Take a look at the roster of companies that are after a digital banking license in Singapore, and you’ll find the usual suspects— Grab, Singtel, Razer, Sea, Ant Financial. Presumably, these firms have the architecture and human resources to keep their proposed online banks running. Yet, for years, fintech has been touted as a field set for great disruption, so one question arises: Is this race just for those in the major league?
Other Southeast Asian countries are watching how Singapore will issue its virtual banking licenses. Many will follow suit soon, with neighboring Malaysia expected to finalize its own licensing framework for digital banks in the first quarter of 2020.
There’s good reason for all of this attention. Singapore was forging a fintech ecosystem long before other countries in the region set themselves on the same path. Companies in the city-state received more than half of the total funding for fintech within ASEAN in 2019. Also, Singapore has the highest banking penetration rate in the region, at about 98%.
In all, 21 applications were submitted to the Monetary Authority of Singapore (MAS). After the review process, five licenses will be granted.
“Clearly the winners in this space are companies that will be able to provide much more than just digital banking,” said Zennon Kapron, founder and director of Singapore-based fintech research and consulting firm Kapronasia. “If the contenders in Singapore are simply offering banking services, that may not be enough.”
MAS has made it clear that licensees must show a path to profitability and implement a strategy to meet the financial needs of underserved businesses and individuals in what is already the most mature fintech market in Southeast Asia. But the major players have made promises that sounded similar to each other.
What’s the goal?
Grab and Singtel said their digital bank will cater to the needs of digital-first consumers and SMEs, which cite the lack of access to credit as a key pain point. Razer Fintech wants to build the world’s first global youth bank to focus on customers in the youth and millennial demographics. Internet company Sea, which owns e-commerce site Shopee, also said it will focus on addressing the unmet needs of millennials and SMEs in Singapore.
Every tech company in the running is setting out to build a one-stop shop that can provide consumers and enterprises with more than what strong local banks—like DBS, UOB, and OCBC—or other existing fintech players individually offer.
Kapron said it is still difficult to judge the potential success of these propositions even though many of the firms behind them have already ventured into fintech.
Despite MAS’s stated requirement that digital banks operating in the city-state must be “anchored in Singapore, controlled by Singaporeans, and headquartered in Singapore,” the contenders—especially those from China—have eyes for regional expansions, as Southeast Asia’s digital economy is expected to be worth USD 300 billion by 2025. The region’s digital lending market could also reach the USD 110 billion benchmark by 2025.
“From the applicants’ perspective, any opportunity to enter the market fully compliant and with the blessing from regulators is quite appealing,” Kapron said, adding that virtual banks in Singapore could build a pan-regional banking platform if they eventually acquire licenses in multiple Southeast Asian countries. “For a company like Ant Financial, maybe it costs USD 1–2 million to apply, but coming to the Singapore market—even if it’s small, it gives them a footprint.”
Ant Financial, which has already secured a digital bank license in Hong Kong, is the world’s most valuable private fintech firm. It is valued at more than USD 150 billion as of March 2019. The company previously told KrASIA that their part in Singapore’s digital bank race was in line with the company’s commitment to promote global financial inclusion.
Singapore today, ASEAN tomorrow
Varun Mittal, associate partner at Ernst & Young, has been advising several clients that applied for the license in Singapore. He said that some contenders do have regional designs. A license from MAS might help score points from other regulators in ASEAN countries, but “you have to do Singapore well first,” he said. “Your regional aspirations may be equity or non-equity, meaning you may have partnerships with banks in other markets, or you may set up banks in other markets in the future, but the core objective has to be about serving locals’ unmet needs.”
Mittal does not think that Singapore has set its barriers too high for the digital bank license application process. He likens the specifications to “basic fitness requirements.”
“Singapore wants innovation with a level playing field—capital requirements, requirements around how much lending you can do, how much risks you can take,” he said. “Singapore focuses on strong banks, not big banks. It’s a small country and you need to be concerned about potential ripple effects.”
MAS’s capital requirement for full digital banks is SGD 1.5 billion (USD 1.1 billion), which can be raised incrementally. That’s 15 times the amount that wholesale banks need—SGD 100 million. And Singapore will only issue five licenses, three short of the count in Hong Kong.
Whether or not the race is meant solely for major players, there is certainly room for further disruption, especially when it comes to supporting SMEs in the country. A survey by Linkflow Capital showed that up to 34% of SMEs in Singapore gained access to financing in 2018, and that was already a massive improvement over 19% in 2017.
When it comes to lending to enterprises, Kapron said, Singapore’s big banks in Singapore often prefer to grant loans to larger entities. It may be up to virtual banks to address this gap in the near future.
Tech companies are also designed to extract non-traditional data, and hence are more willing to make “smart decisions” while they accept the risks of lending to small business owners, said Mittal. “If you’re a hotel owner, and you explain to the traditional banks that there will be a Formula 1 race next month, and you need money to refurbish your hotel—compared to tech companies that can crack all of the data in that area to give you better credit scoring—which one will give you the loan?”
MAS will announce its selection for the five digital bank licenses in June. The licensees are expected to commence business by mid-2021.