July 11, 2019
In 2019, there’s no real need to explain the idea of a ‘virtual bank’ - put simply, it’s defined as a bank which delivers financial services primarily through the internet or other digital channels instead of physical branches. While its easier to understand the consumer side of it but why do we need virtual or digital-only banks? What under-served or unserved customer segments or use cases are we targeting? Is there a solid business proposition here to setup such a bank or just sizzle? To know the answers to these questions, listen to an interesting chat that we are bringing to you as a part of this article, in the soundcloud link below, after a few paras.
Why are we focusing on Singapore in this article? On June 28, 2019, as many of you might already know, the Monetary Authority of Singapore (MAS) announced that it will issue up to five new digital-only bank licenses. The move extends the eligibility for digital bank licenses to non-bank players as well. The five new licenses will comprise:
(a) up to two digital full bank licenses: allowing the provision of a range of financial services and deposits to be taken from retail customers by licensees, and
(b) up to three digital wholesale bank licenses: allowing services to be provided to SMEs and other non-retail segments by licensees.
This move is a step towards establishing standalone digital banks giving an opportunity to non-banks and tech players. In 2000, MAS had allowed the establishment of existing banks to have digital subsidiaries called Internet-Only Banks (IOBs).
In light of this move by MAS, the entire TechFin and FinTech market is in motion and are considering this opportunity very seriously. So, what’s it going to be like in Singapore, with the new licenses? To understand the current scenario better, here’s is an interesting voice chat, featuring Amit Goel, Founder MEDICI, in conversation with South-East Asia FinTech expert, Varun Mittal.
Before we dive deeper into the digital-only banking licenses that are going to be issued by MAS, a quick background on the current banking licenses that exists, just to set the context.
Qualifying Full Banks (QFBs): These banks are allowed to provide a range of services - including the ability to take retail deposits. Banks of this kind can share their ATM network and provide payment services via the EFTPOS network. At present, there are four local banks - namely Bank of Singapore, DBS, OCBC and UOB - and nine QFBs - including HSBC, State Bank of India (SBI), and BNP Paribas. These banks are allowed to establish 25 service locations, or 50 in case their home country has a free-trade agreement with Singapore.
These banks also have the provision of setting up Internet-Only Banks (IOBs). In case a local bank sets it up, the IOB must be a 100% owned subsidiary or must be set up in a joint venture (with the local bank having the controlling stake). In case it is set up by the QFB, their localised or Singapore-incorporated banks should have the IOB as its direct subsidiary and it must meet the capital requirement of S$1.5 billion.
Wholesale Banks: These banks, in contrast to QFBs, cannot provide retail banking services. They may, however, provide other banking services. At present, Singapore has 99 wholesale banks, each of which can have one office.
Market Opportunity for Digital-Only Banks: Evolving Needs of Singapore’s Various Customer Segments
Against this background of existing financial services in Singapore, one anticipates the new licensees will try to carve a segment of their own. But that’s not all - we also expect the older players to leverage the opportunities presented by the new license initiatives. They will look to serve the segments that are potentially under-served and prioritized by MAS for increasing financial inclusion.
One sees this clear prioritization in the announcement by MAS, “the entry of new digital players will add diversity and strengthen Singapore’s banking system in the digital economy of the future. With innovative business models and strong digital capabilities, these players can cater to under-served segments of the market.”
Although MAS has not yet specified the segments they deem under-served, it is possible to draw out potential segments. In the near future, one expects that the following customer segments could be targeted:
SMEs: Singapore is brimming with SMEs, with 99.8% of all enterprises belonging to this category. A whopping 2.5 million workers are employed here. There are over 260,000 such businesses, and their number has only increased over time. The government has been encouraging these enterprises to digitise, in the hope of improving productivity and efficiency. Moreover, it has been noted that the engagement in overseas business activity has increased over the years, to 83% from 56% in just a couple of years. This highlights the need for cost-effective cross-border transactions as well.
Millennials and Gig-Economy Workers: Singapore has a large population of youth along with middle-aged adults who are more willing to accept new technologies and adapt to new experiences. Moreover, they are often freelancers and have multiple jobs. Singapore currently has about 1.2 million millennials, who account for about 22% of the total population. The gig-economy, or those with freelance work, number ~220,000, reflecting an increase of 10% in recent years.
Migrants/Foreign Workers: Those in this category are engaged in several activities, but most often end up in domestic work and construction. The number of foreign workers in Singapore stands at 1.39 million as of December 2018. Since they may not have financial literacy, access to documentation or the ability to meet the minimum monthly balance required in banks, many prefer to hold cash. This segment requires services that take into account remittance, connectivity, and mobility.
Understanding Digital-Only Banks’ License Eligibility
In case you were wondering what the need is for 5 different licenses for digital-only banks in Singapore, here’s the reasoning behind MAS’s decision. Not every digital bank is the same, of course; there will be differences in their target audience, offerings and business models. A market is sustainable if there is diversity and variety in their propositions.
One expects the upcoming licensed digital-only banks to capture their customers and use the available data in different ways. But before we can evaluate the quality and characteristics of Singapore’s digital banking market, let's take a look at the eligibility of applicants.
The application for digital full bank licenses, of which a maximum of two will be available, is open to companies headquartered in Singapore and controlled by Singaporeans. Foreign companies are eligible for these full bank licenses if they form a joint venture with a Singapore company, and the joint venture meets the headquarters and control requirements. In contrast to before, this would mean that IOBs which were subsidiaries of the four local banks or nine QFBs are expected to face stiff competition. This points to a significant expansion of digital banking.
Furthermore, to minimise the risk, digital full bank licenses will be provided in a two stage process. Initially, all licensees will be Restricted Digital Full Banks, where the individual deposits must be capped at S$75,000, and they must offer only simple credit and investment products (no derivatives or complex products). Moreover, the initial paid-up capital at the entry point to be set at S$15 million. Following the bank’s ability to demonstrate its capability to manage risk, they will be converted into a fully functional digital bank, where the minimum paid-up capital requirement of S$1.5 billion and there is no individual depositor cap.
In comparison to Digital Full Banks, the application for digital wholesale bank licenses is open to all companies. Up to three such licenses will be given out. The MAS expects that the new digital bank licenses will “ensure that Singapore’s banking sector continues to be resilient, competitive and vibrant,”. In addition, the new digital players are expected to “provide impetus for existing banks to continue enhancing the quality of their digital offerings.” The minimum paid-up capital required is set at S$100 million. Moreover, digital wholesale banks will not be able to take deposits from individuals, except for fixed deposits of at least S$250,000.
But that’s not all. For an entity to obtain any one of the five digital banking licenses, they need to demonstrate not just ability to meet regulatory requirements, but must showcase technical capability and have a sustainable business model. There is a need to highlight how they would be able to meet the objectives of deeper financial inclusion set out by MAS. Although MAS has not specified how track-record of a company would play a role, it is highly likely that profitability would be key in determining eligibility. Moreover, even regulatory compliance requires substantial investment in both technology and talent. There are strict provisions for reporting, which may potentially prove difficult for newer entrants/non-financial enterprise applicants. To summarise, as per MAS, the following requirements must be met for an applicant to obtain a license:
A clean track record in operating an existing business
Demonstrated ability of a sustainable digital banking business model
No engagement in value-destructive competition to gain market share
Compliance with the same suite of rules as incumbent banks, as well as added rules
Submission of a viable exit plan, should withdrawal be necessary
Clear value propositions to serve existing unmet or underserved needs
The bar is indeed set high when it comes to virtual banking space and expectations. Europe has lots of great examples and Hong Kong serves as a recent and good example of this in Asia. When Hong Kong launched Virtual Banking Licenses, a lot of big players (both tech players and banks) got the licenses. To contextualize this, 29 applied, 8 got a license.
What’s going to happen next in Singapore’s digital-only banking scenario? You can be sure that we, at MEDICI, will be tracking these developments closely. These are exciting times for the world of digital-only or virtual banks, and in the times to come, we will continue to bring you a series of videos, articles and deep-dive research, all a part of MEDICI Inner Circle.
Stay tuned, and for more insights and stories like this, click here to join MEDICI Inner Circle and get free access for 30 days!