By Abdul Hadhi
SINGAPORE — Singapore’s move to issue up to five digital banking licenses paves the way for non-traditional players to break the stronghold traditional players have historically had on the financial sector. Yet, analysts say it is the smaller foreign banks that will feel the biggest hit, not established players who have already taken the technological leap and operate respected digital banks.
They expect limited near term impact on the Big Three – DBS, United Overseas Bank, Oversea-Chinese Banking Corporation – given the already high competition in the sector, the sector’s continued investment in digital efforts, regulators’ phased-in approach and strict controls for rolling out the digital banks.
The move, announced by Senior Minister and Monetary Authority of Singapore (MAS) Chairman, Tharman Shanmugaratnam last month, is a significant step in the liberalisation of the sector, and includes issuing two full digital-bank licences to companies headquartered in Singapore, and up to three digital wholesale banks licences. All must meet the same capital requirements as local banks.
“At end of the day, there isn’t a lot more you can get with a digital bank that the Big Three don’t offer. There’s the extra reassurance at the local banks where your deposits are guaranteed. It’s money, not a cup of coffee,” CIMB Private Banking economist Song Seng Wun says.
OCBC Investment Research noted in one of its daily reports that the new digital banks will also be operating on a smaller capital base with various deposit restrictions, and offering a narrower range of products at the start. It expects incumbents’ advantages, including access to deposit funding, to be largely maintained.
Small foreign banks may have to worry
But the announcement is “credit negative for small foreign-owned incumbent banks in Singapore because their modest domestic franchises will face the greatest disruption risk from digital bank entrants,” says Simon Chen, Vice-President, Financial Institutions Group, Moody’s Investors Service.
Noting that the new digital banks’ activities will be restricted until they meet all requirements, Chen expects them to collectively command only around 2% of domestic banking system assets when fully operational.
Over the medium term, the most likely disruptions for retail banking include the payments segment such as credit cards, foreign exchange transactions and transfers due to the shift to more online transactions, OCBC Investment Research said.
That may prompt the Big Three that began their digital journey much earlier to tap on the significant cost savings and income boost that will accrue mainly from branch and staffing reductions, S&P analyst Ivan Tan suggests.
At the DBS’ AGM, chief executive Piyush Gupta said a new digital bank could generate $100 of income from a cost base a little above $30. In contrast, DBS's cost-to-income ratio stood at 44% last year.
SingTel, Grab, Razer, InstaReM could raise their hands
Fintechs already have the technology and can gain the financial knowhow by hiring the right people or by teaming up with a bank. It makes digital banking is an ideal entry point for those seeking another source of revenue.
Ride hailing giant Grab said as much with Group Senior Managing Director Reuben Lai saying it “will study the digibank licensing requirements closely, and are keeping an open mind as we assess how best to pursue this, including whether to work with suitable partners."
Other fintechs such as gaming hardware manufacturer Razer, telco Singtel, and remittance startup InstaReM are also reportedly exploring the feasibility of applying for one of the licences. MAS expects to invite applications in August.
The remittance industry was an early mover in digitalisation given the relative simplicity of transferring money and “we have seen many startups and MNCs get into this line of business and give the remittance companies a run for their money,” Remittance Association (Singapore) representing chairman Barakath Ali said. The latest move will add to existing competition, he said.
Nonetheless, he expects the sector to benefit from lower costs in the long run, from less manpower and more automation, and more business from online savvy customers. But in the near term, companies may have to do more marketing to build up public trust and alleviate lingering security concerns.