Disruption ahead in Singapore’s financial sector as digital-only banks loom

SINGAPORE — Moves to set up digital-only banks are underway in Singapore as the regulator rounds up applications this month.

Up for grabs are a maximum of two full bank licences and three wholesale bank licences.

Full banks can take deposits from retail customers while wholesale banks serve small and medium-sized enterprises (SMEs) and other non-retail segments.

Digital full bank licensees here should have only one physical place of business. The virtual banks will be allowed to offer cashback services through electronic funds transfer at point-of-sale terminals at retail merchants but will not have access to automated teller machines.

Applicants need not have an established record in banking though they must have a track record of three years or more operating a business in the technology or e-commerce fields, among other criteria.

Customers who have digital bank accounts transact online. They engage with the bank mainly through e-mail, online chat or phone calls.

Companies can also enter into partnerships to apply for a licence.

For example, Singtel has been looking to grow in new areas in the midst of its flagging telco business. It has a mobile wallet called Dash.

The telco has teamed up with technology firm Grab to apply for a digital full bank licence, the companies announced yesterday.

Why it matters

Allowing digital-only banks will ensure that Singapore’s banking sector continues to be resilient, competitive and vibrant.

Digital-only banks tend to have lower operating costs because they need not have physical branches and tellers. They may thus offer customers higher interest rates for their deposits.

The next milestone in the push for digital-only banks will be the middle of next year, when the Monetary Authority of Singapore (MAS) will announce the successful applicants.

The virtual banks are expected to be up and running by 2021.

Digital-only banks made headlines this year as businesses here contemplate how they can make the most out of Singapore’s push to become a global fintech hub, after the MAS said in June that it will be issuing the licences.

The pilot for digital-only banks here follows examples in the United Kingdom and Hong Kong, among other major economies that have allowed virtual banking licences.

A report on the future of digital financial services in South-east Asia by Bain & Company, Google and Temasek in October found that digital-only banks in Southeast Asia can better serve the underbanked in the region.

The report noted that two in five adults in Singapore are underbanked or unbanked, which means that they may have limited access to credit or do not have a bank account.

The underbanked segment represents the true growth engine for digital financial services in the region, the report said, adding: “Technology-enabled business models offer a more effective way to serve this segment, creating new market opportunities.”

Consumer technology platforms are well-positioned to gain share in the underbanked segment given their large and expanding customer base, the report added.

SMEs in the region are another untapped opportunity, the report said, pointing out that about 20 percent of firms in Indonesia that responded to a survey said they need to borrow money but lack access to affordable credit.

“Digital technology and more readily available data have given life to new models for serving SME merchants, who are on the cusp of broader digitalization,” the report noted.

What lies ahead

Analysts told The Straits Times that the new digital-only banks will have their work cut out for them in well-banked Singapore.

Associate Professor Lawrence Loh at the National University of Singapore Business School said that established tech companies need to make sure they are not out of their depth when they fight to get a toehold in the financial sector here.

“The financial sector is heavily regulated,” he said, pointing out the entry costs to banking are higher compared with those for the grocery, food delivery and transport sectors.

That is why new challengers must make sure the products they offer are sustainable and innovative, as well as suit customers’ needs, said Prof Loh, who is director for the Centre for Governance, Institutions and Organizations.