Digital Banking

Smaller Banks in Singapore Are at Risk As Fintechs Eye Digital Banking License

Competition is heating up in Singapore’s digital banking landscape as an increasing number of fintechs including e-wallet operators and payment services providers are looking to apply for when applications open in August.

Liquid Group, Xfers, MatchMove Pay and FOMO Pay are all considering the license, according to a report by the Business Times, while publicly-listed Razer, which operates Razer Pay, and Singtel, which operates mobile wallet Singtel Dash, said they are currently studying the feasibility of applying for it.

Liquid Group, which is part of a consortium of partners exploring digital wholesale banking, the license would allow it to further its plans to develop cross-border mobile payment capabilities on its Liquid platform. The company has already partnered with banks in Hong Kong and Indonesia.

Whereas Xfers operates fintech payment platform for digital businesses wanting to collect, store or send money, the license would give it the ability to get into the lending business and provide additional services such as savings accounts, digital payments, consumer loans and home loans.

Samson Leo, a co-founder of Xfers, said the company is considering the digital wholesale bank license, with the goal of serving small and medium-sized enterprises (SMEs) and other non-retail segments. He added that the company is currently in talks with partners and investors about whether the digital bank license would be a good fit.

FOMO Pay, which has been developing a fintech artificial intelligence (AI) technology to serve underbanked and unbanked merchants, said the license would allow it to give customers a more convenient digital know-your-customer (e-KYC) and onboarding experience. Zack Yang, co-founder and COO of the company, said that the license would also allow it to extend its technology to additional banking product use cases, save manpower, and increase productivity.

Strong contenders for the Singapore’s digital bank licenses

Liquid Group, Xfers, MatchMove Pay, FOMO Pay, Razer and Singtel would be competing against the likes of Grab, Southeast Asia’s ride-hailing giant and the region’s first “decacorn,” Validus Capital, a peer-to-peer lending platform, and InstaReM, a remittance startup, which are also eyeing a digital bank license.

In June, the Monetary Authority of Singapore (MAS) said that it will issue up to five new digital bank licenses, comprising up to two digital full bank licenses and up to three digital wholesale bank licenses. This is in addition to any digital bank that the Singapore banking groups may also establish under the existing Internet banking framework introduced in 2000.

The move will open up digital bank licenses to non-bank players and is part of an effort to add market diversity and strengthen the city state’s banking system in the digital economy.

In addition to a set of requirements such as being incorporated in Singapore, participating in the deposit insurance scheme provided by the Singapore Deposit Insurance Corporation and complying with the same suite of prudential rules as incumbent banks, there will be a two-stage phasing-in process for a digital full bank.

Under the first stage, the digital full bank will be subject to business limitations such as caps on aggregate deposits, restrictions on business and a minimum paid-up capital of S$15 million. In the second stage, the digital full bank will be able to carry out a wider range of services but will be subject to more stringent requirements such as a minimum paid-up capital requirement of S$1.5 billion.

Applicants of a digital wholesale bank license will need to meet the same eligibility criteria as digital full banks, in addition to a minimum paid-up capital of S$100 million. Digital wholesale bank licensees will not be able to take Singapore dollar deposits from individuals, except for fixed deposits of at least S$250,000.

A threat to smaller banks

According to ratings agency Moody’s, Singapore’s decision to issue new digital bank licenses to non-banking companies will affect smaller banks in the sector and “open the door” for fintech companies to use advanced technology and data analytics to offer better banking services and at a relatively lower cost.

“The announcement by MAS that it will issue up to five new digital bank licenses is credit negative for small foreign-owned incumbent banks in Singapore,” Simon Chen, vice president for financial institutions group at Moody’s Investors Service, said earlier this month, quoted by CNBC. “Their modest domestic franchises will face the greatest disruption risk from digital bank entrants.”

Singapore’s banking sector is dominated by three domestic players, DBS Group, Oversea-Chinese Banking Corp and United Overseas Bank, which have led digitalisation efforts in Southeast Asia and have the technology to “defend their dormant positions against the new fintechs,” Moody’s said. However, smaller, foreign banks might not have the necessary resources to compete against tech-savvy new entrants.