assets also plans to spin off business units and set up new digital arms under SCB X, which will play the role of mothership for the SCB financial group.

As partnership is a key strategy to grow the group, SCB recently announced three partnership deals. One is with Advanced Info Service Plc (AIS) to set up a 50:50 joint venture — AISCB — to provide digital lending via an online platform.

Increasing in complexity

According to the Bank of Thailand, the SCB group’s new structure is not new — it has been around in the Thai and global banking sectors for a while. The central bank does not oppose the restructuring as long as the move ensures better services and fair treatment for customers.

The law for financial institutions empowers the central bank to supervise and examine financial business groups, including their parent companies, subsidiaries and joint ventures.

SCB still has to submit a formal application for Bank of Thailand approval for the restructuring after SCB’s shareholders approve the move.

SCB scheduled a shareholders’ extraordinary general meeting on Nov 15 to seek approval of the restructure. The bank is expected to seek central bank permission for the restructuring in November, with the Bank of Thailand expected to reach a decision in December or January.

According to Fitch Ratings, SCB Group’s restructuring is in line with the trend of Thai banks becoming more complex financial groups.

The Thai banking sector is facing a prolonged low-growth and low-interest-rate environment that inhibits growth opportunities in traditional banking segments, leading to several transformative mergers and acquisitions the last two years, said the rating agency.

Telecom with new services

Telecom is a key sector where players are transforming themselves into daily life service providers by capitalising on digital power.

More cross-sector partnership is expected from telecom operators in the future to ensure their revenue streams amid rapid changes in consumer behaviour.

Operators’ core business of telecom infrastructure may dwindle as digital lifestyles could be powered by a disruptor, said Somchai Lertsutiwong, chief executive of AIS.

Regarding AISCB, this is the country’s first joint venture between banking and telecom players to engage in digital banking services, including a digital lending platform, said Mr Somchai. This is the most suitable model for a partnership that serves AIS’s strategy, he said.

Some carriers only engaged in co-marketing campaigns with players in other sectors, or diversified into other businesses in a different segment, said Mr Somchai.

“The joint venture model is the highest level of partnership, allowing both parties flexibility to expand their reach out of their traditional businesses,” he said.

The model makes it easier for commercial banks, which are governed by the central bank, to run new businesses and add value from their existing funds and operations, said Mr Somchai.

AIS chose to establish a joint venture with SCB instead of partnering with a non-bank because the latter would be unlikely to satisfy the long-term growth of AIS’s business, he said.

“A good partnership model is one in which each party lacks different elements and we complement each other,” said Mr Somchai.

AIS believes the bank’s strength is in the lending business and AISCB should benefit from low funding costs for the provision of loans.

Non-bank companies are at a disadvantage in terms of funding costs, especially when scaling business over the long term, he said.

AIS has been developing its digital credit rating model through a data analytics system for five years, said Mr Somchai. Nanofinance services require precise data, especially the personal credit scores of consumers who seek loans, he said.

As of June, AIS had 43.2 million subscribers. SCB has 12.4 million customers using its SCB Easy app.

Everyday service platform

Mr Somchai said mobile services make up 85% of AIS’s revenue, but that proportion is expected to drop to 70% in 2024. The remainder comes from fixed broadband, enterprise business and digital business.

“Telecoms or other businesses that provide a service to the masses need to become an everyday service platform provider that people use routinely,” he said.

Even with mobile services as a core business in the long run, AIS has been working to develop digital platforms to capitalise on changes in people’s lifestyles, said Mr Somchai.

He said AIS is interested in diversifying into video entertainment, gaming, manufacturing, retail and healthcare.

In April, AIS launched a virtual shopping mall — V-Avenue.Co — to provide a new shopping experience for customers using virtual reality (VR) technology.

The company also broadened its foothold, entering the digital insurance market via partnerships with insurance firms.

AIS is now looking into smart healthcare service opportunities, said Mr Somchai.

“Smart healthcare is one innovation mega-trend being adopted in people’s daily life,” he said.

Positve move

According to a Kasikorn Securities (KS) analysis, AIS could utilise AISCB’s digital lending platform to facilitate its mid- to low-tier customers upgrading to smart devices. This could in turn increase customer retention.

AIS’s customers could have better access to financial services and a competitive borrowing rate through its customer database and credit profile analysis, KS indicated. AIS will also be able to provide financing to its dealers and distributors via a nanofinance scheme, said KS.

However, KS indicated AIS may face losses from the joint venture in the early phases.

AISCB’s direct competitor is Line BK, a social banking platform partnership between Kasikornbank and Line Corporation. Line BK has an estimated total loan portfolio of 9 billion baht.

KS said AIS’s expansion into financial services is clearly a “positive” move in terms of market sentiment.

Speed and focus

Voralak Tulaphorn, chief marketing officer at The Mall Group Co, said domestic retail operators have gradually adjusted their businesses after feeling the pinch from digital disruption.

She said the pandemic made speed and focus using agile management the emphasis to increase retailers’ competitiveness.

“Collaboration will be another area we prioritise to build a new retail ecosystem. Synergy with partners helps products and services have a stronger impact with customers,” Ms Voralak said.

She said with changing customer demand and digitalisation, the retail market will see a new fragmented model to serve personalised shopping.

For The Mall, the company will continue to transform its store design at each location to serve the customer journey, in addition to proposing new customer services, said Ms Voralak.