Singapore digital bank licences: What does this mean for DBS, OCBC, and UOB?

MAS recently announced the successful applicants for four new Singapore digital bank licences. Of the four new licences, two are digital full banks and another two are digital wholesale banks. This announcement follows a wave of digital banks that have already emerged across the world, including in the United States, United Kingdom and closer to home, Hong Kong and South Korea.

In this article, we will explore the identities of these four new entrants, understand whether technology companies can indeed run banks, note the lessons from existing digital banks around the world, and finally assess the impact on the three local banks.

Who are the four new licence holders?

A similar thread binds the choice of the four successful applicants: they are established technology companies with existing experience in digital financial services.

  • Grab, while beginning as a ride hailing company, has now accumulated experience in running a payments and mobile-wallet business. The partnership with Singtel will bring additional touch points to Singtel’s customer base not only in Singapore but also its regional associates across South and Southeast Asia.
  • Sea Limited is one of the leading consumer internet companies in Southeast Asia. Synonymous with Garena and Shopee in digital entertainment and e-commerce respectively, Sea also provides digital payments and financial services with SeaMoney. In the third quarter of 2020, SeaMoney transacted more than US$2.1 billion in mobile wallet payment volume.
  • Ant Group, notwithstanding the postponement of its recent blockbuster IPO, operates China’s largest digital payments platform, Alipay. It will bring to the market its data-driven technological expertise and experience in digitalising financial services especially for small businesses.
  • While the consortium of Greenland Financial Holdings, Linklogis, and Beijing Co-operative Equity Investment Fund Management might not ring a bell in the minds of retail customers, that is because their target segment are small and medium enterprises. Greenland Financial is the investment arm of Chinese state-owned real estate developer Greenland. Linklogis is a blockchain powered supply chain finance platform based in Shenzhen. Their technology provides legitimacy and visibility of the underlying invoices so that SME suppliers can access cheaper financing. Linklogis secured a $220 million Series C round in 2018 led by the Government Investment Corporation of Singapore and other investors including Tencent.

Grab-Singtel and Sea were awarded digital full bank licences which permit retail banking, while the latter were awarded digital wholesale bank licences which will serve SMEs and non-retail segments.

Can technology companies run banks?

Running a payments platform or a mobile wallet is significantly different from running a bank. To date, the new entrants are predominantly platform providers acting as facilitators of financial transactions. They are not holding financial risks as a product owner, namely that of credit, interest rate, and liquidity.

By becoming a bank, while newer sources of revenue opportunities are available to capture, the new entrants will have to manage credit risk from loan defaults, interest rate risk from the business of transforming short dated liabilities into longer dated assets, and liquidity risk from sudden deposit outflows. This is no easy task given the specialised skill sets involved and institutional governance required to manage a business that at its core is about securing customer trust.

In addition, while the past 10 years have seen a wave of regulation descend on the banking industry, tech companies were able to grow relatively unconstrained by regulation. For these new entrants, meeting complex regulatory requirements while staying agile will be a key success factor. Nevertheless, there are compelling reasons for the new entrants to rise up to the challenge.

‘All of them have clear use cases and value proposition of [a] digital bank in their current business model. They can easily incorporate innovative digital banking services into their current business and potentially provide better services to the public,’ Associate Professor James Pang from NUS Business School remarked.

What lessons can be learned from existing digital banks around the world?

Existing digital banks already in operation provide interesting takeaways for the new entrants.

Branding and customer experience can serve as a base to gain competitive advantage. Kakao Bank in South Korea provides a useful test case. While Kakao Bank enjoyed the benefit of tapping on the popularity of its mobile messaging app, a big part of its success lies in the branding of its cards and the quality of its app experience. Especially with no physical branches, the app becomes the single most important point of interaction with its customers. Leveraging on the strength of their brand has allowed Kakao Bank to turn profitable not by growing market share of loans, but by growing fee income from partnerships with credit card and brokerage companies. Incidentally, we can see the early innings of this play at Grab with both the GrabPay Card and GrabInvest.

On the flip side, the new entrants would do well to avoid the trappings of merely being the secondary account bank as in the case of Revolut in the UK. This is when customers only hold small transaction balances to take advantage of rewards or foreign currency exchange benefits but have low trust in keeping their hard-earned savings with the bank. Being able to attract a base of deposits that will stick will ensure a consistent source of low-cost funding. The new entrants will have to think hard about their strategy for gathering deposits, apart from the tired and overused tactic of direct crediting of one’s salary to the bank to enjoy higher interest rates.

Finally, there needs to be a credible strategy for sustainable loan growth. Monzo Bank in the UK and Klarna in Sweden provide good examples of what to be watchful for and what to do respectively.

As of Monzo’s latest financial year ended 29 February 2020, just 7% of total assets comprised of loans with 80% of total assets being cash parked at other banks. By way of comparison, the three local banks in Singapore have an average of 60% of its total assets in loans. What good is a bank if it cannot facilitate the provision of credit? While loan origination might not be such an issue for the new entrants given the higher growth potential in Southeast Asia, nevertheless the takeaway from Monzo is the risk of not developing a credible business model that achieves quality loan growth.

In contrast, Klarna has manged to carve out a unique positioning by focusing on a loan strategy that is interlinked to its core offering. The company began as a payments platform and subsequently obtained a bank licence in 2017. Renowned for providing flexible payment schedules for consumers shopping online, Klarna leveraged its network of online merchants to provide credit to consumers seeking to ‘buy now and pay later’. While the pandemic has raised concerns of asset quality, Klarna’s focus on providing consumer unsecured credit allows it to earn a high net interest margin of 12% which is meant to cover the higher rate of credit losses.

What does this mean for the incumbent local banks?

Singapore is one of the most highly penetrated countries when it comes to financial services. Duan Jin-Chuan, Jardine Cycle & Carriage Professor of Finance from NUS Business School, notes that, ‘Singapore isn’t a big market to begin with and the financial inclusion level is also very high. Therefore, the entry of four digital banks will naturally bring us to a transitional phase better characterized as overbanking.’

Given the highly saturated financial services market in Singapore, the digital banks will not have the benefit of a fast-growing market to acquire new customers. Instead, it will need to position themselves as a better alternative to the incumbent banks, who have themselves embarked on significant digital transformation programmes.

‘I contend that the so-called conventional banks are already quite digitalized, in part accelerated by the COVID-19 pandemic, and their advantage as a omnichannel bank (i.e., offering comprehensive digital services while leveraging the already significantly scaled down brick-and-mortar presence) should never be underestimated.’ — Professor Duan Jin-Chuan, Professor of Finance, NUS Business School

One of the aims noted by MAS in its award of the new licences was that it hoped the digital banks would particularly serve the ‘currently underserved businesses and individuals’ which will ‘ further strengthen Singapore’s financial sector for the digital economy of the future.’ While this is a positive for Singaporean businesses and individuals who currently cannot access credit, the question remains as to why the incumbents have not already decided to extend credit to these businesses and individuals.

One concern would be credit risk and the higher rate of non-performing loans (NPL). The NPL ratio for SMEs in Singapore was 4.2% as of June 2019, which is significantly higher than the corporate NPL ratio of 2.2%. In the individual segment, credit card charge-off rates average 5%, which indicates the approximate losses on consumer unsecured credit. What is important to note is that these loss ratios are for the existing book served by the incumbents, which does not include the underserved segment which one would assume carries even higher risk. How the digital banks seek to mitigate this perceived higher risk with their technology and even unique underwriting algorithms remains to be seen.

Piyush Gupta, CEO of DBS, in his recent remarks at the Singapore Fintech Festival threw down the gauntlet, noting ‘really nothing much that is available out there that DBS does not provide in a very competitive, and often world-class kind of manner.’

The fifth perspective

But perhaps the real prize for the new digital full banks is not the domestic market but Southeast Asia ex-Singapore. Although MAS stipulates that the new entrants can conduct banking operations in at most two overseas markets in the entry phase, this requirement ceases the moment the digital banks become fully functioning.

The low financial services penetration in ASEAN, with a rising middle income and a breakneck pace of technological adoption provide fertile grounds for the new entrants. Incidentally, it is in Southeast Asia that the local banks have been slow to expand in. Except for UOB, which seems to be taking the lead, loan growth in the past five years by DBS and OCBC in Southeast Asia remains tepid despite the strong underlying economic fundamentals.

For the new entrants, especially Grab and Sea, their existing digital foothold in Southeast Asian ride hailing and e-commerce markets respectively will enable them to very quickly introduce financial products and services into their existing offering. In this respect, the threat posed by the digital banks lies in their ability to cut off a potential growth engine for the local banks, especially if they are intending on making Southeast Asia their next engine of growth.


TWS is a long-term investor who follows in the philosophies of Buffett, Graham, and Marks. He enjoys observing market trends and is particularly interested in corporate actions as these events present unique investing opportunities. He is currently pursuing a Masters in Finance at London Business School and previously worked at Moody’s Investors Service as a research analyst.

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