Lessons Singapore Could Learn from Australia as It Mulls Its Own Virtual Banking License

While virtual banking is not a completely new phenomenon, discussions about it has re-entered mainstream conversation ever since Hong Kong issued 8 virtual banking license in the second quarter of 2019.

In light of the growing popularity of virtual banks, MAS has also recently issued a statement saying that they are currently studying whether or not they should also start dishing out their own virtual banking license.

For those who are not already familiar with the concept virtual banks as the name implies, they are fully digital banks that provides financial services to consumers through their smartphones.

The conventional argument for why virtual banks are better will always gravitate towards the lack of legacy systems providing them a digital upper hand against its traditional counterparts.

As Singapore embarks on its own virtual banking journey, its worthwhile to examine some lessons both the regulator and incumbent banks could learn.

What Regulators Need to Consider

While Hong Kong has been lauded for its progressive policy in enabling a new generation of banks, opinions about the design of the framework are divisive. Even Australia’s very own fintech unicorn openly called out the Hong Kong Monetary for being to restrictive.

Some argue that the high capital requirements is too restrictive for new entrants seeking to disrupt the market, but others argue that it should be limited. For them, only allowing access to an elite few will help ensure consumer protection.

Personally, I don’t think that consumer protection and allowing startups to innovate is something that is mutually exclusive.

I believe that the Australian Prudential Regulation Authority (APRA) has struck the perfect balance between the two. In Australia, virtual banks are regulated under the Restricted ADI license which allows them to operate as a virtual bank for two years while they build their capabilities and resources.

Wayne Bryes who chairs APRA even specifically highlighted that the framework was designed to balance the competing objectives of encouraging competition while maintaining safety and stability in the financial system.

Instead of imposing exceptionally high requirements, Australia’s approach allows aspirants to work towards tangible goals milestones for startups to demonstrate that they qualify for an unrestricted license.

As a safeguard to limit the risk, restricted ADI license holders are not allowed to accept more than $250,000 in a single deposit and a maximum of $2 million in total deposits.

Since its introduction in 2018, APRA has given restricted ADI licenses to Volt and Xinja. The former, Volt, became the first to receive its unrestricted license in early 2019.

Image Credit: Website, Screenshot Volt

The fact that APRA was able grant Volt a full license in less than a year sends a strong signal to the rest of the industry that the regulator is serious about providing startups a level playing field to provide innovative financial solutions to Australians.

It shouldn’t be too difficult for Singapore to introduce a similar framework for its own version. It’s easy to draw parallels between Australia’s restricted ADI and Singapore fintech regulatory sandbox, which in essence is designed to allow for experiments for innovative ideas for the financial services sector.

All MAS needs to do at this point is to take the lessons that it has learned from their fintech regulatory sandbox and tweak to adapt to their version of what Australia is doing.

What Incumbent Banks Need to Consider

Is it cliche to say financial incumbents can’t rest on their laurels? Yes. But that doesn’t stop it from being true.

Australia’s banking sector is an oligopoly that consist of 4 banks, Australia and New Zealand Banking Group (ANZ), Commonwealth Bank (CBA), National Australia Bank (NAB), and Westpac (WBC) — which is often referred to by as the Big Four by Australians.

The Big Four has enjoyed a relatively stable market dominance until recently when “The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry” released its final report outlining some shocking misconducts it uncovered and 76 recommendations to fix the situation.

Much like mistrust of banks from the 2018-2019 gave rise to many fintech startups that are now household names, the Royal Commission will also accelerate consumers desire to shift from conventional banks to virtual banks.

Recognising that potential exodus banks like the Commonwealth Bank of Australia is launching a flurry of digital banking services, one of which includes a tool that will identify $150 million each year in unclaimed benefits for its customers.

Instead of taking a reactionary approach, it may be wiser for banks to proactively build a suite digital services to not only improve customer experience but to also use it as a tool to build trust and goodwill with your customers.

Whatever the reason may be for consumers to consider a switch banks needs to shore up their defenses to keep their market share.

Image Credit: KPMG

Just applying patchwork upgrades to legacy systems is no longer sufficient, in responding to this possible new reality Singaporean banks may have to one day consider either establishing their own digital bank or outright acquiring one like Scotiabank did with ING Direct in Canada.

Luckily for banks like DBS and UOB they already have some headstart with their Digibank and TMRW in other regions, therefore it would stand to reason that it wouldn’t too difficult for them to do the same in Singapore if the need arises.

As with most things, there is merit in learning from those that come before you. Australia’s license approach has showcased at least one positive case study on a regulator’s front, and for incumbents, a warning—disrupt yourself, or watch someone else disrupt you.