In the aftermath of the pandemic — which led to a significant spike in inflation — interest rates have been rising around the world. Earlier in November, the US Federal Reserve hiked interest rates for the sixth time in the past year.
Guided by foreign policy, banks in Singapore have been following suit. Since the Monetary Authority of Singapore (MAS) allows domestic interest rates to be determined freely, they’re largely dictated by the global sentiment.
Rising interest rates are a challenge, particularly for small and mid-size enterprises (SMEs) and everyday consumers.
Businesses risk losing out on their cash reserves and profit margins in their efforts to repay loans. Home owners face greater mortgage repayments, and those with credit card debt are seeing rates reach record highs.
On the flip side, the banking industry is one of the very few to benefit from this economic environment. “To be honest, these are not tough times for us,” says DBS Bank CEO Piyush Gupta at Singapore FinTech Festival 2022 held earlier this month. “We just reported record profits yesterday.”
In Q3 2022, DBS surpassed analyst expectations and reported S$2.24 billion in net profits. UOB and OCBC found similar success, with the latter also reporting its highest-ever net profit of S$1.6 billion.
“We make a lot more money with higher interest rates,” Gupta explains. During such times, banks are able to widen their spread and enjoy the profits which come with it. They generate better yield on the money they lend out, while paying customers the same interest rates on deposits as before.
Economic challenges in 2023
Despite such benefits, banks need to stay cautious of the uncertainty that lies ahead.
“For the economy as a whole, this is a challenge,” Gupta comments on the economic environment. “If interest rates get up to the five per cent handle, that’s an environment we haven’t seen in a long time.”
In his view, this would trigger a recession in the US and a sharp slowdown in Asia. “If China doesn’t open up, that’ll compound the problem. I think next year could really be choppy [given the] macroeconomic reality.”
I think there’s a recession coming and a slowdown. The only positive lining is if China opens up. For everyone in Asia, China can be a countervailing influence to the general slowdown in the world.– Piyush Gupta, CEO of DBS Bank
Beyond economics, Gupta also acknowledges the looming geopolitical concerns. Although DBS has a long-term strategy — built around ideas such as digitisation and sustainability — which it intends to see through, there’ll be a need to adapt based on the global political climate.
“The China-US tensions are very real, and I think all of us are going to have to negotiate through that in the next two to three years. Singapore as a country, DBS as a bank — we’re all going to have to figure out how to play both sides and it’s not going to be easy,” Gupta says.
The future of finance: Web3 and blockchain
In the midst of all this turmoil, finance is being disrupted on a technological level too. Blockchains and distributed ledgers have opened up a realm of possibilities surrounding the transfer of value.
Even though events such as the recent crypto winter have raised doubts, the value of this technology remains apparent. Private cryptocurrencies might lose their allure over time, but blockchain will definitely have a role to play in the future of finance.
“I think the architecture of a distributed ledger is game-changing,” explains Gupta. “It [allows us to move] from a hub-and-spoke model to a point-to-point model.” This can help take away a lot of the friction and inefficiencies which plague traditional finance.
Gupta believes that the great debate isn’t whether blockchain will be used for value transfer. “Most people would agree that the technology makes sense.” What remains to be seen, however, is the type of currency that’ll be used in the process: will it be public money or private money?
“The answer isn’t rooted in tech. It’s rooted in humanity and soft sciences,” Gupta says.
Crypto advocates would argue that in the long run, “the personal desire of individuals will trump everything”. In their search for control and autonomy, people are more likely to turn to a system free from oversight and regulatory checks.
On the other hand, regulators will say that nation states exist for a reason. People enjoy the sense of security which regulated financial institutions can provide. It’s unlikely that a majority would rather place its trust in a private company rather than the state itself. “I don’t think people will vote to say ‘I want to be a citizen of Facebook’,” says Gupta.
DBS is actively involved in a number of blockchain projects, all of which explore the use of public money on the blockchain. Gupta believes that within the next year, there’ll be several valid use-cases where blockchain helps remove friction from the financial system.
These will primarily be targeted towards merchants and business. When it comes to retail consumers, the scope isn’t quite as broad.
Using retail CBDCs as an example, Gupta explains that existing applications such as DBS PayLah! and GrabPay are already very efficient. There’s little to be gained by introducing retail CBDCs as a replacement.
Gupta reiterates his stance on the great date, stating that public money will continue to reign supreme. “If I had to make a bet private money replacing public money, I don’t think that will happen.”
Featured Image Credit: Singapore FinTech Festival 2022