Digital transformation is the goal that most Vietnamese banks have been pursuing in recent years.
The wave of digital transformation of banks is happening strongly, reflected in the development of new products.
To evaluate banks’ digital transformation, Saigon Times used Information & Communication Technology Index (ICT Index) and component indices such as technical infrastructure, human infrastructure, internal information technology (IT) application and online banking services.
The trend of new product development is supported by the investment as well as IT application of the banking industry. Over the years, Vietnamese banks have made significant investments in IT such as investing in core banking systems and increasing the proportion of partial and complete automation processes.
According to the report on the readiness for development and application of IT communication in 2019, banks tended to focus on improving IT applications to upgrade core banking, increasing the level of automation, but paid less attention on implementing basic applications such as resource management and risk management. Internet banking services for individual customers (lookup, bank transfer, electronic savings, etc.) have become increasingly popular but the level of increase was not significant because the demand is almost saturated, while this type of service for corporate customers saw better growth. The operation of electronic banking also more developed in the period of 2016 2019.
Despite identifying that digital transformation is an inevitable trend, there are differences in the level of investment in technology as well as the digital transformation process of banks. Particularly, the difference levels in IT applications continued to be seen through banks’ IT application ranking.
Commercial Joint Stock Bank for Investment and Development of Vietnam (BIDV) continued to rank first in ICT Index in the period of 2017 2019 as well as the readiness for development and application of IT communication index. In particular, the bank took the lead in items of technical infrastructure, and internal IT application in 2019.
In addition to BIDV with high ranking, state-owned banks such as Commercial Joint Stock Bank for Foreign Trade of Vietnam (Vietcombank), Commercial Joint Stock Bank for Industry and Trade of Vietnam (VietinBank) and Commercial Joint Stock Bank for Agriculture and Rural Development of Vietnam (Agribank) all had low rankings than many other private joint stock banks.
Nam A Commercial Joint Stock Bank (NamABank) focuses on human resource and online services segment, and ranked the second in the readiness for development and application of IT communication index, while Orient Commercial Joint Stock Bank (OCB) ranked the lowest among private joint stock banks in this segment. Global Petroleum Bank was at the bottom of the ranking for online services and technical infrastructure.
The digital transformation phases
A bank’ digital transformation depends on the development level of the bank and its positioning within the new ecosystem. Banks have three reaction stages in the digital transformation process. The first phase is responding to new forms of competition, in which banks respond to changes in supply and demand of financial services by developing new digital channels (via mobile devices) and new digital products, such as digital payment operations. Banks believe that this can help them position themselves in a new competitive environment.
The second phase in the digital transformation process is to renovate technology platforms to transform them into more flexible platforms in modules. This helps accelerate the integration of new technologies and speeds up the development of new products.
In the third phase, banks leading in the digital transformation process will strive to make their large technology investments profitable by pursuing digital strategies that help deeply transform their organisational structure.
According to Saigon Times, the digital transformation process of Vietnamese banks is currently at an early stage. However, there has been differentiation among banks, in which the group of state-owned banks with advantages in terms of capital has invested significantly to adapt to technology (the second phase). A number of private joint stock banks such as Vietnam Technological and Commercial Joint Stock Bank (Techcombank) has invested 300 million US dollars in IT infrastructure. Techcombank is considered a private bank with strong IT infrastructure, focusing on developing customer experience on online banking.
The relationship between digital transformation and banks’ profitability
To evaluate the relationship between digital transformation and the Return on Asset (ROA) of commercial banks, Saigon Times used ICT Index and component indices such as technical infrastructure, human infrastructure, internal IT application and online banking services.
Overall, banks’ digital transformation is positively correlated with ROA. It means that the development and application of IT in this period will to some extent increase the profitability of Vietnamese commercial banks.
For component indicators, the three factors of technical infrastructure, human infrastructure and online customer services are positively correlated with profitability. Particularly, online customer service is closely correlated with banks’ profitability.
Meanwhile, internal IT application is negatively correlated with ROA. This result shows that the investment expenses on deploying internal IT applications such as core banking, basic applications, electronic payment, etc. are not identical among banks, thus leading to the possibility that the average profitability of the banking industry declines.
In summary, the above analysis shows the serious investment trend of Vietnamese banks in the digital transformation process. This digital transformation has had some initial success, although the process requires huge costs and the investments for the transformation may not bring profit in the short term. During a certain period of the digital transformation, banks with a high level of digital transformation will provide differentiated products and services and thus generate greater profits than their rivals. However, this depends on the right choice when investing in digital transformation, as well as banks’ own efforts and attitudes to changes.
