On Dec 4, the Monetary Authority of Singapore (MAS) announced it had awarded two digital full bank (DFB) licences and two digital wholesale bank (DWB) licences. The two DFB licences were awarded to a consortium comprising Grab Holdings and Singapore Telecommunications (Grab/Singtel), and to Sea. And the two DWBs were awarded to a unit of Ant Group, and a consortium comprising Greenland Financial Holdings Group Co, Linklogis Hong Kong and Beijing Co-operative Equity Investment Fund Management Co.

“Of the winning bids, Grab/Singtel, Sea and Ant’s were unsurprising. The DFBs, with their ability to tap the retail segment, hold greater potential to disrupt the incumbent base, in our view,” says CLSA in a recent note.

CLSA is more positive on Singtel than Sea. “We are buyers of Singtel. However, these are related to nearer-term considerations and current valuations rather than anything related to the digibank offering in Singapore. For Sea, we initiate a small valuation for its digital financial services business but after another stellar run in share price, we downgrade our rating from Buy to Outperform as we see lower upside potential now,” the CLSA note adds.

Do these new digital-bank aspirants have what it takes to overcome the odds to turn profitable?

Building a successful digital-only bank

According to business management consultancy Oliver Wyman, aspiring digital banks need access to a sizeable customer base. Grab/Singtel and Sea have access to a broad and wide customer base. But Singapore has a small overbanked population with very few areas left underserved. Hence both the Singapore DFBs and DWBs may eventually have to look towards Asean for growth.

Interestingly, Bank Negara Malaysia has placed a strong emphasis on financial inclusion and players with meaningful access to underbanked rural and urban population segments will have an edge. Secondly, the DBs will need a variety of distribution channels and customer touchpoints.”

These could include a combination of both online and offline channels for various kinds of business. These include travel services, e-commerce, gaming, e-wallets, convenience stores, remittance services and gas stations,” Wyman says.

Third, digital banks would need to provide financial products to target customers. These include simple products like loans and deposits, funds transfer and remittances, and eventually savings and insurance products. Moving further up the ladder as customers become wealthier, they may need a mortgage and eventually retirement funds. “To do this, they will need alternative data sources for credit evaluation and they will have to create micro products to suit the needs of target customers,” adds Wyman.

Fourth, technology could be a key differentiator. The digital bank needs to be able to make use of data through various data analysis using technology and various forms of AI. Digital banks will have to provide a top-quality customer experience without a branch. Technology can also reduce the cost of acquiring and servicing customers.

For example, TMRW, a digital-only bank owned by United Overseas Bank, which is scaling up in Thailand and Indonesia, is able to undertake credit evaluation using AI by its FinTech Avatec.ai, personalise its banking products with Personetics and analyse transactions with Meniga. TMRW model is based around engagement and it uses something called ATGIE as its strategy — Acquire, Transact, Generate data, Insights and Engage.

“Data enables us to understand each TMRW customer better and to provide them with financial solutions that are relevant to their needs. With this in mind, we designed a completely new data-centric business model for TMRW which focuses on customer engagement as the primary goal,” says Kevin Lam, head of TMRW Digital Group at UOB.

While digital challenger banks have technology and new business models on their side, MAS and regulators elsewhere would still require them to observe risk management, capital and liquidity regulations under Bank of International Settlement rules, compliance aimed at preventing financial crimes and anti-money laundering features and robust cybersecurity. Non-banks may not be familiar with the level of regulatory scrutiny to which banks are subjected to, Oliver Wyman suggests.

Once again, banks such as TMRW have an advantage in that its parent is regulated by MAS. While TMRW has managed to hit the ground running in places such as Thailand and Indonesia, Singapore’s new DFBs and DWBs may need to tread more carefully as they build up banking knowledge.

Grab/SingTel vs Sea

“For us, the bigger threat to the system is likely to come from Grab/Singtel, given their larger customer base and more reputable brand names versus Sea’s Shopee and Garena,” says CLSA. “Moreover, with services restricted to staff, business partners and suppliers in the initial stages, the Grab/Singtel partnership will be able to get off the ground far quicker than Sea,” CLSA adds.

To do that, Credit Suisse points out that Singtel may have to spend between $600 million and $900 million to shore up paid-up capital and operating losses.

Grab is viewed as a super app in some quarters while Singtel has a significant subscriber base of around 4.2 million in Singapore. Together, the duo has a ready-made database to tap when they launch digibank services, CLSA notes. Grab will retain a 60% stake in the entity while Singtel will hold the remaining 40%.

“The consortium aims to address the ‘unmet and underserved’ needs of the consumer and enterprise segments in Singapore. They plan to target ‘digital-first’ consumers, who have come to expect greater convenience and personalisation, gig workers with flexible incomes and micro, small and mid-sized enterprises (MSMEs), who often face limited access to financing,” CLSA says.

According to CLSA, if the success of a digital bank rests on access to customers, access to Micro, Small, and Medium Enterprises (MSMEs), frequency of digital interactions, an abundance of data and trust in the brand name, Grab/ Singtel comes out on top in most of these segments.

Hurdles for foreign-owned digital only banks

Both the DFBs and DWBs need to show a path-to-profitability and offer a clear value proposition that meets underserved needs. The operating models of digital-only banks overseas demonstrate that the Singapore DFBs and DWBs may have to fund operating losses for their initial years while they face constraints because of phased-in financial services activities under the watchful eye of the MAS.

Because of Covid, banks globally and in Singapore have reported higher credit costs. Meanwhile, earnings are likely to remain under pressure on the back of lower net interest margins as a result of quantitative easing and consistently low policy interest rates. These factors are likely to pressure all banks including digital-only banks, as acknowledged readily by digital-only banks such as Monzo.

Monzo and Revolut which have been operating in the UK for the past five years are still loss-making (see Table 2). Monzo’s losses more than doubled to GBP113.8 million ($203.3 million) for the 12 months to February, before Covid-19 hit the UK.

“Covid-19 is testing the sustainability and resilience of businesses in all industries, making going-concern assessments more demanding and judgemental. We’re no different and are exposed to the risk that revenues are significantly lower for a period of time. For a growing business, it also makes the fundraising environment more challenging. These indicate that the ability of the group to continue as a going concern is subject to material uncertainties,” Monzo said in its annual report published in July.

In FY2019 ended December, Revolut posted a total loss of GBP106.5 million, treble the loss of GBP32.9 million reported in FY2018. Recently, Reovlut’s founder Nik Storonsky told CNBC the bank broke even in November. Both Revolut and Monzo are not listed.

Kapronasia reports that Korea’s Kakao Bank posted record earnings in 2Q2020. Kakao Bank is different from Revolut in that it focuses on the domestic Korean market, eschewing the cash burn of global expansion. The Kakao messaging app in Korea enabled Kakao bank to build a customer base at lower cost. On the other hand, Revolut has opted for size with the view that this approach will deliver earnings. In a recent LinkedIn post, Kapronasia says Chad West, Revolut’s director of marketing and communications, noted that Amazon took 14 years to reach profitability, Spotify 10, Airbnb eight and Facebook five.

Nubank, a Brazilian digital-only bank reported a net loss of BRL312.7 million ($81.5 million) in FY2019, again treble the BRL100 million loss reported in FY2018.

Digital opportunity for Singapore’s new banks

The big growth opportunity for the DFBs and DWBs is beyond Singapore. “We believe Singapore itself is unlikely to be significant and the more material value creation would be from capturing the potential growth of digital financial services in Asean,” says Credit Suisse.

A case in point is UOB which has developed a two-pronged approach described by Lam as an “attack-defend strategy”. In the anchor markets of Singapore and Malaysia, UOB has an omni-channel approach where customers can bank both online through UOB Mighty, and in its branches. Mighty, literally a bank on a phone, is used to defend its home turf. Similarly, DBS Group Holdings has its Digibank, and Oversea-Chinese Banking Corp (OCBC) has its OCBC Mobile Banking App.

TMRW is UOB’s challenger digital bank in Asean, Lam says, citing a Google, Temasek Holdings and Bain & Company report which points out there were 40 million new internet users in Asean this year, bringing the total number of internet users in the region to 400 million or nearly 70% of the population.

Boston Consulting Group, Finastra and the Singapore Fintech Association’s report The Coming of Digital Challenger Banks also outlines the opportunity in Southeast Asia. “Upcoming Digital Challenger Banks in Singapore have a tremendous opportunity across the broader Southeast region, which is set for strong economic and demographic growth in the coming decade. By 2030, the Asean-5’s (Indonesia, Malaysia, the Philipines, Singapore and Thailand) GDP is projected to reach US$4.3 trillion ($5.7 trillion), making it the world’s sixth-largest economic block,” the BCG report says. In terms of population, the Asean-5 will be home to 540 million people, putting it as a collective market behind only China, India and the EU.

Meanwhile, a young digital-literate generation, supported by internet infrastructure and smartphone adoption provides the opportunity for digital-only banks. According to the BCG report, more than 50% of Indonesians currently do not have a bank account, and approximately 68% of adults in Vietnam and 65% in the Philippines are unbanked.

“Building a low cost and agile model is also key for digital banks to be sustainable in the long run. The data-centric business model that we designed for TMRW enables us to keep acquisition costs low by combining the strengths of various technologies to create a personalised banking experience and to grow a base of customers who are highly engaged,” Lam explains.

DBS’s digibank which started as a digital-only bank in India in 2016 has adopted a phygital strategy combining digital with physical. “Digibank is now working to what we most recently modelled. We continue to get better quality customers. With recent regulatory changes in India they’ve liberalised [further], giving us the opportunity to start acquiring customers more easily than two or three quarters ago,” DBS CEO Piyush Gupta said at a recent results briefing. “But we’ve slowed down on lending this year for obvious reasons to both consumers and SMEs. Deposits, wealth management and payments are doing well.”

DBS’s digital opportunity may lie elsewhere. On Dec 10, DBS launched the DBS Digital Exchange which allows institutional and accredited investors to trade digital assets such as cryptocurrencies and other stable coins. Binance, the world’s largest crypto exchange generated the equivalent of $1.8 billion in transaction fees which may mean significant upside for DBS’s fee income.

Grab/Singtel and Sea have a year to ready themselves for the battle with formidable defenders and are expected to become operational in early 2022. — with additional reporting by Jovi Ho


A high bar for new digital banks

The Monetary Authority of Singapore (MAS) had previously announced that it would award banking licences for up to two Digital Full Banks (DFBs) and up to three Digital Wholesale Banks (DWBs). There were a total of 14 eligible applications. The applications were assessed on the following criteria:

• Value proposition of business model, incorporating innovative use of technology to serve customer needs and reach under-served segments;

• Ability to manage a prudent and sustainable digital banking business; and

• Growth prospects and other contributions to Singapore’s financial centre.

The assessment was done taking into account all relevant considerations for each criterion. MAS also took into consideration the eligible applicants’ reviews of the business plans and assumptions underpinning their financial projections arising from the impact of the Covid-19 pandemic.

In June, MAS asked all eligible applicants to review their business plans and assumptions underpinning their financial projections, including sources of funding, as the Covid-19 pandemic has significantly impacted macroeconomic and business conditions since the applications were received at the end of 2019. An independent review of these assumptions was also required.

To select the successful applicants, MAS set stringent expectations across the assessment criteria. The two selected DFB applicants were clearly stronger than the other eligible DFB applicants. As for the DWBs, the two selected applicants met the expectations of MAS and were assessed to be demonstrably stronger across the criteria. MAS decided to award banking licences to the two DWBs. As the DWBs are introduced as a pilot, MAS will review whether to grant more of such licences in the future.

The DFBs will start as a restricted digital bank — whereby it can only offer simple credit and investment products — to build up its business model and internal processes, and gradually progress to become a full functioning bank. When the restricted digital bank first commences operations, it will be subject to an initial deposit cap of $50 million, an individual depositor cap of $75,000 and will have an initial paid-up capital of $15 million. MAS expects a restricted DFB to be in this phase for one to two years.

The restricted digital banks will become full digital banks when they prove themselves to the regulators. This will allow them to provide a wide range of financial services and deposits can be taken from retail customers. Minimum paid-up capital will rise to $1.5 billion at this stage and they will be subject to the same liquidity requirements as the other banks.

A DFB will be subject to the same level of risk-based capital requirement as a domestic systemically important bank (D-SIB), which would include 6.5% CET-1 Capital Adequacy Ratio (CAR), 10% total CAR, 2.5% capital conservation buffer, and up to 2.5% countercyclical capital buffer. While DFBs will not be designated as D-SIBs at the onset, the higher risk-based capital requirement is imposed given their untested business models. This will provide a buffer for any unexpected losses.

DWBs can only serve corporate clients and SMEs. They will be allowed to offer SGD current accounts for business uses, including sole proprietors and partnerships. These accounts can be interest-bearing. They must have a minimum paid-up capital of $100 million.