When Virtual Became Reality: MAS and Digital Banking in Singapore

It’s August, and the Monetary Authority of Singapore is preparing to open its doors to fintech startups and existing banks looking to own the mantle of a ‘Digital Bank’. Singapore will not be the first country to adopt this mode of virtual banking – its neighbour and financial peer Hong Kong has already started on the digital banking path earlier this year. The biggest and best of mainland China’s banks have been operating virtually since ‘14. And we have success cases like N26 and Revolut from Europe.

There is a definite precedence for triumph, but then no two countries – like no two investors ever – are the same. Or, it would be the easiest thing to recommend the same strategies to everyone and call it a day (this warrants a whole different discussion all together!). Singapore has been blooming as a financial haven, and having lived, worked, and started up here, I hope I can shed some light on the country’s fintech space and highlight my views on what this new regulation would mean for our island nation.

Let’s begin with the basics.

The five digibank licenses up for grabs are divided into two categories:

• Two ‘Digital Full Bank’ licenses: the owners of these licenses will be allowed to cater to the retail segment and accept deposits from customers;
• Three ‘Digital Wholesale Bank’ licenses: which allow the owners to cater to non-retail and SME segments.

The MAS plans to implement these licenses in stages. So, while the capital and liquidity rules remain the same for both categories of licensees, the MAS will cap the amount of deposits allowed in the ‘Full Banks’. Such banks will also be barred from offering complex investment products to their clientele such as derivatives, structured notes, and proprietary trading.

This stage-wise implementation will help fintech players with no banking parentage move forward in a structured manner and build processes that will be to the benefit of the retail majority. Digitisation always brings in an uprooting of the traditional; but this paradigm shift does not necessarily have to translate into anarchy; and this structured progression of licensees will ensure that Singapore does not reach that stage.

Now, on the one hand, having digital private banks would cut through the monopoly of the traditional banking system. On the other hand, it could potentially lead to a choice paralysis.

So, is having more banks really good?

In March of 2018, Germany’s N26 raised $160 million in venture capital – the largest fintech deal in the fatherland at that time.

Some days ago, they topped it up with a series D funding extension of $470 million – the biggest in Europe so far. The company is currently valued at $3.5 billion, has 3.5 million customers worldwide, is revamping its products (N26 Black is now N26 You) and is now headed to the Americas.

Another fact check: Commerzbank, the largest in Germany, has 11.9 million customers today. It was founded in 1870. Compare this to N26’s client base, or even Revolut (3 million and counting, established in 2015) and you can see how fast things move in the fintech space when the incumbents are unable to fill the lacunae in the market.

Germany, and Europe, has been a haven for digital banking because there has been an ingrained apathy towards digital measures among traditional players. Banking fees in Germany are typically low, but the low profitability had little or no incentive for the big banks to enter the digital space; leaving the way open for startups like N26.

But if you look slightly westwards at the Americas, the two oft-used names in the ‘Digital Bank’ space (Moven and Simple) have hardly made a dent. The banking sector in the U.S. is highly concentrated with the top 5 banks controlling over 50% of the assets. The profits accrued through M&A and consolidation have been poured into creating a resonant web and mobile banking presence. JP Morgan Chase, for instance, spent around $10.8 billion last year to enhance its web and mobile-based services.

Coming back home from this global tour, let’s take a look at the banking space in Singapore. We have about 117 foreign banks, and 6 local banks operating in the country – the top 3 of which already have a very strong online presence.

So, if an existing lack of technology is a prerequisite for fintech disruption (as in the example of Europe), then what do these new MAS licenses mean for a country like Singapore which is already so tech-aware? 

MAS has been categorically clear that the new licenses shall be granted to applicants who are catering to an underserved segment (among other constraints) and not just to encourage price competition. Business models prevalent in the western world catering to niche segments shall be the ones most players will evaluate or emulate a product market fit before embarking on this journey. From access to credit to innovations around integration of savings, payments and investments can lead to interesting business models that Singapore is likely to witness in the coming years.

Surely, the customer stands to gain here?

In the recent days, we have seen fintech firms reduce prices in order to gain new customers. We have already witnessed the launch of a ‘negative fee mutual fund’ this year, and there’s more where that came from! As the number of banking apps and digital banks increases, it may lead to an inevitable scenario where each is stepping on the other’s toes. Price points are going to remain an important tool to attract customers, but in a concentrated market, it’s important to remember that customer-acquisition tactics work only when they are buoyed by stellar product offerings and customer support.

In the emerging markets of the APAC region, where the monied middle class is predominantly young, digitisation is not just about taking an existing service and making it available online. As challenger banks in the U.S. have shown us that competitive pricing and the absence of long queues at bank branches are good-to-have, but the real cherry on the cake is providing better financial management tools to the middle class than the existing banks do.

For a financial hub like Singapore, where there are so many players already waiting to distinguish themselves from the others, it is important to have USPs that go beyond simplification and ease of use – not that these aren’t great weapons to add to your arsenal. Enhanced user experience, faster credit disbursal, and availability are just some of the improvements the market is likely to see. And technology will undoubtedly play a huge role in this.

Harking back to a name I mentioned earlier, Monzo; we know that one of the most important reasons for Monzo’s success is the fact that it adopted APIs from the get go, allowing different fintech front-end systems like robo-advisors and crowdfunding platforms to piggybank on their APIs. In the U.K., the Revolut app soared to great heights because it took an important banking function – foreign currency exchange – and made it simpler and more accessible by lowering the fees associated with it (to the tune of 5%). Their no-fees-no-frills model has been a great hit ever since.

Personally, I would like to see the licensees develop frictionless methodologies for managing assets and liabilities and using new age algorithms which are highly data-dependent. The performance of such tools and the learnings thereof could add a new layer to the array of financial services already present in Singapore.

Now, let’s talk challenges.

Finance and money will always be sensitive subjects even in this digital age. Physical customer care centres are mandatory today, and so is the O2O (Online-to-Offline) model of customer service which even the poster boys of e-commerce have adopted (Amazon Go stores for namedropping). We even have examples from companies like Monzo holding on-ground events to listen to and understand their client base.

The line between automation and physical association may be thinning but it hasn’t completely dissolved. For a digital bank with multiple customer touch points, customer journey and satisfaction will always remain a challenge; and the biggest opportunity for differentiation.

Thankfully, some of the names being talked about in Singapore as potential licensees (Singtel, Grab, Razer) are brands that are familiar with the space and known for their excellent service. We also have brands like Validus and Instarem potentially vying for the crown who may not be as well-known but have experience and sound know-how to back them up.

Here’s the first challenge that I foresee – there’s a ‘shoebox’ approach that users have towards digital banking which can be a big impediment for full-fledged digitization.

In the U.K., for instance, only 1 out of 10 users have a banking app on their phone. About 47% of these users have less than GBP 1,000 in these accounts. They shoebox their accounts so that the savings account is where they keep their unused monies, and the digital accounts become the de-facto wallets for everyday spends. These apps helps users separate their salary/income accounts from their expenses, and the analytics aid in understanding spending trends and saving better.

At the end of the day though, there is always a brick-and-mortar institution that people come back to. In the U.S., a decade of neobanks has seen only 3% of millennials create their primary checking account with a digital bank (Simple, Chime, or Moven) according to a study. The same study also mentions that this percentage drops to 1.5% when we look at Gen Xers, and 0.8% when we talk of Baby Boomers.

“In contrast, more than four in 10 Millennials have their primary checking accounts at just three banks–Bank of America, JPMorgan Chase, and Wells Fargo…And a third of Gen Xers and Baby Boomers still keep their primary checking account at those three megabanks.”

– Forbes

The second problem is about shared space.

The fintech ecosystem in Singapore is large, but it’s starting to get crowded for sure. Now, it’s foolhardy to assume the launch of digital banks will wipe out the smaller banks in Singapore in one fell sweep, but the smaller players will find it increasingly harder to survive as the days go by.

The top 3 banks have made remarkable strides in digitization and improved their customer journeys by leaps and bounds. The new entrants to this field may not be able to match the amount of work, and money, required to digitize legacy systems which the big 3 have put in. And this ‘moat’ will keep them safe for a while. For those down the ladder, I can only say this – it will take a while, and some rounds of funding, before the challengers can beat the legacy warriors in this virtual battle, but it is definitely on the cards. 

And because we always end with our thoughts for the future, here are mine. 

As Bradley Leimer of Spain’s Santander Bank puts it, digital banks have to provide something more than ‘Amazon Prime’, to be worth considering. With every revolution in the finance world, we change the way we transact and trade, but the old is never completely weeded out. We have had paper money since Adam, and we still use them today. I would like to see digital banks in Singapore go beyond being an alternative for paper money; and provide the kind of trust and value to customers that the biggest names in the business have been built on.

Singapore has earned the epithet of ‘Switzerland of the East’ because of its standing in the financial echelons. For the country’s digital banks to become a force to reckon with, we need much more than aesthetics and tech wizardry. Some of the oldest banks in the world have survived because of intangible assets like trust, and personal relationships; which is hard to create in a digitized economy. This is a ubiquitous challenge in the fintech sector, and one that Singapore’s digibanks will also face in the coming days. It will be interesting to see how we as a nation, and a fintech hub, respond.

I have my fingers crossed. And my license application waiting to be filled out :)

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This piece was originally published on the Kristal.AI blog. Follow us for more great content!