In 2019, there’s no real need to explain the idea of a ‘virtual bank’ – put simply, it’s defined as a bank that delivers financial services primarily through the internet or other digital channels instead of physical branches. While it’s easier to understand the consumer side of it, but why do we need virtual or digital-only banks? What under-served or unserved customer segments or use cases are we targeting? Is there a solid business proposition here to set up such a bank or just sizzle? To know the answers to these questions, listen to an interesting chat we are bringing to you as a part of this article, in the SoundCloud link below, after a few paras.

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Why are we focusing on Singapore in this article? On June 28, 2019, as many of you might already know, the Monetary Authority of Singapore (MAS) announced that it would issue up to five new digital-only bank licenses. The move extends the eligibility for digital bank licenses to non-bank players as well. The five new licenses will comprise:

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1. up to two digital full bank licenses: allowing the provision of a range of financial services and deposits to be taken from retail customers by licensees, and
2. up to three digital wholesale bank licenses: allowing services to be provided to SMEs and other non-retail segments by licensees.

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This move is a step towards establishing standalone digital banks, giving non-banks and tech players an opportunity. In 2000, MAS allowed existing banks to have digital subsidiaries called Internet-Only Banks (IOBs).

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In light of this move by MAS, the entire TechFin and FinTech market is in motion and are considering this opportunity very seriously. So, what will it be like in Singapore, with the new licenses? To better understand the current scenario, here’s an interesting voice chat featuring Amit Goel, Founder of MEDICI, in conversation with Southeast Asia FinTech expert Varun Mittal.

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LISTEN HERE: Amit Goel discusses digital-only bank licenses in Singapore with Varun Mittal, an expert on FinTech in SE Asia

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Before we dive deeper into the digital-only banking licenses that will be issued by MAS, a quick background on the current banking licenses that exist, just to set the context.

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• Qualifying Full Banks (QFBs): These banks are allowed to provide a range of services – including the ability to take retail deposits. Banks of this kind can share their ATM network and provide payment services via the EFTPOS network. There are four local banks, namely Bank of Singapore, DBS, OCBC, and UOB – and nine QFBs, including HSBC, State Bank of India (SBI), and BNP Paribas. These banks can establish 25 service locations or 50 in case their home country has a free-trade agreement with Singapore.
  
  These banks also have the provision of setting up Internet-Only Banks (IOBs). If a local bank sets it up, the IOB must be a 100% owned subsidiary or set up in a joint venture (with the local bank having the controlling stake). In case it is set up by the QFB, their localized or Singapore-incorporated banks should have the IOB as their direct subsidiary, and it must meet the capital requirement of S$1.5 billion.
  
  
• Wholesale Banks: These banks, in contrast to QFBs, cannot provide retail banking services. They may, however, provide other banking services. At present, Singapore has 99 wholesale banks, each of which can have one office.

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Market Opportunity for Digital-Only Banks: Evolving Needs of Singapore’s Various Customer Segments

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Against this background of existing financial services in Singapore, one anticipates that the new licensees will try to carve their own segment. However, that’s not all – we also expect the older players to leverage the opportunities presented by the new license initiatives. They will look to serve the potentially under-served segments and be prioritized by MAS for increasing financial inclusion.

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One sees this clear prioritization in the announcement by MAS, “The entry of new digital players will add diversity and strengthen Singapore’s banking system in the digital economy of the future. With innovative business models and strong digital capabilities, these players can cater to under-served segments of the market.”

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Although MAS has not yet specified the segments they deem under-served, it can draw out potential segments. In the near future, one expects that the following customer segments could be targeted:

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1. SMEs: Singapore is brimming with SMEs, with 99.8% of all enterprises belonging to this category. A whopping 2.5 million workers are employed here. There are over 260,000 such businesses, and their number has only increased over time. The government has been encouraging these enterprises to digitize in the hope of improving productivity and efficiency. Moreover, it has been noted that the engagement in overseas business activity has increased over the years, to 83% from 56% in just a couple of years. This highlights the need for cost-effective cross-border transactions as well.
2. Millennials and Gig-Economy Workers: Singapore has a large population of youth, along with middle-aged adults who are more willing to accept new technologies and adapt to new experiences. Moreover, they are often freelancers and have multiple jobs. Singapore currently has about 1.2 million millennials, who account for about 22% of the total population. The gig economy, or those with freelance work, number ~220,000, reflecting an increase of 10% in recent years.
3. Migrants/Foreign Workers: Those in this category are engaged in several activities but most often end up in domestic work and construction. The number of foreign workers in Singapore stands at 1.39 million as of December 2018. Since they may not have financial literacy, access to documentation, or meet the minimum monthly balance required in banks, many prefer to hold cash. This segment requires services that consider remittance, connectivity, and mobility.

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Understanding Digital-Only Banks’ License Eligibility

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If you were wondering what the need is for five different licenses for digital-only banks in Singapore, here’s the reasoning behind MAS’s decision. Of course, not every digital bank is the same; there will be differences in their target audience, offerings, and business models. A market is sustainable if there are diversity and variety in their propositions.

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One expects the upcoming licensed digital-only banks to capture their customers and use the available data differently. But before we can evaluate the quality and characteristics of Singapore’s digital banking market, let's look at applicants’ eligibility.

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The application for digital full bank licenses, of which a maximum of two will be available, is open to companies headquartered in Singapore and controlled by Singaporeans. Foreign companies are eligible for these full bank licenses if they form a joint venture with a Singapore company, meeting the headquarters and control requirements. In contrast to before, this would mean that IOBs, which were subsidiaries of the four local banks or nine QFBs, are expected to face stiff competition. This points to a significant expansion of digital banking.

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Furthermore, digital full bank licenses will be provided in a two-stage process to minimize the risk. Initially, all licensees will be Restricted Digital Full Banks, where the individual deposits must be capped at S$75,000, and they must offer only simple credit and investment products (no derivatives or complex products). Moreover, the initial paid-up capital at the entry point is to be set at S$15 million. Following the bank’s ability to demonstrate its capability to manage risk, it will be converted into a fully functional digital bank, where the minimum paid-up capital requirement of S$1.5 billion, and there is no individual depositor cap.

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Compared to Digital Full Banks, the application for digital wholesale bank licenses is open to all companies. Up to three such licenses will be given out. The MAS expects that the new digital bank licenses will “ensure that Singapore’s banking sector continues to be resilient, competitive, and vibrant.” In addition, the new digital players are expected to “provide the impetus for existing banks to continue enhancing the quality of their digital offerings.” However, the minimum paid-up capital required is set at S$100 million. Moreover, digital wholesale banks will not be able to take deposits from individuals, except for fixed deposits of at least S$250,000.

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But that’s not all. For an entity to obtain any one of the five digital banking licenses, they need to demonstrate not just the ability to meet regulatory requirements. Still, they must showcase technical capability and have a sustainable business model. There is a need to highlight how they would be able to meet the objectives of deeper financial inclusion set out by MAS. Although MAS has not specified how track record of a company would play a role, profitability would likely be key in determining eligibility. Moreover, even regulatory compliance requires substantial investment in both technology and talent. There are strict reporting provisions, which may prove difficult for newer entrants/non-financial enterprise applicants. To summarise, as per MAS, the following requirements must be met for an applicant to obtain a license:

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• A clean track record in operating an existing business
• Demonstrated ability of a sustainable digital banking business model
• No engagement in value-destructive competition to gain market share
• Compliance with the same suite of rules as incumbent banks, as well as added rules
• Submission of a viable exit plan, should withdrawal be necessary
• Clear value propositions to serve existing unmet or underserved needs

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The bar is indeed set high when it comes to virtual banking space and expectations. Europe has many great examples, and Hong Kong serves as a recent and good example of this in Asia. When Hong Kong launched Virtual Banking Licenses, many big players (both tech players and banks) got the licenses. To contextualize this, 29 applied, 8 got a license.

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