Talk is on the street that you can’t pay by cash anymore in China as everyone pays through their phones.
While it may be an exaggeration to say that China is completely cashless, digital banks have overturned the banking industry in China. Could that be our future, given that the Monetary Authority of Singapore (MAS) is loosening up the rules and issuing 5 digital bank licenses soon here? What else does digital banking mean for you and me?
What can digital banks do?
Digital banks, when fully licensed, should provide the same functions of a traditional bank but without the brick and mortar branches. Some virtual banks can tap on existing ATM networks, though.
They operate purely on digital platforms, so you can probably expect real-time updates, quicker account approval times, quick investing services and personalisation. These will be done using artificial intelligence and big data analysis.
Ideally, virtual banks should be faster, more efficient and operate at a much lower cost structure than traditional banks, since there is less expenditure on property rent and manpower.
According to an MAS spokesperson, digital banks will open up the below possibilities:
- New digital banks could potentially offer deposit accounts without imposing any minimum deposit amount or fall-below fees, as seen in the United Kingdom and Hong Kong.
- Digital banks with access to more wide-ranging data sources could adopt different credit risk assessment approaches to lend to under-served segments of the economy such as the young and micro enterprises.
- Increased competition from digital banks is also likely to spur existing banks to improve further on their own digital offerings.
Timothy Chen, CEO and co-founder of MaxFinx, a company that provides the infrastructure for digital banks, says, “Digital banking will speed up account opening, allow instant customer verification and personalisation of banking services at much lower costs.”
So, probably like how Circles Life spurred incumbent telcos to revamp their pricing, regular folks should be able to see some innovative financial products and hopefully higher interest rates on deposits. Fingers crossed!
Not so fast… Only a limited number of digital bank licenses will be issued for now
In Singapore, the MAS has announced in June 2019 that 2 digital full-bank licences and up to 3 digital wholesale bank licences will be issued. Applications will be open in August 2019.
“Restricted”? What can digital banks not do in the meantime?
According to an MAS spokesperson, “A Restricted Digital Full Bank will be subject to a deposit cap. The deposit cap will commence at S$50m (with a corresponding low paid-up capital of S$15m) and will be gradually lifted as the bank demonstrates its ability to manage its operations and risks in an adequate manner that is commensurate with the scale of its business.”
There will also be deposit caps from each individual customer and restricted digital full banks can only offer simple credit and investment products.
Difference between digital full banks and digital wholesale banks
|Digital full bank||Digital wholesale bank|
|Serves retail customers, with a deposit cap of $75,000 for each individual||Serves small and medium-sized enterprises (SMEs) and other non-retail segments|
|Will start off as a Restricted Digital Full Bank in Singapore and offer simple credit and investment products||Will open and maintain deposit accounts for businesses|
What are some of the most successful digital banks globally?
Let’s look elsewhere to see how the digital banking landscape will play out in Singapore.
China was one of the first in Asia to embrace digital banking since as early as 2013. China’s mobile payment market is now the world’s largest market with $17 trillion in transactions in 2017.
Huge financial technology companies like Ant Financial Service Group, known for their mobile app Alipay, and Tencent Holdings Ltd, creator of QQ Wallet and WeChat Pay, have since developed a range of apps that provide banking and payment services ranging from loans to insurance to private banking.
Ant and Tencent have recently made way into Hong Kong, winning virtual banking licenses there too. To date, Hong Kong has issued 8 digital bank licences and the banks are expected to begin operations within 2019.
In response, traditional banks in China have caught up with the competition and are moving into offering more digital services. There are now fully automated bank branches in Shanghai featuring teller-bots and “Intelligent Teller Machines” that much more capable than existing ATMS.
We will probably see the same trend happening in Singapore. Although for a period of time traditional banks can leverage on the fact that they can have both digital and physical banking facilities, they would probably need to up their game to serve tech-savvy consumers.
Seven Bank in Japan, a unit of Seven & I Holdings did just that. Since improving their virtual banking services, they have offered banking and other financial services through ATM machines in 7-Eleven convenience stores throughout Japan, without operating actual branches.
While virtual banks would need some time to establish themselves, it has the potential to become mainstream given the ubiquity of the digital services in our daily lives.
Who will vie for these 5 digital bank licenses in Singapore?
Since MAS’ announcement, Grab, InstaRem, Razer, and Validus Capital have expressed interest to become a digital bank. OCBC is also in talks with Singtel about vying for a licence. Looks like the competition will be fierce.
It’s anyone’s guess as to who will be successful, but the bank must fulfil the criteria stated out by the MAS. To become a digital bank, companies must be:
- Headquartered and controlled by Singaporeans. Foreign companies can apply too if they form a joint venture with a Singapore company. These companies must have a track record in operating businesses in the technology or e-commerce fields.
- Value proposition must demonstrate ability to bridge the gap in unmet needs in the market. They should also present a long-term digital banking business model.
What does this mean for you and me?
Singaporeans are already no stranger to mobile banking. Digital banking will probably only take it a step further.
The biggest hurdle for the new players would be to overcome the branding lead that our local banks enjoy, especially among the baby boomers.
But if there is any lesson to learn from Circles Life’s entry to the telco market, attractive pricing and responsive customer service go a long way.
That said, with MAS taking a conservative approach, it will be some time before virtual banks root themselves in Singapore.
At the recent Association of Banks Singapore (ABS) Annual Dinner, Senior Minister Tharman explained that MAS is starting with two digital full bank licence to prevent fragmenting the small domestic retail market which is generally well-served by the incumbents.
An MAS spokesperson tells us, “Restricting digital full bank applicants to players that are anchored in Singapore ensures that a strong local core in our banking system remains, and we avoid unintended unilateral liberalisation of our full bank regime as a result of our WTO commitments.”
Well, it appears that the first beneficiaries of digital banking would be small and micro SMEs. Digital banking will probably allow small companies to get better credit scoring and subsequently, faster loan approvals.
Timothy Chen, CEO and co-founder of MaxFinx says, “Despite Singapore being a heavily banked market, there are still some who have fallen through the gaps, such as SMEs, micro setups, and so on. They are not as well served as the medium and large enterprises.”
MaxFinx will offer a cloud-based fintech platform that tailors financial services for banks and corporations. One of the software modules, transaction management, allows companies to monitor their cash flow and also review their counter-party risks and credit scoring.
He says, “This means that SMEs can get better credit scoring and faster turnaround for loan approvals. We strongly believe it will reduce fraud for a lot of business transactions too.”
Will you bank with a digital bank?
It was announced earlier this year that deposit insurance coverage in Singapore will go up from $50,000 to $75,000 should a bank or finance company fail. This insurance coverage applies to Singapore-dollar accounts, whether it’s savings, current or deposit accounts.
Full digital banks will be covered, which means it is safe to deposit up to the deposit insurance amount of $75,000.
Never knew this existed? Well that’s because our local banks are well-reputed to be safe and financially strong.
If you’re thinking about entrusting your life savings with a virtual bank, better check if they have additional insurance coverage for deposits above and beyond $75,000.
Will you bank with one of the new digital banks?