Singapore’s banking space is entering into a new phase with the introduction of Digital Banks. MAS is planning to issue up to 5 new licenses to applicants, who will add value to banking sector and the economy. MAS has received 21 applications, 7 for full digital bank licences and 14 digital wholesale banking licences. The applicant must provide a five-year financial projection of the proposed digital bank, showing a path towards profitability.
Applicants need not have a track record in banking, the MAS said. It noted the new competitors would encourage existing banks to continue improving their digital offerings. Customers who have digital bank accounts transact online- either via their mobile devices or computers. Digital banks tend not to have physical branches, which means that customers engage with the bank mainly through e-mail, online chat or phone calls.
MAS has put in place the safeguards as regulators usually require of digital banks; a track record of running a business, a clear value proposition, compliance with the same regulations as traditional banks and an exit strategy so that in the event of business failure, they can be wound up with minimal risk to depositors of the financial system.
Digital Banking is an extension of all internet, e wallet payment methods and internet banking presently in place. Digital bank expectations are to provide services to unmet, unbanked or underbanked customers. The greatest selling point of digital banking is convenience and lower fees.
Digital Bank contender wants to meet the needs of tech startups including blockchain or crypto related businesses, online businesses and entrepreneurs from co-working spaces which they consider disconnected from the banking system.
MAS plans to issue 2 digital full bank licences under which a wide range of financial services can be provided and deposits taken from retail customers. These are controlled by Singaporeans. Foreign companies are eligible if they form a joint venture with a local company. Applicants for full bank licences have to be Singapore-based and controlled by Singaporeans. The full digital bank requires an initial paid up capital of S$1.5 billion.
Digital wholesale bank applications can be majority owned by foreign entities. Digital wholesale banks take deposits from SMEs and other non-retail segments. The application for a wholesale bank licence is open to both Singapore and foreign players. For such applicants, the minimum paid-up capital is S$ 100 million. They can open and maintain business deposit accounts for SMEs and corporates, wholesale bank licences that are limited to non-retail clients target millennials and small and medium-sized enterprises. When the restricted digital bank first commences operation, it will be subject to an initial deposit cap of $50 million. Generally the deposits will be allowed only a small group of depositors such as business partners, staff related parties and selected customers.
DBS, OCBC and UOB
The Three major banks in Singapore have internet banking as the extension of retail banking and both DBS and UOB have started to provide Digital banking as an extension of their banking eco system. DBS launched digibank, a revolutionary mobile-only bank, which is branchless, paperless and signatureless, in India and Indonesia during 2016 and 2017, respectively. It is doing well in both markets, and today, they have over 2.5 million digibank customers in India and about 600,000 digibank customers in Indonesia. DBS bank is exploring and extending digibank to other markets where they have a limited physical presence. Digi Bank (digital bank in India) lets customers open accounts at designated places across the country, such as popular coffee chain Café Coffee Day. They need only their Aadhaar card, which contains the user’s biometric information.
United Overseas Bank has kiosks in Thailand where customers can authenticate their identities to open an account with its digital bank TMRW. They need to upload a picture of their citizen identity card and fill in details on the bank app as part of the registration.
OCBC is the only one that does not have a prime digital bank and it has been using technology to facilitate services such as robo-investment advice and instant online account opening for SMEs.
FORECAST OF DIGITAL BANK BENEFICIARIES
The GIG workers, SMEs and the foreign workforce may be well served by digital banks. Digital banks with information on individual digital records can make use of their digital foot print to come up with alternative credit scores for these borrowers.
- a) GIG Economy Workers:
Ant Financial, an affiliate of the Alibaba Group in China, made use of individuals’ transaction data with Alibaba to compute a private credit scoring, the Zhima credit. Using both online and offline information, including social media interactions, the Zhima Credit updates a person’s credit rating continuously. This has helped the GIG Economy workers to obtain credit facilities by a different method of approach.
- b) SMEs:
Alternative credit rating can also be applied to small and medium-sized enterprises (SMEs), especially start-ups that have less than three years of operations. Banks are often reluctant to lend such companies due to the lack of collateral and their young credit history. With sufficient working capital, these firms can face liquidity problems in the short run despite having sound business prospects in the long term.
- c) FOREIGN WORKERS:
The third group who may benefit from digital banking are foreign workers in Singapore.
Kakao Bank, affiliated to the country’s popular social media and mobile gaming company Kakao, managed to get two million customers in less than two weeks after it has launched in July 2017, and now has about nine million, equivalent to one-quarter of South Korea’s working population. Kakao Bank, South Korea’s first digital bank, opened a quarter of a million accounts within the first 24 hours of its launch. In its first week, it lent the local currency equivalent of US$232 million (S$312 million) and took US$245 million in deposits. Months later, the country’s second virtual bank-K Bank- accepted 35,000 accounts on day one. By 2018, Kakao Bank and K-Bank were both reporting quite significant net losses, according to the Korea Federation of Banks. The Korean experience is a reminder that the journey to profitability for virtual banks is likely to be long and difficult.
While Singapore, according to the World Bank, has a bank account penetration rate of about 98 per cent, the rest of the region is mostly under-banked.
In Myanmar, about 74 per cent of the population lack a formal bank account. Indonesia, the region’s most populous nation, has an unbanked rate of 66 per cent, while the rate in Vietnam is 69 per cent, and in the Philippines, 65 per cent of its people have no bank accounts.
Malaysia’s Central bank announced to issue up to five licenses to new online banks offering either conventional or Islamic banking under a proposed licensing framework.
Malaysia has said it protects bidders, whose equity is controlled by local companies and maintain RM 100 million (S$ 33 million) in capital initially and ramp that up to RM 300 million later.
The UK requires new banks to present a plan setting out their business viability and how they will make money. But digital banks in the UK have been more focused on acquiring customers than generating profits. In the UK, it can be as low as GBP 5 million (S$8.6 million) as the minimum capital requirement for setting up a digital bank.
Customers who want to sign up for an account with Britain-based Monzo can download the start-up’s app and provide a photo of a valid identity document such as passport or driving licence and record a short video of themselves.
As UK-based digibank Starling Bank Said in a statement: “While they can copy our features, they cannot copy our cost base.”
Britain’s digital app-based banks that are attracting moneyed urban millennials Monese. During early 2000 Estonia born entrepreneur NORRIS KOPPEL arrived in Britain and spotted a major gap in UK banking foe newly arrived foreigners who have trouble in opening bank accounts. MONESE serves those shunned by big banks. During the 5 years of operation, they have expanded 31 nations in Europe with 2 million customers.
‘Goldman Sachs’ digital bank called ‘MARCVS’ (refer the US leading para) quickly gathered more than 130b in deposits in the UK by offering some of the highest interest available, helping to drive up costs particularly the smaller banks that do not have access to cheap deposits from current account holders.
The Steering Committee on Fintech has submitted its report to the finance ministry with recommendations on allowing the operation of Virtual Banks (Digital Banks) easing KYC procedures, implementing fintech to prevent fraud and incentivizing Non-Banking Financial Companies (NBFCs) to increase lending to the agricultural sector.
M-pesa, a branchless banking service, has provided mobile payment services in countries such as Kenya since 2007. With more than 38 million users in African countries, it has been touted as a gateway for households to gain full access to financial services in a safe and cost-efficient manner.
The Hong Kong Monetary Authority received more than 50 applications and ended up giving out eight licences and the digital banks are in operation, since then.
The Monetary Authority has issued guidelines. Digital Banking in Hong Kong are affiliates of ALIBABA GROUP HOLDING, XIAOMI CORPORATION, and a consortia let by Standard Chartered Bank, we lab, the city’s first online micro lender. The authority expects HK $300 million (S$52.2 million) as the minimum capital for digital banks.
The Digital Bank history in China are as follows.
In China, MY Bank, which is backed by tech giant Alibaba, has served more than 16 million small businesses, 80 per cent of them first-time borrowers. Its biggest rival WeBank, backed by Tencent, which also runs the WeChat super-app, made more than 100 million loans in its first five years of business, most of them micro-loans ranging from US$150 (S$200) to US$30,000.
Digital Bank are in place at US and the experience are stated below.
JP MORGAN CHASE shut during 2019, its millennial focused banking app service FINN after a year of operation; analysts say there was duplication in FINNs service with the bank’s existing offer. FINN could not attract customers even though they offered higher interest rates.
The experience of GOLDMANSACH’s is different. The digital only virtual bank is named after MARCUS GOLDMAN, went out with market beating rates. (Its is called MARCUS).
Headquartered in San Francisco, Varo Money during the year 2018, it became the first mobile bank in the USA to secure preliminary approval for a national bank charter – a significant hurdle to overcome for a challenger bank looking to make a nationwide impact.
Simple was founded in Brooklyn, New York during the year 2009 and provides a mobile checking account with features like quick payments between friends and family also using the app. Users can also access automated budgeting tools, which enable customers to save for personalised savings goals or everyday bills and expenses. The account is provided with a Visa debit card, which can be used to access cash for free.
Based in San Francisco, SoFi – short for ‘social finance’, the fintech primarily offers loan products with dedicated refinancing offers for students, personal loans and homebuyer plans, but has also moved into the spending market with its SoFi Money deposit account. This account is linked to a Visa debit card, and offers users up to 2.25% APY savings on deposits, with no unexpected bank fees charged.
New York-based Bank Mobile has checking accounts aimed at students and young people as well as savings accounts, credit cards, personal loans and student loan refinancing. The mobile checking accounts are linked to a Mastercard debit card, pay 1% APY on balances up to $15,000 (£11,580), and feature tools like instant spending notifications, a free ATM locator and in-app cheque deposits.
Based in San Francisco, Chime, more than three million people have decided to give Chime’s mobile checking account a try, attracted by the various personal finance tools available, including early access to paychecks, spending notifications and instant in-app locking of the linked Visa debit card if lost or stolen.
Digital Banking is now firmly entrenched as a part of everyday life in Europe, a Mastercard survey shows, with security and convenience the most important factors for people looking to manage their money online or through their phones. Nearly two thirds use banking apps from traditional providers but one in five now use digital-only banks.
Meanwhile 66% say that the biggest advantage of going digital is that it saves time, and 65% cite ease of use. A similar percentage think the demand for mobile will increase because it makes transactions simple and convenient.
More than half of those surveyed say they would consider switching to a digital bank. However, with traditional banks offering more digital services, an increasing number of respondents say that they will stay with their provider.
Facebook announced plans for its own blockchain-based digital currency called Libra, and others may follow. Even Central banks of some countries are becoming more interested in launching their own national digital currencies. These developments could threaten the business models of traditional banks and, indeed, even digital-only banks, who are not operating globally.
Countries like Singapore with great infrastructure and digitally transformed economy with the introduction of Digital bank will become a smart city nation. The issue of Cyber security prevention of Money laundering and countering terrorism financing are of big issues to be considered by the digital bank operators.