Singapore's new digital banks are unlikely to affect financial stability as they grapple with capital and liquidity ratios, credit risks and credit scores at a time when local banks' digital banks continue to gain ground,
The Monetary Authority of Singapore’s Financial Stability Review issued on Nov 25, looked at the financial stability implications following the launch of four digital banks in Singapore, GXS Bank, Trust Bank, Anext Bank and Green Link Digital Bank.
The regulator points out that the new digital banks are required to demonstrate sustainable business models, so that competition is not value destructive. The new digital banks are subject to the same prudential requirements (including capital and liquidity requirements) as existing banks. MAS will phase in the permissible activities of digital full banks via a three-stage process, to minimise risks to retail depositors and mitigate the risks of untested business models.
“While incumbents and new entrants may target the same customer segments, digital banks remain a relatively new concept in Singapore’s banking landscape, and customers may hence be inclined to adopt a “wait and see” approach before banking fully with a digital bank,” MAS notes, citing a survey by PricewaterhouseCoopers (2019) which found that 67% of Singapore customers are likely to continue using their current bank for their primary account.
On the efficiency front, digital banks may spur incumbents to innovate and improve efficiency to lower ‘cost to serve’. This would boost incumbents’ profitability. Potential indicators to monitor include bank profitability ratios such as return on equity or return on risk-weighted assets (to assess revenue efficiency) or cost ratios like cost-to-income (to assess operating efficiency), MAS says.
One of the risks is for digital banks to target riskier, underserved segments with new credit risk scores or software. Borrowers may not have sufficient credit history, there is a risk that making lending decisions based on alternative data that has not been tested through a full credit cycle could lead to higher-than-expected credit losses in a downturn, MAS cautions.
Asset quality may also be an issue because digital banks usually serve younger individuals with lower incomes and lower credit scores by granting them loans that are mostly unsecured. They may also have access to a smaller retail deposit base, and are likely to be funded via the interbank market.
At present, in Singapore, banks’ cost of funds on the rise as banks compete for deposits. MAS has also flagged technological risks such as cybersecurity, system failures or malfunctions, cyberattacks on banks’ infrastructure to exfiltrate sensitive financial data or disrupt core information technology systems, and scams.
Analysts have also pointed out that the local banks dominate the market, yet are very agile, and are able to adapt and fill niches that are not banked. Among the strategies of local banks with digital banks is to access retail customers and SMEs in large markets such as Indonesia, Thailand and Vietnam. DBS Bank launched Digibank in India before expanding to Indonesia a year or so later. United Overseas Bank launched UOB TMRW in Thailand in 2019, before moving to Indonesia. Launches are planned in Malaysia and Vietnam.
“Digital banks lower barriers to entry. There are a number of criteria to be successful one of which there has to be an open space to compete in,” analysts say, adding that it isn’t obvious there is such an open space in Singapore as the local banks do a pretty good job of providing financial services here.
A study by Google (2019) found that 74% of adults in Southeast Asia are unbanked or underbanked. But in Singapore the underbanked are around 2% of the population.