The Monetary Authority of Singapore (MAS) announced on Friday (December 4th) that it had granted digital banking licenses to four winners.
The Grab-Singtel consortium and Sea received full digital banking licenses and digital wholesale banking licenses to the Ant Group and a consortium of Greenland Financial Holdings, Linklogis Hong Kong and Beijing Co-operative Equity Investment Fund Management.
This means that non-banks in Singapore will be allowed to provide banking-related services for the first time.
However, these services are only offered online with no physical offices.
If you're new to the concept of digital banking, we've broken it down so you know what to expect when it hits the market from 2022.
Difference between full and wholesale digital banking licenses
MAS intends that a full digital bank will eventually be able to conduct all banking transactions as existing banks in order to serve both private and corporate customers.
Like a traditional bank, it can provide banking services such as an account, deposits, loans, debit and credit cards, payments, and investment products to Singaporeans.
On the other hand, a digital wholesale bank can only serve non-retail customers such as small and medium-sized enterprises (SMEs).
MAS first announced in June 2019 that it would be awarding five digital banking licenses, including up to two full banking licenses and up to three wholesale banking licenses.
This means that MAS could issue another wholesale banking license to another player.
In addition, MAS has announced that the licenses are currently being rolled out as a pilot project. It is therefore being examined whether more licenses should be granted for digital wholesale banks in the future.
A total of 21 applications for the licenses were submitted and 14 were shortlisted, including five full digital banks and nine wholesale digital banks.
Here's a quick rundown of who applied for the wholesale digital bank license so we can have an idea of who the new licensee could possibly be:
Photo credit: Vulcan Post
Requirements that must be met to be a digital bank
According to the MAS, applications were assessed based on three factors: value proposition, ability to conduct prudent and digital banking, and growth prospects and other contributions to Singapore's financial hub.
It has also asked applicants to review the business plans and assumptions underlying their financial projections, taking into account the impact of the COVID-19 pandemic.
Full digital banks had to meet a minimum paid-in capital of S $ 1.5 billion and had their headquarters in Singapore and were managed by Singaporeans.
Because of MAS 'high capital requirements and heavy emphasis on profitability, many of the hopefuls have come together to form consortia to bolster their opportunities.
Digital wholesale banks, on the other hand, require a lower capital requirement of S $ 100 million and can be supported by foreign companies.
Applicants must also be able to show a path to profitability through a five-year financial projection.
Advantages and disadvantages of a digital bank
One of the greatest advantages of digital banking is the high interest rates and low fees.
Digital banks don't have to pay overhead costs for physical branches or workers to staff them. By automating various processes, you can streamline your operational processes and reduce further costs.
With these cost savings, they pass them on to consumers in the form of higher interest rates on deposits and lower fees on financial products.
The lower cost of digital banking means that underserved groups in Singapore such as entrepreneurs and micro-businesses can be better reached. For example, they can offer the opening of deposit accounts with no minimum amount or take a different approach to assessing credit risk.
Another benefit is relative convenience. While traditional banks are usually closed on weekends or holidays, digital banks are open 24/7, so you can access banking services at any time without leaving your home.
As digital banks rely heavily on technology, they can also use the data they collect to offer more personalized services.
With artificial intelligence (AI), digital banks can also quickly analyze customer data for mortgage applicants as well as their past financial behavior to determine the probability of default and determine the fate of their application immediately.
Photo credit: Vulcan Post
While digital banking offers many advantages on the way to a digital future, it is equally important to be aware of the possible disadvantages.
Security breaches and identity theft are possible, and misuse of personal information is rightly a problem. Digital banks need to make sure they protect personal and financial information, with security a high priority.
Another disadvantage of digital banking is the inconvenience of having the system fail due to technology or service interruptions. If both the website and the mobile app are inaccessible, consumers cannot go to a physical bank to do the required banking.
If you prefer face-to-face customer service, you might prefer a traditional bank instead, as digital banks typically don't have a face-to-face banking relationship.
Are digital banks the way to go?
While this is the first time Singapore has had digital banking, the concept itself isn't new at all.
In Asia itself, we have digital banks in China, Japan, South Korea, Hong Kong and Vietnam. Outside of Asia, there are digital banks in countries like Australia, the UK, the US, and Sweden.
These digital banks have chosen mobile devices to create differentiation. They use digital touchpoints to deliver simple, convenient, and more personalized customer experiences.
In addition, the COVID-19 pandemic has actually accelerated the need for digital banking in Singapore.
From working remotely to ordering meals through an app, digital tools have emerged as a way for many to live their lives amid the pandemic. The same goes for banking, where more people go online to open bank accounts or apply for credit.
This new normal of daily online activities has made it easier for digital banks to enter the market.
The entire COVID-19 situation has brought the role of technology, data and contactless interaction to the fore.
The whole idea of digital banking is that it is completely branchless so you don't have to go into a branch and get in touch with anyone. This contactless transaction means consumers do not have to worry about contracting the virus.
As the banking sector opens up the sector to non-banks, the sector is also forced to innovate and introduce new services.
The presence of emerging digital banks will definitely encourage healthy competition, especially in the digital innovation space, for the benefit of consumers and businesses in Singapore.
Selected image source: Reuters / Singtel / Sea / Chen Zhongqiu via Getty Images