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Digital does not mean different: Can Singapore’s digital banks bring the fight to the three incumbents?

Jovi Ho and Khairani Afifi Noordin
Jovi Ho and Khairani Afifi Noordin9/22/2022 08:27 PM GMT+08  • 22 min read
Digital does not mean different: Can Singapore’s digital banks bring the fight to the three incumbents?
Is this a half-hearted launch for Singapore’s digital banks?
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Grab and Singtel’s digital bank may be overshadowed by Standard Chartered’s NTUC tie-up, while Sea’s MariBank has yet to debut amid group-wide layoffs. Is this a half-hearted launch for Singapore’s digital banks?

Two digital banks were launched in succession at the turn of the month, close to two years after the Monetary Authority of Singapore (MAS) announced the four successful bids for digital banking licences here.

GXS Bank, backed by Singapore Telecommunications (Singtel) and Grab, unveiled its app and savings account on Aug 31. The following day, Standard Chartered Bank (StanChart) and FairPrice Group introduced Trust Bank, along with a credit card, savings account and family personal accident insurance.

With MAS’s blessing, GXS is one of two digital full banks (DFBs) launching here — the other being Sea’s MariBank. Meanwhile, Trust Bank rides on StanChart’s qualifying full bank (QFB) licence, which the British multinational bank received in 1999, and is not part of the four new licence winners.

While much attention has been paid to Trust Bank’s attractive sign-up promotions and rewards, the true pilot to watch is GXS’s fledging moves and the uneasy silence of MariBank, which has yet to debut.

The new players have tried to paint a blue ocean scenario. Yet, with a limited market here, is this a half-hearted launch for Singapore’s digital banks? GXS, for example, claims two in five adults here are underbanked, citing a 2019 report by Bain & Company, Google and Temasek. Its solution is the GXS Savings Account, targeted at gig economy workers, self-employed entrepreneurs, small businesses and those new to the workforce.

See also: Digital banks unveiled, incumbents respond with higher interest rates

At launch, customers can deposit up to $5,000 into their accounts, earning daily interest at 0.08% p.a. In contrast, Singapore’s most popular bank, POSB, part of DBS Group Holdings, offers 0.05% for the first $10,000.

Unlike the unbanked, however, the underbanked are not hard-pressed to open another savings account elsewhere.

See also: Sea stays silent amid layoffs

Last December, DBS Group CEO Piyush Gupta said “it’s not that easy” for digital banks to carve out space in Singapore’s saturated market.

Speaking at the Reuters Next conference, Gupta pointed to Singapore’s 98% banking penetration rate. “Even in markets like Brazil and China you can see that the relative market share, size and growth of the incumbent banking system hasn’t shifted very much.”

Within Singapore’s current account savings accounts (CASA) landscape, DBS Bank alone commands a market share of around 52%.

Gupta added: “Without a doubt, you are going to have to compete. People will come in with aggressive pricing products and so on. But on the whole, I think we’re relatively well positioned and we should be able to hold our own.”

The three local banks today, DBS, United Overseas Bank (UOB) and Oversea-Chinese Banking Corp (OCBC), are all winners and survivors of multiple rounds of industry-wide consolidation, including a particularly dramatic round between 2001 and 2002 when five banks became three in quick succession.

With the battle scars still visible, the three banks are in no hurry to put out the welcome mat for new entrants. “[DBS’s] Digibank is able to offer banking digitally; we have the most complete and comprehensive set of offerings as a digital bank,” says Gupta on the sidelines of a recent briefing on DBS’s plans for decarbonisation.

Payments, money transfers, financing and wealth management are all available on Digibank. For example, DBS’s remittance business offers customers everything that money transfer service Wise offers; Wise and DBS’s payments and financing matches anything that Grab offers.

See also: Standard Chartered's new regional wave

Moreover, the tailwind of higher interest rates and an incoming additional $2 billion of net interest income will enable DBS to move ahead of any digital bank.

For instance, DBS is moving towards a financial inclusion model, which is being rolled out by subsidiary Lakshmi Vilas Bank in India. “We are using data and algorithmic underwriting for micro-SMEs [micro, small to medium-sized enterprises] and consumers. Our current credit quality is outperforming what we assessed for the transaction. We are getting recoveries from that book and our current book is doing quite well,” Gupta adds.

How digital banks are performing globally

Also known as challenger banks or neobanks, digital banks are by no means sprouting out only in Singapore. Across the world, they grew out of increasing demand for a sophisticated interface, and opportunities that new technologies offered to financial institutions on the supply side.

With their legacy software systems, banks were slow to adapt, and newer financial institutions came into the market to serve these unmet needs, says Insead professor of economics Antonio Fatas.

Global consultancy firm Simon-Kucher estimates there are close to 400 neobanks around the world, serving one billion client accounts.

Some of these banks enjoy lofty valuations built on their promises to grow. However, only 5% of these banks have managed to break even.

In its analysis of the world’s 25 largest neobanks, only two have reached profitability, while a majority earn less than US$30 ($42.36) in annual revenue per customer.

That is not to say that there are no winners. Although the concept is relatively new in this part of the world, Asia has seen several successful digital banks. One example is South Korea’s Kakao Bank, an Internet-only bank launched by communications giant Kakao Corp in 2017.

The bank managed to sign up more than 300,000 customers in 24 hours, raking in US$930 million deposits in one week and handling more than 6.5 million accounts in just one year.

For the digital banks trying to operate in Southeast Asia, they are meant to target and reduce the number of underbanked and unbanked individuals in the region.

While Fatas does not believe that these players have a “strong” role to play in this area, he says there is room in some countries for the digital banks to serve a larger percentage of the population.

The market, however, is not very profitable. “And as long as regulations do not change, it is unclear that digital banks have a great advantage over regular banks to develop this market. The issues are more complex than just ‘digital’ technology,” warns Fatas.

As incumbent banks and bank-aspiring tech companies go head-to-head to get a larger slice of the pie, the competition will create lower fees for retail users as well as SMEs, says Fatas.

The differences that can be made will depend on the starting point. In a saturated and competitive market like Singapore, the new players may not make much of a difference, he adds.

“These are banks. If they manage to enter the market with better products, better, faster and cheaper interfaces, they will make a difference. Otherwise, just because they are ‘digital’, [it] does not make much of a difference. Traditional banks are also digital in many of their products they offer or the interactions with their customers,” Fatas adds.

Anecdotally, many consumers are seemingly happy to stay with tried-and-tested names, and old ways of banking. “The reported long queues at banks, despite the availability of online account opening and placement of fixed deposits, also suggests that many depositors remain more comfortable placing their savings with a physical bank,” say RHB Group Research analysts in a report on Sept 22.

The medium is not the message, and neobanks’ philosophy must be greater than technology, says Kanv Pandit, group managing director, APAC, banking solutions at US financial services corporation FIS. “They promise simpler, more transparent banking than conventional banks, and often cater to a specific niche, demographic or interest group.”

Singapore’s neobanks are backed by major local brands or large corporations with strong capital positions, notes Kanv. “They can offer a compelling value proposition and market their fintech services more quickly and confidently.”

To entice customers, the neobanks could offer products that streamline and simplify the banking or payment experience, Kanv tells The Edge Singapore. “They can drive customer loyalty through engaging digital experiences that serve customer needs for safety, reliability, service and overall experience. The premise is based on simplicity as well as better returns.”

Relative to the incumbent banks, neobanks’ service portfolios are narrower by design, and they are not for everyone, says Kanv. “However, they simplify everyday banking tasks like making and receiving payments, and often cater to a specific niche, demographic or interest group. Thus, we would still expect a market in Singapore for these neobanks.”

The real underbanked

GXS’s claim to serve the “underbanked” in Singapore remains to be proven, but the goalpost itself is vague with no concrete parameters.

To GXS’s credit, its main offering goes beyond a savings account with 0.08% p.a. interest. GXS customers can also customise up to eight Savings Pockets within their accounts.

Designed to help users save for specific goals, customers earn greater daily interest with these Pockets at 1.58% p.a.

According to GXS, cash flow is important for its target market — those outside the corporate world. The digital bank hopes to attract them with daily interest, no penalty fees and no minimum balance requirement.

The incumbents, in comparison, will charge $2 if customers cannot maintain an average daily balance of at least $500.

GXS, which is 40% held by Singtel, is not here to compete “head-on” with the big banks, says the telco’s CFO Arthur Lang. “We do feel that there are specific opportunities that the current banks do not cater well. We’re talking about how we can make banking so much easier and help SMEs to grow their business to recover from Covid-19.”

According to him, GXS can serve the underbanked who may lack a stable credit history. “The typical banks will ask for some historical financial statements and all that. But we have more current data; we have created better credit models and insights.”

Lang raises an example of a restaurateur looking to expand his business. “If I were to show financial statements from the last two years to the bank, they would not give me a loan. Why? The past two years were the worst years because of Covid-19.”

In contrast, GXS can assess the application from other angles. “If that restaurant is a GrabFood merchant, Grab will know his daily volumes. Just based on that data, we will know the flow of business on a very current basis,” says Lang.

The joint venture partners of GXS know the market is tough but they are going in with their eyes wide open, he adds. “The three local banks are already very strong; one of them claims to be the best digital bank. I must admit that the digital bank business is strong and it’s a good business. But we’re not here to be number one. We’re here to be different and I think leveraging on data insights, which others don’t have, we’ll be able to make a difference.”

Of course, both Digibank and UOB TMRW also have AI programmes that are able to leverage on data insights.

TMRW uses Meniga to clean, categorise and process complex transaction data to generate personalised insights for customers; and AI-based money management system Personetics, to forecast balances, monitor transactions and increase customer engagement.

As a superapp aspirant, Grab has over the years built its financial services capabilities, eventually forming its financial services arm GrabFinance (GrabFin). Launched in May, the GrabFin brand offers a range of payment, lending, insurance and investment products for users. On the other hand, Grab finds itself behind the likes of WeChat, which is the region’s recognised superapp.

GXS CEO Charles Wong clarifies that the bank is an independent body and has no plans to formally integrate with Grab’s financial services arm.

“We are definitely working closely together as we exist in the same ecosystem. Our ‘true North Star’ is looking at how we can solve customer pain points when they are interacting with us within the ecosystem — it makes no sense for us to go out with the same products,” he adds.

Using deposit accounts as a starting point, Wong says there are many ideas within the products pipeline that GXS wants to introduce to its customers. The list includes joint accounts and joint Pockets where several people can save money for the same purpose, as well as an extension of Pockets to include lending and investment elements.

However, it will take time for GXS to roll out these new products, as it continues to explore the use cases that best address its target customers’ pain points. “We are definitely looking at the entire spectrum of customers’ financial needs; we are not in a hurry to roll out everything. We want to be very purposeful and mindful in terms of how we are solving our customers’ needs,” says Wong.

Meanwhile, Trust Bank can tap into a ready customer base from Singapore’s leading supermarket chain; it boasts connections to Link Rewards, the rewards and loyalty programme integrated with the FairPrice Group ecosystem.

To entice new customers, Trust is offering up to 21% off purchases across NTUC FairPrice, Kopitiam, Cheers and Unity. Trust’s savings account provides customers with a base interest rate of 1% p.a. on deposits up to $50,000.

Deposits above $50,000 will earn an interest rate of 0.05% p.a. In addition, NTUC union members receive a bonus interest of 0.4% p.a. on deposits up to $50,000 when they make five eligible Visa purchases on their Trust card. Non-members will receive a lower bonus interest of 0.2% p.a.

Trust’s product suite also includes the Trust credit card, which doubles as a debit card and allows customers to select their own repayment date. Trust is also providing family personal accident insurance by Income, another key piece of NTUC, at a premium of 50 cents per month. Customers who sign up for a Trust credit card will also pay no premium for the first two months, with no limit on the number of dependents covered.

In their efforts to bank the yet-unreached, digital banks could find bluer oceans elsewhere in the region. Compared to Singapore’s 98% banking penetration rate, the World Bank places Cambodia at 33%, the Philippines at 51%, Indonesia at 52% and Malaysia at 88%.

Indonesia, in particular, is home to 100 million unbanked residents. The most populous country in Southeast Asia places fourth worldwide for its share of unbanked adults, behind Pakistan (115 million), China (130 million) and India (230 million).

The unbanked may own mobile phones, but still prefer to save informally. Some methods include saving cash at home; saving through assets like livestock, jewellery or real estate; or purchasing investment products, such as equities or government securities.

According to the World Bank’s Global Findex Database 2021, 30% of adults in the Philippines put their money elsewhere, making it one of the economies with the highest share of adults who save without a bank.

In Cambodia, 35% of unbanked adults cited distance as a barrier, yet 75% of them also reported owning a mobile phone.

In Cambodia and the Philippines, about 20% of unbanked adults — or about 10% of all adults in the two countries — received government transfer payments in cash.

FIS’s 2022 Global Payments Report shows credit cards continue to dominate e-commerce payments in markets such as Australia, Hong Kong, Singapore, Japan and South Korea. On the other hand, digital wallets are the primary e-commerce payment method in Indonesia and the Philippines; while Malaysia, Thailand and Vietnam predominantly rely on bank transfers.

Emerging Southeast Asia economies have a large underbanked population with limited access to financial services, says FIS’s Kanv, and many cannot access traditional credit facilities.

Singapore base, regional expansion

When MAS opened the application for Singapore’s digital bank licences, the regulator said in January 2020 that it had received 21 applications for up to five digital bank licences being offered.

Across the causeway, Malaysia received 29 applications for five digital banking licences that were awarded in April this year.

According to RHB analysts, applicants in both countries included e-commerce firms, leading technology and telecommunication companies, fintech outfits and financial institutions.

“The majority of applicants were consortiums, with entities seeking to combine their individual strengths to enhance the digital bank’s value proposition,” write RHB analysts, in their Digital banking: The leap forward report, released on Aug 22.

Unlike Singapore and Malaysia, Indonesia does not have a dedicated digital banking licence. Instead, tech companies eyeing Indonesia’s market have chosen to acquire controlling stakes in domestic incumbent banks.

In late 2020, Internet giant Gojek bought a 22% stake in Bank Jago to offer digital banking services right from the Gojek app.

This was soon followed by Sea’s acquisition of Bank Kesejahteraan Ekonomi, since renamed SeaBank, in February 2021.

At Grab’s 2QFY2022 ended June results announcement on Aug 25, the company said GXS will launch in Malaysia and Indonesia in 2023, following Singapore’s lead. Grab and Singtel, together with a consortium of Malaysian investors including Kuok Brothers, an investment holding company under the multinational conglomerate Kuok Group, were awarded a full digital banking licence in Malaysia on April 29.

The digital bank joint venture will hold a 55.45% stake in the proposed Malaysia digital bank, which will be led by Lai Pei Si, CEO-designate. Lai was previously the managing director and country head of consumer, private and business banking at StanChart in Malaysia.

GXS Malaysia is expected to target the local micro-SMEs as well as other financially underserved segments, such as the gig economy workers. It is currently hiring to fill 200 roles by its eventual launch.

GXS Singapore’s Wong says it is still “very early days” for the bank’s development in Malaysia. In January, Grab and Singtel each snagged a 16.3% stake in Indonesia’s Bank Fama, though there are also no updates on the launch of GXS there.

Wong says Southeast Asia as a whole represents “huge opportunities” for GXS with the population of underbanked and underserved residents in Thailand, the Philippines and Vietnam. “We are extremely interested in Southeast Asia — 70% of our Southeast Asia customers are currently underserved or unbanked. We are very focused in this area and we will constantly look for opportunities.”

Meanwhile, Trust Bank has no regional plans. Its CEO Dwaipayan Sadhu says the bank will fully focus on the Singapore market by leveraging on the NTUC ecosystem. That said, parent StanChart has partnered with Bukalapak to launch a similar neobank in Indonesia.

“We’ve seen how players like Grab expand to target some of these emerging economies with embedded financial services,” says FIS’s Kanv. “The new neobanks might very well take a similar approach, though they will first need to acquire the relevant country licences.”

Similar to traditional banking, being in more markets would provide digibanks with the economies of scale that they need to be efficient, says Insead’s Fatas.

This could be relevant for digibanks that are just starting and are small in nature. “But [these players] have to be careful; banking remains a local business and being in more than one country will come with costs.”

MAS’s rules and profitability

As DBS’s Gupta noted last year, Singapore’s regulators require the digital bank licensees to run a tight ship. The new entrants have submitted plans towards profitability over the next few years, which would prevent them from buying market share by running huge losses over time.

MAS’s rulebook for these new banks runs over nine pages. The regulator is explicit that DFBs must be anchored in Singapore, controlled by Singaporeans and headquartered in Singapore.

MAS also requires DFB applicants to commit funds or “concrete fundraising plans” to meet the minimum paid-up capital of $1.5 billion when the bank becomes fully functional.

At least one entity in each applicant group must have also spent at least three years of track operating an existing technology or e-commerce business.

Grab, Singtel and Sea have submitted five-year plans for their respective DFBs, which are still in a “restricted” stage. MAS expects a restricted DFB to be in this phase for one to two years. The restricted DFBs have $15 million in minimum paid-up capital, along with deposit caps of $50 million in aggregate and $75,000 per individual customer.

A restricted DFB will not be able to widely solicit deposits from the public at this point. However, it will be able to solicit deposits from its shareholders, employees, related entities and “any other persons who are familiar with the DFB’s parent or major shareholders’ businesses”, such as existing customers of the parent entity.

In addition, restricted DFBs can only offer unsecured credit up to two times a customer’s monthly income. From then on, the banks’ path towards profitability is not as straightforward.

After the entry phase, MAS will “progressively increase” the deposit cap and the minimum paid-up capital requirement of the restricted DFB.

MAS says it will not prescribe a growth path for a restricted DFB, though it expects a DFB to be fully functioning and meet the minimum paid-up capital of $1.5 billion within three to five years. “A DFB applicant should project its growth path based on its business plans, with the aim of meeting the minimum paid-up capital within a reasonable period.”

There is mention, however, of an “annual review” of DFBs. “MAS will assess the restricted DFB based on factors such as strength of internal controls, frequency and type of compliance breaches, customer complaints and sustainability of business performance. It will also include a review of the auditor’s report on the digital bank’s financials and effectiveness of its internal controls.”

Eventually, DFBs will be regulated just like traditional banks, if they survive that long, and will have to comply with minimum common equity tier-1 (CET-1), net stable funding and liquidity coverage ratios, and other regulations stipulated by Basel III and IV, and International Financial Reporting Standard (IFRS).

Formula for success

According to the Boston Consulting Group, there were 249 digital bank players in 2021. Of these, just 13 have been successful in generating positive bottom lines. Of the 13 successful players, 10 are based in the Asia-Pacific region.

Successful digital banks include KakaoBank in South Korea, Monzo and Starling Bank in the UK, and Tencent-backed WeBank in China, write RHB analysts.

To the RHB analysts, a successful digital bank requires four “key enablers”. They are: a strong demographic, or access to a large underserved and unbanked population; technological capabilities for the development of customer-centric products, data analytics and credit risk assessment; access to a robust ecosystem that would allow for rapid expansion of the customer base and cross-selling opportunities; and a supportive regulatory environment that emphasises innovation and financial inclusion.

But there is no single formula for success, says FIS’s Kanv. “Each neobank will have its own value proposition. Globally, many neobanks offer limited financial products, principally checking and savings accounts. In addition, services can span lending, BNPL, debit cards, credit cards, investments and foreign currency.”

Dennis Khoo, the previous head of UOB’s TMRW Digital Group, says that there are certain “patterns” among successful digital banks. One of them is the “bottom of pyramid” strategy, where they target customers who are not current customers of the incumbents.

Some examples of those who have succeeded using this strategy are Brazil’s Nubank, as well as China’s MyBank and WeBank, says Khoo. “While that is a successful model, the opportunities don’t really exist here in Singapore. If they decide to serve [the non-incumbent customers], there would be too few customers.” He adds: “The closest customers they can find are young professionals, who are the affluents of the future, treated as the mass market today. The saving grace in Singapore is that the GDP per capita is high. Due to that, the digital bank’s customer revenue will be higher.”

Khoo is currently the programme director of National University of Singapore’s Digital Transformation Leaders Programme. In July 2020, he assumed the role of CEO-designate of a digital wholesale bank (DWB) candidate, formed by a consortium of investors including social media platform Bytedance.

Khoo says the consortium was one of the finalists of the DWB licence, but was ultimately not selected. Instead, one DWB licence was awarded to a consortium by Greenland Financial Holdings Group and Linklogis Hong Kong, while another went to an entity wholly-owned by Ant Group.

Green Link Digital Bank (GLDB) was launched on June 3, making it the first digital bank licensee to officially launch in Singapore. Targeting micro, small and medium enterprises (MSMEs), the digital wholesale bank’s services will be expanded to cover supply-chain financing products to cater to business demands from various areas, including high-growth potential industries.

The Ant Group soft-launched ANEXT Bank on June 6. The bank seeks to provide digital financial services to local and regional MSMEs, with a focus on cross-border operations. Singapore merchants that use Alipay are potential customers for ANEXT Bank’s services.

Aside from the challenges that the digital banks may face in Singapore, Khoo says becoming a regional bank is difficult as consumer banking is a local business. This lack of sustainable scale is why banks that used to boast so-called “universal bank” monikers like HSBC Holdings and Citigroup, as well as StanChart, have pulled out of several markets in recent years.

Most successful challenger banks are in countries with large populations, says Khoo. It has become increasingly difficult to be a global or even regional consumer bank. The reason has to do with capital — before the Global Financial Crisis, capital was fungible. “Now, capital is captive — this is because banks work on leverage, their own capital comprises about 12%–15% of the loan principle while the rest are from depositors, and hence prudent regulations and capital requirements are essential to the robust functioning of the financial system in every country.”

This is why the sector is so highly regulated, says Khoo, and will continue to be so. “From that context, banking will always be a local business. Therefore, in the effort to build a regional digital bank in five countries, while there will be some synergies, there would also be the challenges of operating in one country, times five.”

Would Khoo try again for the digital wholesale bank licence, if the MAS were to ever award another licensee?

After a long pause, Khoo says that he would give it a pass. “While there is a room to build a SME-focused bank in Singapore, I prefer to focus on my current venture of helping companies be more successful in their digital transformation.”

Photos: Albert Chua/The Edge Singapore, Insead, FIS, Singtel

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