(Nov 11): In 2000, iFAST Corp started as an online unit trust distribution platform to disrupt the unit trust industry.

By leveraging the internet, the company’s popular fundsupermart.com was able to charge a cheaper service fee of 2.5%, compared with 5% offered by banks. Moreover, the platform enabled the company to provide information on the different unit trust products in the market, thus allowing investors to make better investment decisions.

Since then, iFAST has transformed itself into a wealth management fintech company, expanding its suite of financial and investment products to include stocks, bonds and exchange-traded funds. And now, the company is aiming to apply for a digital bank licence in Singapore.

Since Aug 29, the Monetary Authority of Singapore has begun accepting applications for new digital bank licences and will do so until Dec 31. The licences will be given out to non-bank players to engage the underserved segments of the Singapore market, that is, those not served by the traditional and incumbent banks.

MAS is offering up to two digital full bank (DFB) licences and up to three digital wholesale bank (DWB) licences. The holder of a DFB licence is allowed to take deposits and provide a wide range of financial services to the retail and non-retail customer segment. On the other hand, the holder of a DWB licence will be allowed to serve only the small and medium-sized enterprise and other non-retail segments.

MAS is expected to announce the list of successful applicants in mid-2020. Subject to meeting certain requirements, such as putting in place risk management systems and processes, the digital banks are expected to start operations in mid-2021.

Lim Chung Chun, chairman and CEO of iFAST, says the company, via a consortium, is now keen to apply for a DWB licence instead of a DFB licence which he had indicated in a late August interview with Money FM 89.3. Lim says the change in plans is to better align with the company’s strategy.

“As we further study the business model that we are keen to pursue as a potential digital bank, we find that we will be able to do most of what we want to do using the DWB licence. It will therefore be more capital- efficient to use the DWB [licence] instead of the DFB [licence],” he tells The Edge Singapore.

Second digital bank application

For now, Lim declines to disclose the identities of the company’s partners in the consortium except to say that they are foreign companies. He adds that iFAST will submit its application “just before” the deadline, as the company is currently “preparing” the relevant paperwork.

If iFAST submits its application for the DWB licence, it will be the second time that the company has applied for a digital bank licence. In 2Q2018, iFAST announced that its wholly-owned subsidiary, iFAST Hong Kong, had submitted an application to the Hong Kong Monetary Authority (HKMA) for a virtual banking licence there.  In 4Q2018, however, the company informed the market that iFAST HK had failed to be shortlisted to progress to the next phase of applications.

Despite the failure, iFAST had previously said it would continue to pursue the virtual bank licence application in Hong Kong. And that is still the case for the company. Lim says iFAST is still interested on getting the virtual banking licence in Hong Kong, as it will be complementary to the services offered by the company across different markets. He adds that iFAST may have another chance of obtaining the licence, as HKMA had stated in May that it would closely monitor the new virtual banks upon the commencement of their operations. This may imply that the Hong Kong regulator will be assessing the “overall situation” before deciding on issuing future batches of virtual banking licences, he says.

Lim notes that the failed application in Hong Kong has taught the company to try a different strategy to increase its chances of obtaining a local DWB licence. “One of the considerations that we have in the Singapore application is to put in the application as a consortium, instead of just on our own. We will therefore be tapping the different strengths of each consortium member. We will, however, still be taking the lead,” says Lim.

So, why is iFAST keen to enter the digital banking space? According to Lim, all financial transactions have to go through a bank. So, having a banking business will offer synergistic benefits to the company’s wealth management platform in Asia. After all, the banking industry is the “foundation” of the broader financial industry. “Before you manage your wealth through investments, you need a bank account. When clients pay money to us, they have to go through a bank,” he says. “If we are able to play a role in the digital banking space, that can actually help our overall wealth management business quite substantially.”

As at Sept 30, iFAST had assets under administration of $9.44 billion. The company aims to grow its AUA to $100 billion by end-2028. For Singapore, its key market currently, the company has set a 10-year target of $35 billion. For 3QFY2019 ended Sept 30, the company reported a record net revenue of $16.85 million, but earnings fell 5.5% y-o-y to $2.5 million, owing to higher investments in IT capabilities.

Assuming iFAST is successful in applying for a DWB licence, Lim says the company will continue to position itself as a wealth management fintech player instead of a digital bank. “[The licence] is about how the players are able to use it to enhance their business model. Our core business will still be wealth management and it will continue to be our key strength. The digital bank will expand our capabilities in financial services so that we can do better,” he says.

Disrupting the banks

Still, iFAST’s entry into digital banking could offer the company new opportunities with first-mover advantage. According to Lim, the banking industry will undergo “major changes” in the near term. He predicts that many digital banks will emerge within the next three to five years. And this will be the trend not only in Singapore but also in the UK, Hong Kong and other countries, he says.

One reason for the emergence of digital banks is that the banking industry has long stagnated, making it ripe for disruption. Lim claims that the incumbent banks have grown lazy and complacent as a result of no real competition. In fact, the high barriers to entry into the banking industry as a result of regulation only discourages competition. “Traditionally, if you are not already a bank somewhere in the world, you can’t be a bank,” he says. “So, if you have an industry operating that way, [the players] will all think in a similar manner. There is a tendency to [have few innovations], as they are happy with the amount of deposits.”

With the entry of digital banks, however, real innovation could follow, including easier and more efficient bank account opening processes and cross-border transactions. Lim recalls that when his daughter began her tertiary studies in the UK, he understood the pain of opening an overseas bank account. Apart from the usual paperwork, his daughter had to undergo an interview as part of the due diligence process. She also opened an account with the Singapore branch of the UK bank, to facilitate an easier transfer of money to her UK account. But the linking of both accounts was similarly a “difficult process”, he recounts.

“Sometimes, you need a new group of players to come in and challenge the status quo. That is why, increasingly, there are more countries heading in this direction of offering [digital-only bank] licences to non-traditional players,” Lim says.

Improving IT capabilities

As a fintech player in the wealth management space, Lim says it is crucial for iFAST to have an in-house IT team. This is because outsourcing its IT functions will only slow down the company’s pace of execution. And as technology and finance continue to converge, it is increasingly important to have sufficient IT resources. “Traditionally, financial services were an area in which people saw IT as playing more of a supporting role. But IT has to be increasingly seen as playing a core role for the fintech and financial services companies,” he says. In the light of that, iFAST has continually improved its IT capabilities by hiring more IT personnel. As at the time of writing, about one-third of the company’s workforce of 600 comprised IT personnel. “In the last few years, we have consciously improved our overall capabilities in IT. We are at a stage where we have a good amount of resources. If we are successful in our application for the DWB licence, there will be further investment in this area,” Lim says.