This article was first published on 5 September 2019, and has been updated to include the latest developments.
The Monetary Authority of Singapore (which regulates Singapore’s banking sector, among other things) recently announced that it will be issuing 5 licenses for digital banks to operate in Singapore. With all new things, like cryptocurrencies, robo-advisors and digital insurers, there has also been quite a bit of hype and misunderstandings floated around.
Here’s your definitive guide to understanding what digital banks are – and what they are not.
TLDR: What’s Happening With Digital Banking Licenses?
The Monetary Authority of Singapore (MAS) announced in June 2019 that it will issue up to 2 digital full bank licenses and up to 3 digital wholesale bank licenses. Full bank licenses allow banks to accept deposits and serve retail customers like you and me, while wholesale bank licenses will be allowed to serve Small-Medium Enterprises and non-retail clients.
Applications for these licenses closed on 31 December 2019, where MAS received 21 digital banking licenses in total: 7 for digital full bank and 14 for digital wholesale bank.
On 18 June 2020, MAS announced that 14 applicants were shortlisted from the initial list of 21. These applicants are now invited to the next stage of assessment, during which they would be required to present their proposals via virtual meetings.
MAS would be evaluating applications based on the value proposition put forth by the applicants, their assessment on the applicants’ ability to manage a prudent and sustainable business, as well as growth prospects and other contributions to Singapore. MAS has also specified that applicants must provide financial projections that show a path towards profitability within 5-years.
Based on timeline estimates, the earliest we can probably see the first digital banks serving clients is from 2021.
Companies like Grab, Razer and Singtel have expressed they are reviewing the digital banking framework and are open to exploring the feasibility of entering the digital banking market.
In addition, the digital full banks will be subjected to restrictions, such as deposit caps for individual customers and caps on the total amount of deposits it can hold, starting at $50 million. The restrictions will be gradually loosened as the digital bank demonstrates its ability to manage risks and run operations robustly.
What Does It Mean To Have Digital Banks (Compared To Existing Banks)?
Essentially, digital banks are a subset of traditional full banks and wholesale banks. In other words, they are licensed to offer a similar (but smaller) set of products and services that you expect from existing banks, including savings accounts, fixed deposits, payments, and loans.
So, if you’re expecting something radically different, then you might be a little disappointed.
Digital banks are subject to the same capital requirements and regulatory requirements as banks today, including Know Your Customer (KYC) and Anti-Money Laundering (AML) processes.
Existing Banks Can Also Offer Comparable (Or Superior) Digital Banking Solutions
It is important to understand that while there is a lot of hype about the possibilities that digital banks can usher in, there is nothing to stop incumbent banks from enhancing their digital banking services and offer everything a digital bank can. This includes theoretically faster and more convenient banking services, lower operating costs, better analytics and recommendations.
Incumbent banks also have advantages like a solid track record, a large existing customer base, and years of experience crafting products and marketing campaigns that resonate with Singaporeans.
While we enjoyed the possibilities provided by digital-first upstarts like Grab, ShopBack and Lazada, we should not forget about the problems these companies have struggled with, even if these issues are relatively rare, such as incorrect crediting/deductions, downtimes, and non-existent unresponsive customer service.
You might tolerate and forgive such issues from startups providing less essential services, but if these digital banks make similar mistakes with your money, that would have serious ramifications. Incumbent banks, on the other hand, have decades of experience operating mission-critical infrastructure at scale, and are well-poised to deliver reliable digital banking solutions.
Unique Advantages That Digital Banks Have
Interestingly, the advantages that the incumbent banks have over their new digital rivals are also what holds them back, and potentially give the digital upstarts a fighting chance of getting ahead.
The incumbent banks need to cater to their existing customer pool, many of whom are set in their ways. Even if the banks wish to move to a paperless workflow, the need to still serve their existing customers who stubbornly refuse to change mean that they would need to support multiple channels, which is very costly – financially and in terms of giving up speed.
Digital banks, on the other hand, can pick the kind of customer they wish to target, such as social media savvy millennials and those who prefer to bank completely digitally, and build products and services around their selected demographic. If they can build an enthusiast community of early digital bank adopters, every customer can be a powerful advocate for them.
Talent is another important determinant for success. Incumbent banks have thousands of employees, which is an asset. However, the organisational structure and recruitment efforts over the past few decades were tailored towards optimal performance at a traditional bank.
Digital banks have a clean slate and can build an organisation and recruit the mix of talent based on the new digital future they wish to build. We can expect them to recruit a large proportion of data analysts, user experience designers, and community managers, while leveraging on cloud technologies and the latest big data and cryptography techniques to power a modern, powerful and cost-effective infrastructure.
Incumbent banks have plenty of legacy systems that they are always in the process of upgrading, but this comes at a large financial and training cost. Furthermore, they may not have the right mix of talent to compete at speed with a digital bank that is built from the ground up.
Competition Pushes The Status Quo Forward, For The Benefit Of Users
Whether digital banks can live up to their potential and promise remains to be seen. At the same time, incumbent banks could also potentially disrupt themselves and remain ahead of the curve. Either way, customers in Singapore have more and better choices.