Australia and New Zealand Banking Group Limited (ANZ) and Oversea-Chinese Banking Corporation Limited (OCBC) of Singapore have agreed to withdraw from their joint venture to develop a stand-alone internet bank in Asia.
The announcement follows six months of detailed work on the business model, which indicated that financial returns were not sufficiently compelling given market entry costs and a softer economic environment. The venture was announced in July and would have seen the two banks investing $100 million over three years to create an entity offering a range of online financial services and related lifestyle products including shopping, travel and entertainment.
The JV has spent approximately 20% of the projects total investment," a company spokesperson comments. "This is equally shared between ANZ and OCBC Bank. The costs were spread across a range of areas. Some $12 million has been actually spent, of which 39% comprises software and consultancy and 30% staff costs. Total costs to date, including dissolution costs such as severance and technology contractual obligations, are estimated to total $19 million.
"Although it is disappointing for everyone not to proceed, we are pleased to have reached an early understanding of the project's viability before sizeable expenditures were incurred," says Alex Au, chairman of the ANZ-OCBC joint venture and OCBC vice-chairman and ceo.
The project would have marked OCBC's second foray into pure-play internet banking after it set up Asia's first such venture in April last year through its Bank of Singapore subsidiary. That product - FinatiQ.com - offers investment accounts and third party unit trusts.
"Entry costs in key Asian markets and the up-front investment in technology associated with a stand-alone entity are significant when assessed against the required returns," he says.
No doubt the Monetary Authority of Singapore (MAS) guidelines for internet banks played a part in the decision to cancel the venture. These guidelines dictate a minimum paid-in capital of S$100 million ($57.18 million) for internet-only banks. This alone would have eaten up a great deal of the ventures initial funding.
Experience in the US and Europe has also shown that an internet-only bank has to offer loss-leading interest rates to attract enough customers to create a critical mass. UK stand-alone bank egg, launched in October 1998, now boasts 1.5 million customers and is viewed as one of the most successful examples of internet only banking. Even so, its losses for 2000 totalled ú200 million ($294 million), within market expectations. It aims to break even in 2001.
According to Elmer Funke Kupper, ANZ group managing director of strategy and international, ANZ and OCBC will continue to build on the experience and working relationship that has been established over the last six months.
"Both banks will benefit from the market and technology research undertaken, as well as the technical skills and knowledge acquired during the planning phase," he concludes.