June 22, 2017


by Ryan Ong

SINGAPORE has a lot of external debt, according to an article on the top 20 nations with the highest external debt. It’s a little strange that it would freak people out, even if they don’t know how external debt works. I mean, have you taken a look at the countries on that list? Most of them are rich and developed countries, with the United States topping the list. It’s not like they’re featuring countries like Somalia or Syria, so that should tell you it’s mostly a positive thing. But how can owing money be a good thing? Well…

Photo By Shawn Danker
Monopoly Money.

by Ryan Ong

PANDA versus dim sum is not what you’d think of as a fair match, but in recent weeks the dim sum seems to be winning. Financially, investors have gotten pissed with China’s onshore yuan bonds. They’re heading back to Hong Kong in droves. Biologically, it’s because Pixar lied to you (please tell your children pandas eat bamboo only, before any ugly choking incidents at the zoo).

by Ryan Ong

AT SOME point in history, someone realised that – maybe instead of another stupid coupon – customers would be happier if they just got money back. This started the world of cashback, where people attempt to smother buyer’s regret with the cents they save. But things have changed since the first cashback credit cards grew popular in the ’90s.

What is cashback?

In personal finance, cashback is defined as getting a small cut of the merchant’s fees when a transaction is made. In investing, cashback is defined as something you will never get from a fund manager, no matter how much they screwed up. Cashback can also occur when someone is paid a commission for selling you something, and they in turn give you a cut of it.

Let’s look at the first instance.

When you purchase something through a payment portal, credit card, debit card, etc., the merchant pays a fee for processing your transaction. This is how NETS, Visa, MasterCard, and payment portals like PayPal make their money. It’s also why you pay higher cab fare when using your card.

Cashback is a percentage of the amount paid: if you get a 6 per cent cashback on a $100 magazine subscription, you get $6. Now you try: if you’re offered a 10 per cent cashback on a California Fitness subscription of $2,000, what would you get? The correct answer is “ripped off”, but $200 is acceptable also.

What is the difference between cashback and a discount voucher?

The general idea is that cashback is more versatile.

For example, say you’re given a 10 per cent voucher for a $50 meal at Restaurant X. Odds are, the terms of the voucher say you can only use it during your next meal there. The only way to take advantage of the voucher would be to go back. And vouchers are pretty hard to exchange for cash.

With cashback, you just get the money outright.

The rise of the cashback site

Before ecommerce got off the ground, cashback was the province of credit cards. But over time, credit cards grew more stingy, and cashback rewards diminished. For example, many credit cards have a cap on cashback: you may get a deal like 6 per cent cashback on all purchases, to a limit of $200 per month.

Alternatively, some credit cards ruined the versatility of cashback, by giving it the same drawbacks as vouchers (e.g. get 8 per cent cashback! But only if you shop at this highly specific store, that sells luxury shoelace extensions).

With online shopping getting more popular, some entrepreneurs realised it was easy to do a better job. Along came sites like UK based Quidco, and US based Topcashback.com. These sites started to offer higher cashback, without the limitations of their credit card counterparts (although in some cases they co-operated, and you could stack discounts from both). Singapore’s counterpart is called Shopback, and it operates in mostly the same way.

How do you use cashback sites?

Navigate to the site, and create an account. As you buy items, the cashback you accumulate will show in your account. Once the accumulated cashback is at least $10, you can withdraw the money (to a bank account, PayPal account, or whatever you designated).

Can you actually save money?

In the sense that a sale saves money, yes. If you’re going to buy things that you’ll buy anyway, then yes, you save with cashback. If you start buying things just because of the discount, then you’re just blowing money on more shopping.

There are a few things you need to watch for though:

One of the hazards is that cashback sites are dependent on merchants accepting a transaction.

If a merchant finds fault with your purchase (e.g. they claim you asked for a refund even though you didn’t), they might delay payment to the cashback site. And the site really is at the mercy of its advertisers, affiliate marketers, client businesses, etc. The site has to be paid their commissions, before they can give you a cut.

This means there could be a long delay before getting your cashback. If you browse the terms and conditions on Shopback (visible whenever you click a particular product or service), some of them clearly warn that it can take 30 to 60 days to get your cashback.

The other worry is that cashback sites are fairly new, and are not regulated. In the event that they don’t pay you, or close down while you have a lot of cashback accumulated, you’re probably going to lose the money. So it’s a good idea to withdraw your cashback as often as you can.

(And don’t even think of something silly, like suing them. What are you going to do, fight two months in court over $12 off a shampoo bottle?)

Do cashback sites have the potential to take off in Singapore?

Singapore is a financial hub, so any cashback site here is up against stiff competition. There are a multitude of credit cards offering cashback; and while that cashback is more limited, banks are much quicker to deliver the money (and are trusted because of the high degree of regulation).

Hopefully, the two will fight each other to our advantage: the banks will prompt cashback sites to improve on promptness, and the cashback sites will cause the banks to rethink their Uncle-Scrooge-level miserliness. Some of these credit cards now give 1.5 per cent cashback. Seriously, 1.5 per cent. They may as well chuck a Mentos at your forehead and call that the discount.

Beyond that, the rise of cashback sites depends on whether they can find a way to differentiate themselves. Right now, plenty of Singaporeans will look at them and say “Meh, it’s just another discount site”. They’ll need to find that magic ingredient which the zillions of other sites lack.


Featured image by Sean Chong.

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by Ryan Ong

TEMASEK Holdings is set to fully acquire SMRT, if only the shareholders can agree to a price of $1.68 per share. This would make the total buyout price of SMRT $1.18 billion. It would also take SMRT off the stock market, and beholden to Temasek instead of its crowd of current shareholders. But what does it mean for the staff and customers, and why do these acquisitions occur anyway?

What is an acquisition?

An acquisition occurs when a company buys a controlling stake in another (or the entirety of another company). In this sense, SMRT can be said to have been acquired by Temasek Holdings already (at present Temasek owns 54 per cent of it). An acquisition can happen in one of two ways:

Friendly acquisition

With friendly acquisitions – as is the case with SMRT – the company being acquired works with the buyer to ensure a smooth transition. This doesn’t just mean helping to facilitate the sale of their shares; it also extends to planning the handover with regard to staff and customers.

For example, SMRT has told the National Transport Workers’ Union that no SMRT staff will lose their job, as a result of the buyover. We also know that SMRT will not scrap the train service; part of the reason Temasek is buying it (see below) is to allow it to improve on that.

The company that’s doing the buying, however, still has to convince the existing shareholders to part with their shares for an agreeable sum. This is usually at a slight premium to the market price.

Hostile takeover

This happens when a company does not want to be acquired. In these situations, the buying company has to find a way to convince existing shareholders to sell it a controlling stake. This is invariably an expensive prospect, since the shareholders are being bribed into handing over the reins.

One of the biggest recent examples of a hostile takeover was in 2014, when Icahn Enterprises attempted to acquire Clorox (yes, that Clorox you use to mop your floors). Shareholders were offered a premium of more than 20 per cent on their stocks, and the total bid for Clorox came to more than $14.4 billion (Icahn still failed to acquire the company).

A hostile takeover may also involve a Leveraged Buy Out (LBO). This is when the buying company intends to sell off the assets of the acquired company in order to pay for the buyout.

For example, a company might want to buy over its competitor, but lack the resources. It then discovers that its competitor has assets valued at $2.5 billion, with few or no loans. The company could borrow an extra $1.5 billion from the bank for its takeover bid, and then sell off its competitor’s assets to pay the loan after the acquisition is made.

Cue Hollywood drama, because that usually means everyone in the acquired company is going to lose their jobs (it is being bought simply to shut it down).

Why do companies want to acquire other companies?

The main reasons are:

  • Business synergies
  • Diversification
  • Eliminating costs
  • Eliminating competition
  • Buying emerging talent

1. Business synergies

This is when two companies have complementary goals, or ways to compensate for each other’s weaknesses. For example, a property developer may be really good at building condos, but suck at selling them. The developer might then purchase a property-related magazine, and use the acquired media (along with it staff, who are more skilled at marketing) to sell their condos.

2. Diversification 

As a business grows bigger, it becomes dangerous to rely on a single product or service. It would, for example, be dangerous for Temasek Holdings to put all its money solely into banks, or solely into shipping. If it did that, a decline in the chosen industry could lead to collapse, and billions in shareholder losses (and a lot of lost jobs).

For the same reason, you often find big companies that own businesses unrelated to theirs. Most people don’t realise that Kraft, for example, has been owned by Phillip Morris (a cigarette company) for a long time.

This is why there are specialised ethical investing funds, for people want to ensure their money doesn’t go into industries like tobacco, firearms, sex, etc. It can be confusing which companies have acquired which in the corporate world.

3. Eliminating costs

A business may acquire a supplier or distributor, in order to lower costs. For example, an electronics company may be paying a lot of money to a manufacturer, to produce its designs. It might decide to save money in the long term, by just buying over the manufacturer.

This can also work “downward”. For example, a clothing manufacturer may buy over the distributor that sells its label.

4. Eliminating competition

This is where hostile takeovers tend to happen. A business may be buying over another company simply to eliminate a rival. Most governments are wary of this, because it is a practice that can result in monopolisation (when a company has enough money to buy and remove all competitors).

The Competition Commission of Singapore (CCS) looks for the following traits when deciding whether an acquisition is anti-competitive:

– The merged entity has/will have a market share of 40 per cent  or more; or
– The merged entity has/will have a market share of between 20 and 40 per cent and the post-merger combined market share of the three largest firms is 70% or more

Section 54 of the Competition Act prevents acquisitions that would be anti-competitive.

Hostile takeovers may also draw the attention of the National Trades Union Congress (NTUC), if it would result in mass unemployment (this can happen if a company buys over a competitor, only to sell all the acquired competitor’s assets to pay for the buyout).

5. Buying emerging talent

This is a variation of point 4. When Facebook bought Whatsapp for around $29.6 billion, it wasn’t because they wanted to buy Whatsapp’s customers and business. In fact, Whatsapp only generated over $13.4 million in sales just after Facebook bought them. Does that mean it was a bad idea?

Facebook probably isn’t crying. Consider that, if Whatsapp had expanded further, it could have one day become a social media site that would rival Facebook. The cost to Facebook then would have been even higher.

Also, a large corporate player sometimes spots an obscure company with great talent and a marketable product, that is not fulfilling its potential. This may prompt them to buy the company quickly, and absorb its potential.

How will the acquisition affect customers?

Acquisitions happen all the time, and usually customers don’t notice. With regard to SMRT, there may even be a positive effect – because Temasek takes them off the stock exchange, SMRT will no longer have to worry about shareholders’ demands and their dividends.

It doesn’t need to worry about making short term profits to please shareholders, and can focus on running its services better.

Acquisition by Temasek is something of a compromise: it’s not quite nationalisation, but it brings SMRT closer to being a nationalised entity. The end result on customers though, is likely to be unnoticeable.


Featured image by Natassya Diana.

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Binary Options Trading, buy sell, put call

by Ryan Ong

BILLIONAIRE Peter Lim just raised a ruckus over an ad, which promotes a “get-rich-quick” scheme. Now you might think these ads are nothing unusual – they will name drop famous rich people from Warren Buffet to “my sister who makes $10,000 an hour working from home”. But the ad Mr Lim is upset about was particularly elaborate, and even spoofed The Straits Times. But as much as you might roll your eyes and laugh, you should know the “scheme” being promoted – a binary options site – has a real following:

by Ryan Ong

FINTECH is a natural response to inefficiencies in the financial system. And before we go further, l’d like you to consider the most famous banking innovation is the ATM. When the world decides your greatest innovation is us no longer having to see your face, you know how much banking processes suck. Enter the internet, with websites that provide banking solutions better than banks can provide them. And now, even the Monetary Authority of Singapore (MAS) wants an environment that’s more supportive of Fintech:


What is Fintech?

A portmanteau of “finance” and “technology”. Properly speaking, it refers to the way various websites aim to replace specific functions of a bank, with a more effective version.

For example, P2P lending sites aim to replace the lending function of a bank, with one that’s less tied up in red tape. Blockchain technology aims to replace the transaction systems of the bank, with one that’s safer and harder to hack. Trading sites replace the brokerage services offered by many banks, at a price that saves money for investors, and so on.

Individually, none of these specific Fintech industries represents a threat to a bank (e.g. P2P sites may replace the loans function, but you can’t really deposit money with them). This is why, during the birth of several Fintech companies, banks didn’t take much notice: Fintech firms could steal some business from the bank, but they could never replace the whole bank.

Today, banks have changed their tune. Collectively, Fintech companies have become like a school of piranhas: each one can potentially perform a specific function better than the bank. As a result, traditional banks are seeing little chunks of their business being torn away, and the collective losses are mounting.


The two views on Fintech

There are two differing views on what Fintech will do to traditional banking.

One school of thought is that Fintech threatens banks as much as a spitball threatens a battle tank. Fintech sites, according to this perspective, do things that banks no longer have much interest in anyway.

For example, P2P lending sites can give out loans to small businesses, and this should theoretically compete with banks. But many banks don’t want to give out small business loans anyway. The risk is high, and the upside is low (in the unlikely event your Jar Jar Binks-themed cafe becomes a roaring success, are you going to offer to repay your business loan at a higher interest rate? Of course not, so there isn’t much in it for the bank).

Another example:

Mortgage comparison websites, which might seem to affect bank business negatively by directing users to the cheapest loan, mostly work with the banks. See, the mortgage rate changes with the bank’s loan quota (the bank has a certain amount it wants to lend out, and the rates go up as this amount is reached). So the mortgage comparison sites are actually doing the banks a favour: they are advertising the banks that want to give out more loans. The banks that show up as expensive don’t care, because they’ve probably met their quota already.

On top of this, the old school concept of banking – that of banks using deposits to lend to businesses and earn off the interest – is outmoded. Today, the “deposit and loan” aspect of banking may only account for a sliver of the bank’s revenue. Many banks derive the bulk of their earnings from trading derivatives, repackaging loans into bonds, speculating with Credit Default Swaps (CDS), and other things that are invisible to us until they blow up the economy.

From this school of thought, banks aren’t being made obsolete by Fintech at all. Fintech is only taking over the functions that banks don’t care much to provide anymore.

The alternative view is more cautious.


Fintech will do to banks what Uber did to taxis

Fintech is catching on fast with Millennials, many of whom (1) are tech savvy and find traditional bank processes too inconvenient, and (2) have grown up in a world where there is increasing distrust of the banking industry.

The view that banks are better established and that Fintech only takes “small” amounts of business, is pretty similar to what many big hotel chains thought, right before Airbnb started to beat them like stepchildren in a faerie tale. Consider that, before Uber moved into Singapore, ComfortDelGro was a giant cab company with literally thousands more vehicles, and near total dominance of the industry. Uber was not even challenged by Comfort (and perhaps still hasn’t been), probably because it seemed insignificant.

While Fintech firms may start with taking small portions of business, they could conceivably grow into other aspects. For example, consider a payment portal: many online shoppers leave some money in their Paypal account. What happens if a site like Paypal decides to take these “residual” deposits, and start investing them using the same fractional reserve banking system that commercial banks use?

What happens if one day, P2P lending sites start rating companies the same way Moody’s or Fitch does, and moves into the finance industry in a way that dramatically affects bond markets? That could disrupt bank businesses at a higher level than retail banking.

This perspective holds that banks shouldn’t sit on their ass and be self-assured. They need to start competing with Fintech yesterday.


Examples of Fintech in Singapore

1. Comparison sites

These are sites that aggregate information on different products, and give you a rate comparison. The G has already done this for insurance: CompareFirst.sg gives you a list of insurance policies and quotes, so you can pick based on price, coverage, etc.

We also have sites like MoneySmart and MortgageWise that compare home loans, SingSaver and Get.com which compare credit cards, SG Car Mart for comparing car insurance, and others. The point of these sites is to save you the effort of having to manually compare.

Most comparison sites are free to you, as they operate on the referral fees or commissions they get from selling the bank or insurer’s product.

2. P2P Lending

You can find this on sites like MoolahSense and CapitalMatch. The site hooks you up with a business that needs money, and you can lend them some (usually there’s a minimum sum of $1,000). The interest on this loan is high, up to 21 per cent per annum, so you can grow your money fairly fast.

Of course, this means you take the risk of the business defaulting, and being unable to pay you back. P2P Lending is often used in small doses (like five per cent of your investment portfolio), so the potentially high returns can offset the low returns from safer products.

3. Trading sites

These are companies like Call Levels or 8 Securities, which make it easy or cheap to trade stocks and Forex. Those of you who already do this will be aware of issues such as platform fees, or interface features like the update systems. Pick the one that works for you.


Banks aside, Fintech adds a lot of value to you, as the end-user.

Fintech ultimately saves time and money, two resources everyone is always short of. Nurturing Fintech is going to be the smart way forward for us, both because we’re a finance hub, and because Fintech is aggressive when it comes to marketing. If you don’t understand loans or trading, you can bet there’s a Fintech site out there that wants to ram the knowledge down your throat.

In a way, Fintech isn’t just making things convenient. Fintech companies, in an effort to create demand for their services, often produce content explaining mortgages, insurance policies, risk management, and other things we would make mandatory in the school syllabus if we were smarter people. Whatever happens to the banks, Fintech is healthy in more ways than one.


Featured image Fintech, money, finance by Flickr user Tech in Asia(CC BY 2.0)

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Photo By Shawn Danker
The Singapore stock exchange building.

by Ryan Ong

EXACTLY how much does a company need to tell you about its business? Should SMRT have told its shareholders about its defective trains? Or was that not really relevant? After all, you probably don’t ask questions about the various companies in your mutual fund portfolio; for all you know, one of them produces dim sum out of old pants and the medical waste of an STD clinic (which would explain the frozen Xiao Lung Baos in several supermarkets). This week, we’re looking at disclosure from a financial aspect:

by Ryan Ong

BANKS have started to drop home loan rates faster than an O Level student dropping humanities. The rate for private bank loans, which usually hovers at around 1.8 per cent for the first three years, went as low as 1.28 per cent. Here’s how the math works out:

Say you buy a condo for $1.6 million, because privilege is best flaunted. The total loan amount would be $1.28 million (you can only borrow up to 80 per cent of the value, the rest has to be paid in cash. That’s why people still smuggle drugs despite the death penalty).

Say this $1.28 million has a 25 year loan tenure, with an interest rate of 1.8 per cent. Monthly repayments would be around $5,302 per month. Wow, that’s more than my fund manager makes for me per month (by around $5,302). Over a period of three years (the interest rate jumps on the fourth year, it won’t stay the same), that’s $190,872.

Now adjust it downward by just a little, to 1.3 per cent. The monthly repayments come to about a flat $5,000, or $180,000 over three years. That’s a savings of $10,972. That ain’t chump change – it’s enough for a European holiday, or maybe one bun at a Marina Bay Sands cafe.

Needless to say, plenty of private home owners have suddenly felt the urge to refinance. It’s even a strong temptation for those using HDB Concessionary Loans. HDB loans can be refinanced to bank loans, although they cannot be switched back afterward. HDB loans have an interest rate of 2.6 per cent. (Yes, it’s more expensive than the banks. Ask your MP to justify it! They love to serve their public!)


Why would the banks charge so little?

The first reason is that banks care and want to give back to society, such as through generous undeclared funding for struggling writers. The second reason is that home loans are pegged to certain indexes.

The most commonly used index to determine home loan interest is the Singapore Interbank Offered Rate (SIBOR): the interest rates of 20 banks are ranked from highest to lowest, and the SIBOR rate is the averaged number between the six middle banks.

Although it’s local, SIBOR rates are indirectly affected by interest rates in the United States.

For example, one of the reasons rates have been so low is due to the 2008/09 Global Financial Crisis. In order to stimulate economic recovery, the Federal Reserve (Fed) reduced the interest rate to zero. This caused SIBOR to go lower than an argument in a YouTube comments box, and partly contributed to a property frenzy that peaked in 2013.

This is where Brexit comes in.


How did Brexit make a difference?

I’m getting there. Bear with me.

By 2015 the United States economy was recovering, because unemployment had fallen and Donald Trump was still a funny joke. The Fed decided to raise interest rates again, because prolonged periods of low interest tend to result in high inflation further down the line.

After sufficient people had threatened to throw themselves off the roof, the Fed announced they’d raise the rate slowly. They would start with a teeny bump, of 0.25 per cent. Then there would be three more rate hikes, until the end of 2016. This caused SIBOR rates to rise steadily, with many banks expecting it would hit two per cent by end 2016. There was a big hunt for good fixed rate loans.

The two things happened.

First, the US economy didn’t grow as fast as expected. Second, Brexit.

While it won’t have a significant impact for a while more (the UK has yet to initiate the proceedings to leave the European Union), it’s uncertain what will happen when they do. It’s plausible that the European Union (EU) will deny the UK access to its single market, or come to harsher terms than expected. It’s also possible that the UK’s departure signifies the coming break-up of the EU, if states like France, Portugal, Italy and so forth decide to also pull out.

In light of slowing growth (the US is no longer sure its economic recovery is as complete as they suspected), and the uncertainty of Brexit…they decided to freeze the other three rate hikes.

This means the rate stays at 0.25 per cent, and SIBOR won’t be reaching new highs this year.

Even better, the worse the outcome of Brexit, the more pause the Fed might give to raising rates. That puts many Singaporean home owners in the odd position of wanting some tension and fear in international markets, in order to keep the house cheap. You can bend steel bars around the irony.


It’s funny because we’re an island

The metaphorical meaning of “island” usually denotes self-sufficiency (no man is an island). Whoever said that clearly didn’t conceive of Singapore, which is buffeted by outside forces – and dependent on the fates of other nations – precisely because we’re an island.

None of that is likely to change: not by SG 52, SG 100, or SG 10,000. When something as domestic as our home loan rates can be impacted by foreign affairs, it explains our near constant paranoia.


Featured image Home Loan by Flickr user CafeCredit (CC BY 2.0)

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