Singapore To Issue Digital Banks Licenses In 2020; Here Is What You Should Know
Digital banks are increasingly becoming popular in Asia, and countries such as Singapore are emerging as a fintech hub in the regions and beyond. This comes after the Monetary Authority of Singapore announced in June that it will issue five licenses to digital banks in 2020. Technological advancement has been disrupting various sectors, and the financial sector is equally trying to keep up. With MAS issuing the licenses, it means that entities that do not have banking parentage will be able to carry out banking activities.
The concept behind digital banks
Digital banks are virtual banks that operate like traditional banks, but they do not have physical branches. Once fully licensed in Singapore, they will be offering the same services that conventional banks offer, including leveraging existing ATM networks. The motivation of digital banks comes from the drive that necessitated traditional banks to take their services online. There are different names used to refer to digital banks, depending on where you are from. Some call them challenger banks, virtual banks, digital-only banks, and neo banks.
The digital-only banks can take deposits from retail clients just like the other banks. For Singaporeans, this function is the same as with a saving account offered by OCBC banks and DBS banks that have digitalized the function. In essence, this means that a customer will be able to do all the banking services online without having to visit a brick and mortar store.
Singapore will be offering two digital full bank licenses and three wholesale digital bank licenses. Digital full banks will be subject to the current regulatory requirement s that govern the conventional banks, which include regulations relating to money laundering, technology risks as well as terrorism financing. On the other hand, digital wholesale banks will be more inclined to the provision of non-retail banking. These include the provision of banking services catering to the monetary requirements of small and medium-sized enterprises.
Advantages of Digital banks
Since the banks offer their services, purely online customers will, therefore, expect to receive real-time updates, quick investing services, fast account approval times as well as personalization. They eliminate the need for a lot of paperwork and cumbersome processes involved when one is dealing with traditional banks. To enable the banks to deliver the services in real-time, they will be using big data analysis and artificial intelligence technology, which is increasingly enabling most sectors.
Technically the digital banks will be able to provide services quicker and more efficiently compared to brick and mortar banks. They will be able to do this at a much lesser cost structure relative to conventional banks considering there will be less expenditure on manpower and property rent.
Similarly, the digital banks will open up new possibilities for Singaporeans, such as the potential of offering deposit accounts without the imposition of fall below fees or minimum deposit amount. This has already been experienced in Hong Kong and the UK, where digital banks have been established already.
Also, digital banks will be able to adopt varied credit risk assessment approaches, considering they will have access to several data sources. This will help in boosting the lending of underserved segments in Singapore, such as micro-enterprises and young people.
Enhanced competition coming from digital banks will equally be a growth driver, and it will spur the current traditional banks to enhance the digital offerings. This will, therefore, better delivery of banking services.
Disadvantages of digital banks
Despite digital banks enabling numerous possibilities, they nonetheless have a downside. For instance, a restricted digital full bank is subject to a deposit cap. The banks which will receive the license will see a deposit cap beginning at S$50 million, including an S$15 million in low paid-up capital. This will, however, be lifted with time once the banks show that they can manage risks and operations in an adequate way that is proportionate with the scale of the business.
Similarly, there will be a cap on deposit for customers, and the digital full banks will only be offering a limited number of credit and investment products. Customers will not get services such as bank signature and notarization online. These services are very important in legal and financial transactions.
Digital banks are also exposed to risks that conventional banks experience, such as fraud. Usually, complex encryption software protects account information of customers, but like any system, they are also at risk. Accounts are likely to be subject to hacker attacks, malware, phishing as well as unauthorized activity.
With human elements lacking, it might not be possible for customers who have unique needs to get help when it comes to digital banks. Sometimes a customer who has a business account may wish to expand, and this may need capital and someone who understands the unique needs of the customer, but with digital banks, this is not possible.
The outlook of digital banks in Singapore
Singapore is following the path taken by some countries such as Hong Kong and China in having digital banks. The process of digitization had already begun with banks such as UOB, DBS, and OCBC, which have significantly invested in digital offerings. The advent of digital banks with innovative approaches and string capabilities will make it easier to serve the underserved segments in the country. Singapore expects to have a fully digitized economy in the next ten years.
The announcement of digital licenses expected in 2020 will enable Singapore to offer services to the underserved population. Currently, Singapore enjoys a banking population rate of 96%, and therefore the digital banks will significantly disrupt the financial sector. Some of the banks vying for the digital bank licenses include Razer, Valiude, Grab, and InstaReM. Equally, OCBC has engaged Singtel to vie for the digital license.
For Singaporeans who are already conversant with mobile banking, this move will take banking to the next level. However, the challenge for new players will be overcoming the branding lead that local banks currently enjoy. Nevertheless, MAS is taking a conservative approach, which means it will take sometime before digital banks become the thing in Singapore.