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Southeast Asia

Singapore banking: Race for digital licences enters final stretch

Singapore has whittled the bidders for its five digital banking licences down from 21 to 14; several are well-funded partnerships with Chinese backers and a track record in disruption. But has Covid-19 moved the Monetary Authority of Singapore’s goalposts?

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Contestants in the race for Singapore’s five new digital banking licences are approaching the finishing line. In June, the Monetary Authority of Singapore announced that the initial field of 21 applications had been whittled down to 14 that met the grade.

Because of the Covid-19 pandemic, the whole process – from the initial invitation for applications back in August 2019, up to the present day – has coincided with a complete reshaping of the economic and social environment. As the bidders present their cases, they must be wondering whether the MAS’s own considerations have changed along the way.

“In the pre-Covid world, I would have imagined the focus would be on innovation, on who can bring in the cheapest services for the segments the MAS was aiming for – the under-banked in Singapore,” says Thilan Wickramasinghe, head of research for Asean financials at Maybank Kim Eng. “Initially, that would have been the primary deciding factor. Increasingly, now it will be stability, safety and capital.”

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Thilan Wickramasinghe, Maybank Kim Eng

Innovation will still be a big part of it, he says, “but MAS will be looking at who’s got the deepest pockets and the ability to manoeuvre, even if there is a prolonged slowdown.”

That being the case, who’s likely to come out on top?

When Tharman Shanmugaratnam, Singapore’s senior minister and chairman of the MAS, announced the plan to award new digital licences, he said they would “mark the next chapter in Singapore’s banking liberalization journey. They will ensure that Singapore’s banking sector continues to be resilient, competitive and vibrant.”

And he specifically urged new licensees to cater to those currently underserved by existing banks: most entrants appear to have decided this means small and medium-sized enterprises and retail.

Shanmugaratnam announced two different types of digital licence. There would be two full licences, allowing winners to take retail deposits, and three wholesale licences.

In the pre-Covid world, I would have imagined the focus would be on innovation. Now it will be stability, safety and capital
Thilan Wickramasinghe, Maybank Kim Eng

Those who think SMEs represent the real market opportunity have tended to go for the wholesale option, while those who want to cater to retail customers have opted for the full service option.

The original field of 21 included seven bidders for the full licence, and 14 for wholesale. The MAS tells Asiamoney this may be because the full banks will have a higher minimum paid-up capital requirement than the wholesale winners.

Licensees can be majority foreign-owned or, in the case of the wholesale licences, entirely foreign-owned.

Emerging trends

One of the first trends to emerge as the consortium groups took shape was how many Chinese firms wanted to get into digital banking in Singapore. Of the original 21 bidders, seven had a Chinese backer.

Familiar names included Ant Financial (now renamed Ant Group), ByteDance, Xiaomi-Finance and AMTD, along with less familiar Greenland Financial Consortium (part of the Greenland real estate group) and Asia Digital Bank Corporation (ADBC), which pretty soon teamed up with another household name: Tencent Cloud.

Another clear trend was the need for partnership, whether that is Chinese players tying up with locals, new technology with old, or family wealth with startups.

One of the best examples of this is the decision of Grab and Singtel to form a 60:40 partnership to apply for a full digital banking licence. Grab has been hiring already: in April it hired Charles Wong, Citi’s head of retail banking. It is no surprise at all to see Grab in the mix: Euromoney and Asiamoney have been reporting on a likely entry into broader financial services by the Singaporean ride-hailing and food-delivery group for years; last year, the head of its financial services arm made his ambitions clear to us.

“Charles is the senior managing director of Grab Financial Group who will spearhead our Singapore digibank effort, should we get the licence,” says Grab in written responses to questions from Asiamoney.

Asked about the potential of a digital licence in Singapore, Grab points to the difficulties that smaller companies face in getting access to credit, and says that it has found that over 70% of SMEs believe access to credit would be transformational to their business.

“There is still a persistent use of cash for retail banking consumers, and while there is stickiness with the current bank of choice, many consumers are not happy with their current offerings,” Grab says, citing its own survey.

We aim to give retail better ways to save and grow wealth [and] allow SMEs to simplify and grow their business
Reuben Lai, Grab Financial Group

Grab already does a great deal: on a single day in early August, it announced a new micro-investment solution within the Grab empire, a consumer loan offering through a third-party loan platform, buy-now-pay-later plans for e-commerce and a range of insurance offerings.

It is tempting to ask what it can’t already do that a digital bank licence will fix?

“If we’re successful, we’ll be able to serve retail customers and SMEs,” says Reuben Lai, senior managing director of Grab Financial Group. “We aim to give retail better ways to save and grow wealth [and] allow SMEs to simplify and grow their business. The difference the bank offers us is a more fulsome set of licences and products.”

Grab is already the biggest ride-hailing operator in southeast Asia, with businesses in Indonesia, Myanmar, Vietnam and other countries: the licence would allow Singapore to serve as a stepping stone for similar services across the region, Lai says.

Grab, like many other bidders, thinks that Covid-19 has just made all these things more pressing.

“What Covid has done is accelerated our plans, because these products are even more relevant now,” Lai says.

A long-underway process – small businesses adopting digital payments for daily transactions, and retail customers expecting to complete their banking needs on mobile apps – has been dramatically strengthened by the pandemic.

The partnership with SingTel is important. Grab already does quite a lot in financial services in Singapore: e-money, lending and insurance distribution. But to take it to the next level – a customer-centric, digital bank with a variety of banking and financial services – SingTel will help both with its customer base and its entrenchment into the life of Singaporeans generally.

“We believe that a successful digital bank must not only be familiar with the needs of its customers but also be able to develop and manage a comprehensive digital ecosystem,” Grab says. “Both Grab and Singtel offer accessibility, affordability and experience by leveraging our respective platform insights to address deficiencies in current bank offerings.”

Intriguing combinations

ByteDance, the Chinese company behind the TikTok social media application, is thought to be in talks to tie up with a well-known Singaporean name – the Lee family that owns OCBC (not the one that provided Singapore’s founder and its current prime minister).

The Financial Times reported on this link in June and, if correct, it would be an intriguing combination of two very different institutional cultures; when one tries to approach the Lee Group of Companies for comment, they ask you to send your questions not by email, but by post.

One of the bigger consortia was formed by an eclectic mix of characters who have come together as the Razer Youth Bank. The leader in this group, with a majority stake of 60%, is Razer, the gaming group. Its partners are Sheng Siong Holdings, FWD, LinkSure Global, Insignia Venture Partners and Carro – respectively a supermarket chain, insurer, Chinese Wi-Fi startup, tech venture fund and used-car platform. It bills its offering as the “world’s first global youth bank” and clearly intends to play on Razer’s brand in that demographic.

Equally crowded is the Beyond consortium. This is led by V3 Group (in which KKR invested last year), whose luxury brands include massage-chair producer Osim and premium tea brand TWG Tea.

EZ-Link, the group behind the ubiquitous contactless smart card used on public transport in Singapore, is also a big name in Beyond, which includes property developer Far East Organization, the Singapore Business Federation, Sumitomo Insurance, and Heliconia Capital Management (a subsidiary of Temasek). Beyond is piloted by the consumer entrepreneur Ron Sim, who owns Osim.

We see a lot of partnering with businesses where their main business line may not be in the financial industry but technology
Wee Kuang Tay, Phillip Securities

Other applicants have opted to go it pretty much alone. One such is Ant, which has applied for a wholesale digital banking licence – it has one in Hong Kong too. It is no surprise to see Ant in the mix. In Singapore, it already has a majority stake in the e-commerce site Lazada.

Another bidder is Lazada’s natural competitor, Sea, an internet group backed by Tencent, and which owns the Shopee online shopping platform and a gaming arm called Garena.

Locally, the Singaporean fintech bank Arival, which focuses on SMEs and cryptocurrencies, has applied for a digital wholesale licence. Euromoney interviewed Arival’s founders in March.

Not every interested party has stayed the course. A consortium of OCBC, Keppel, Vertex and Validus withdrew, as did newer names Nium and Revolut, put off by high capital requirements.

The MAS has not said which of the 14 names are still in the race, and most applicants are unwilling to confirm on the record – an exception being Sim’s Beyond consortium, which said it had progressed to the next stage.

Asiamoney understands that Grab/SingTel, Sea, Razer, Ant, ADCB/Tencent and Singapura/MatchMove are all through the next stage.

Licence competition

The MAS has said that reaching the next stage is based on three factors: value proposition and business model, incorporating the innovative use of technology; ability to manage a prudent and sustainable digital banking business; and growth prospects and other contributions to Singapore’s financial centre.

The MAS provided written answers to questions from Asiamoney, asking that responses be attributed to a spokesperson.

The MAS spokesperson says the licences have “attracted strong interest from a diverse group of applicants,” from e-commerce firms to tech and telco companies, crowd-funding platforms and payment service providers, and financial institutions.

“We are still in the midst of the assessment process, and look forward to engaging the applicants on their proposals.”

The MAS tells Asiamoney that the pandemic has accelerated trends in digital banking; it cites a survey by SingSaver in July, which found that 70% of respondents had used online banking frequently since the start of the pandemic, and that 80% of Singaporeans said they would continue to bank online even after the pandemic dies down.

“The environment is conducive for a digital bank with no physical branch network to take off,” says the MAS spokesperson.

It is, in some sense, a bold move for a regulator. For the first time, companies will be able to offer banking services despite not having a track record in banking.

But the MAS hopes it will also gain strength as a pan-Asian gateway for the region, “such as in the area of enterprise financing to support Asian companies and SMEs with regional and global aspirations.”

As for the incumbents, the MAS says “digital banking is not new in Singapore and our market is generally well-served with significant digital banking services,” so “we are looking to the digital banks, with their deep digital know-how and insights from operating non-bank businesses, to serve the needs of the traditionally underserved segments and add diversity to the banking system.”

Financial innovation

Singapore’s established trio of DBS, OCBC and UOB are looking on with interest.

It is not as if any of them are slouches in this area: DBS is considered one of the world’s best adopters of digital technology within banking, and UOB is several years into a digital transformation of its own.

“Singapore is a well-banked society,” says Wee Kuang Tay, research analyst at Phillip Securities.

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Wee Kuang Tay, Phillip Securities

The ubiquity of physical branches, and the investment already in digital banking, means it could take between five and 10 years before the digital banking licences have a real impact, he adds.

Tay says the key motivation is not to provide a threat to the established banks but to create a complementary source of financial innovation. That is why he thinks the winning banks are likely to be those that are not already entrenched in the financial system.

“We see a lot of partnering with businesses where their main business line may not be in the financial industry but technology, and they want to use a digital banking licence to complement their current business models and to build a stronger network effect,” Tay says.

“Razer, for example, wants to build a small banking system for the gamers. Singtel wants to onboard some of its clients so it can bypass the banking system entirely. And Grab will be able to offer more deposits and products that can generate income for them.”

When the announcements are made, Tay expects a slightly different approach between the wholesale and full-service winners. The wholesale applicants will expect to get going immediately; he has the impression that on the retail side, there will be a slow build-up of the business.

“It seems that the government is going to hand-hold them to build up their banking arm so they are successful in expanding,” Tay says. “I don’t think they are looking for someone who is able to just burn cash in the short term to disrupt the industry and end up exiting it very quickly.”

Maybank Kim Eng’s Wickramasinghe believes there is a gap for these digital banks to fill, no matter how strong the incumbent banks are in their tech offerings.

He says that over the last five to six years, the three big banks have moved their businesses towards higher-quality and larger customers as a method of reducing overall risk in their books.

Risk-weighted assets have gone up at the banks. Old-fashioned banks also have higher cost bases, thanks to their large physical presence.

“Yes, large banks are digitally savvy, but they still carry large legacy costs,” Wickramasinghe says. “A digital player who comes in with no legacy costs and who is mostly cloud-based can deploy a lot faster and [is] still able to make a spread on low-yielding customers.”


DBS weighs up digital upstarts

Piyush Gupta, DBS, doesn’t underestimate the threat from new digital entrants

What do Singapore’s established banks think about the potential threat from these new digital entrants?

Asiamoney asked Piyush Gupta, chief executive of DBS Bank, winner of many plaudits for its own digital transformation.

“New entrants into any market increase competitive intensity, and the virtual banks who will be awarded licences this year are no exception to the rule,” says Gupta.

“In addition, it is likely that the new competitors will be free from the burden of legacy and have access to large resources. Therefore, they will quite possibly be able to disrupt the market in interesting ways and are not to be under-estimated.”

However, it will not be easy for the new entrants, either in the short or medium term, he adds.

For a start, banking penetration is already 98% in Singapore, a relatively small market with a population of only 5.8 million.

“There are really no obvious underserved segments,” he says. “To the extent they exist, the revenue pools are likely to be small.”

Secondly, the incumbents, most obviously DBS itself, have strong digital offerings already, making it hard for a new player to be differentiated.

Third, once they reach a certain size, the new players will face large capital requirements as well as regulatory compliance burdens.

“On the back of the Uber and WeWork IPOs, it is unlikely that investors will have appetite for continued unlimited cash burn without a line of sight to ebitda and returns,” Gupta says.

While new competition will probably drive prices down, “it is a healthy sign that the regulators are unwilling to support predatory pricing,” he says. “In industries like e-commerce and ride-hailing, deep discounting with a winner-takes-all mentality has led to industry instability. Such instability in financial services may be unwise.”

Gupta says DBS has been preparing for this for six years “by seeking to disrupt ourselves before someone else can.”

He points out that the bank’s digital retail banking platforms already serve 3.4 million people; its more specialist digital financial planning too has reached one million people, and it handles 7.4 million overseas remittance transactions annually.

Covid-19 has only accelerated this work, he says; during the pandemic, the bank opened 24,000 equity accounts in less than a month, 50% up on the usual volume, and it processed 41,000 accounts remotely for migrant workers who were not allowed to leave their dormitories in April.

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