If You Want to Be My Digibank, You’ve Got to Get With the Programme: Singapore clarifies the eligibility criteria for digital banks

September 17, 2019

3 min read

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What's going on here?

On 28th June 2019, the Monetary Authority of Singapore (MAS) announced that it will issue up to five new digital banking licenses (to see our article on that click here). For the first time, following Hong Kong’s move earlier this year, MAS applications are being opened to firms with no track record in banking. MAS expects to grant licenses in mid 2020 and start business by mid 2021.

What does this mean?

Digital banks are also known as virtual banks as they do not have a physical bricks-and-mortar presence (with the exception of having a customer service centre). MAS will offer two digital full bank licenses, which will allow licensees to provide a wide range of financial services and take deposits from retail customers. The other three are digital wholesale bank licenses which will allow licensees to serve small to medium enterprises (SMEs) and other non-retail segments. MAS has stated that only one physical place of business for both licenses will be permitted.

Eligibility for the digital full bank license require the companies to be headquartered in Singapore and controlled by Singaporeans. However, foreign companies can still be eligible if they form a joint venture with a Singapore company and the joint venture meets this requirement. 

Companies applying for the digital full bank licence will also have to demonstrate a track record in operating an existing business; a clear value proposition on how it can serve existing unmet needs; a sustainable digital banking business model; comply with the same set of capital and risk controls as incumbent banks; participate in the deposit insurance scheme (protection of deposits up to S$75,000 per depositor), and have a viable exit plan.  

The licensing framework for a digital full bank licence will be implemented in stages. At the beginning, the digital banks will only be allowed to offer simple credit and investment products. They will not be able to engage in investment banking activities (e.g. derivatives), establish banking operations in more than two overseas markets, or offer complex investment products (e.g. structured notes). However, interested applicants will need to demonstrate the ability to meet only S$15 million in paid-up capital at the onset. Banks will be freed from caps on deposits and restraints on activities once a minimum of S$1.5 billion in paid-up capital is achieved. 

Unlike the digital full bank licensing framework, a digital wholesale bank licensing framework will be implemented in one stage due to the fact that customers will be more sophisticated and better able to take risks.

What's the big picture effect?

Consolidating Singapore’s position as a leading FinTech (financial technology) hub, the “liberalisation” of Singapore’s banking sector is expected to offer more choices to the consumer. Although it is unclear as to what the future digital banks of Singapore will provide, it is likely that the new banks will offer increased convenience and more personalised services such as the ability to set up accounts on a mobile device as Korea’s KakaoBank has done. 

Notable contenders for the new licences are rumoured to be Grab, a ride-hailing app, and OneConnect, a FinTech unit. Grab is likely to expand its FinTech branch since its launch in 2018 (GrabFinancial). The company is likely to optimise its offerings through its e-wallet, GrabPay, using its impressive existing set of data on consumer behaviour. OneConnect is also rumoured to seek a digital wholesale banking license to provide banking services to SMEs. The firm was granted a license in Hong Kong earlier this year.

Incumbent banks will need to innovate their digital services in order to compete in an increasingly digital sector. However, concerns about unfair competition have been put to rest. It is likely that MAS will focus on companies that add value rather than disrupt as it has stated that it “will not allow value-destructive competition to the detriment of long-term financial system stability”.

Report written by Heerim Hwang

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