The Monetary Authority of Singapore (MAS) announced on Friday (December 4) the grant of digital bank licenses to four winning applicants.
It awarded digital full bank licenses to the Grab-Singtel consortium and Sea, as well as digital wholesale bank licenses to Ant Group and a consortium comprising Greenland Financial Holdings, Linklogis Hong Kong and Beijing Co-operative Equity Investment Fund Management.
This means that for the first time in Singapore, non-banks will be allowed to provide banking-related services.
However these services will take place strictly online without having any physical branches.
If you are still unfamiliar with the concept of digital banks, we’ve done a breakdown of it so you will know what to expect when it launches from 2022.
Difference Between Digital Full And Wholesale Bank Licenses
MAS’ intention is for a digital full bank to eventually be able to conduct all banking businesses as existing banks, which aims to serve both retail and corporate consumers.
Like a traditional bank, it can provide Singaporeans with banking services like an account, deposits, loans, debit and credit cards, payments and investment products.
On the other hand, a digital wholesale bank can serve non-retail customers only, like small and medium-sized enterprises (SMEs).
MAS first announced in June 2019 that it will award five digital bank licenses, which included up to two full bank licenses and up to three wholesale bank licenses.
This means that MAS could award one more wholesale bank license to another player.
Furthermore, MAS has said that the licenses are currently introduced as a pilot so it is looking to review whether it should grant more digital wholesale bank licenses in the future.
A total of 21 applications were submitted for the licences and 14 were shortlisted, comprising five digital full banks and nine digital wholesale banks.
Here’s a quick look at who applied for the digital wholesale bank license so we have an idea of who could potentially be the new licensee:
Requirements That Must Be Fulfilled To Be A Digital Bank
According to MAS, the applications were assessed based on three factors: value proposition, ability to manage a prudent and digital banking business, and growth prospects and other contributions to Singapore’s financial centre.
It has also asked the applicants to review the business plans and assumptions underpinning their financial projections, taking into account the impact from the COVID-19 pandemic.
Digital full banks were required to meet a minimum paid-up capital of S$ 1.5 billion, and must be headquartered in Singapore and managed by Singaporeans.
Due to MAS’ high capital requirements and strong emphasis on profitability, many of the hopefuls joined forces to build consortiums to strengthen their chances.
Digital wholesale banks on the other hand, need a lower capital requirement of S$ 100 million, and can be helmed by foreign firms.
Applicants must also be able to show a path towards profitability through a five-year financial projection.
Pros And Cons Of A Digital Bank
One of the biggest advantages of digital banking is the high interest rates and low fees.
Digital banks don’t have to pay overheads for physical branches or manpower to staff it. Due to automation in various processes, they are able to streamline their operational processes and reduce further costs.
With these cost savings, they pass it on to the consumers in the form of higher interest rates on deposits and lower fees for financial products.
Thanks to the lower costs of digital banks, underserved groups in Singapore like entrepreneurs and micro enterprises can be better reached out. For example, they may offer the opening of deposit accounts without a minimum amount, or adopt a different credit risk assessment approach.
Another benefit is its relative convenience. While traditional banks are typically closed on weekends or holidays, digital banks are open 24/7 so you can access banking services at your fingertips anytime without having to leave your home.
Moreover, as digital banks rely a lot on tech, they can also offer more personalised services with the data gathered.
With artificial intelligence (AI), digital banks can also quickly analyse customer data for mortgage applicants as well as their past financial behaviour to determine the likelihood of default and decide the fate of their application instantly.
Although there are many advantages to digital banking as we move towards a digital future, it’s equally important to be aware of the potential drawbacks too.
Security breaches and identity theft are possible, and the misuse of personal information is quite rightly a concern. Digital banks must make sure that they protect personal and financial information, making security a high priority.
Another downside to digital banking is the inconvenience when the system is down due to technology or service disruptions. If both the website and mobile app is inaccessible, it’s not possible for consumers to head down to a physical bank to perform the needed banking transaction.
Additionally, if you prefer face-to-face customer service, you may prefer a traditional bank instead since digital banks tend to have a lack of personal banker relationship.
Are Digital Banks The Right Way Forward?
While this marks the first time Singapore will be having digital banks, the concept itself is not new at all.
In Asia itself, we have digital banks in China, Japan, South Korea, Hong Kong and Vietnam. Outside of Asia, digital banks also exist in countries like Australia, Britain, United States and Sweden.
These digital banks have embraced mobile to create differentiation, using digital touchpoints to offer simple, convenient, and more personalised customer experiences.
Moreover, the COVID-19 pandemic has actually accelerated the need for digital banks in Singapore.
From working remotely to ordering meals via an app, digital tools have emerged as a way for many to lead their lives amid the pandemic. The same goes for banking transactions, with more going online to open bank accounts or apply for loans.
This new normal of conducting daily activities online has made it easier for digital banks to enter the market.
The whole COVID-19 situation has brought to the forefront the role of technology, data and contactless interaction.
The entire idea of digital banking is it that it’s entirely branchless, so you don’t have to head down to a branch and be in contact with anyone. This contactless transaction means that consumers don’t have to worry about contracting the virus.
Moreover, as the banking industry opens up the sector to non-bank players, the sector is forced to innovate and introduce new services.
The presence of emerging digital banks will definitely foster healthy competition, especially in the area of digital innovations, for the benefit of Singapore’s consumers and businesses.
Featured Image Credit: Reuters / Singtel / Sea / Chen Zhongqiu via Getty Images
