The strategy for digital retail banks in Singapore

In mid-2019, the Monetary Authority of Singapore (MAS) announced that it will issue 5 new digital full bank licenses to non-bank players in a major move to liberalise the banking industry in Singapore – 2 of these will be digital full banks serving retail customers while the other 3 will be digital wholesale banks, which will be allowed to serve only small and medium enterprises (SMEs) and other non-retail segments.

Perhaps it was in response to Hong Kong introducing virtual bank licenses as part of their smart banking initiatives to promote financial innovation and inclusion in Hong Kong and attract underserved segments.

Among Hong Kong’s 8 new virtual banks, notable ones include Ant SME – a subsidiary of Ant Financial, Ping An One Connect – a unit of China’s insurance giant Ping An and Infinium – a joint venture between Tencent, ICBC and Hong Kong Exchanges and Clearing (HKEX).

In Singapore, 21 applications were received from several consortiums including a Grab-Singtel partnership and one led by Razer, plus an independent bid by Sea Limited.

The case for digital full banks

Singapore has currently 5 locally incorporated full banks owned by the three major banking groups (OCBC, UOB and DBS) and 28 foreign full banks with the ability to provide a full range of banking services permitted by the banking act, including deposit taking, cheque services and lending and financial advisory.

As part of earlier efforts to liberalise the banking sector in Singapore, Qualifying Full Bank (QFB) licenses were also awarded to 9 foreign full banks which allowed them to make further inroads in the retail business such as sharing ATM networks, provide CPF investment services and establishing up to 25 branches.

Clearly, MAS interest in awarding digital full bank licenses can be attributed to promoting banking services in the digital channel without the physical infrastructure. In the case of South Korea’s Kakao Bank, which saw 300,000 accounts opened within the first 24 hours of launch, it forced incumbent banks to innovate themselves and improve the quality of the customer experience.

Promoting financial innovation

The key to disrupting traditional banking is through financial innovation and promoting financial inclusion among the underserved and underbanked segments of society.

Technology companies have always been at the forefront of platform innovation and customer focused experiences. By teaming up with traditional financial giants with years of industry expertise and know how, we can expect to see innovations in traditional financial services such as new and highly personalised products and services across banking, payments, investments and lending.

In the US and UK, digital banks empower retail customers through better tools and user-friendly apps to better manage their finances.

European challenger bank N26 offers its customers a way to open an account from their mobile phone in under 5 minutes, set up personalised money goals through personalised sub-accounts, and the ability to receive their paycheck earlier if they can’t wait for payday.

N26 personalised money goals and sub-accounts

US-challenger bank Simple was built to help people instead of confuse them, with a simple to use banking and budgeting app with features such as savings goals and in-app bill tracker to help users stick to a budget automatically.

Simple: Savings goals to help you save towards a dream or goal

Digital banks may also offer higher and more competitive interest rates on deposits compared to traditional banks.

For example, Goldman Sachs’ online bank Marcus is FDIC-insured and offers an Annual Percentage Yield (APY) on savings 4X the national average.

Others offer a broad lineup of offerings at a one-stop shop with no monthly or minimum balance fees.

Ally Bank in the US for example, offers a variety of accounts from high-yield savings accounts to money market accounts with no minimums.

Non-banking fintechs have also introduced new products and services catered to the different needs of both individuals and small enterprises.

Popular online US wealth management solution Personal Capital offers free tools to help investors get a 360 degree view of their money – from budgeting to investing. It is able to connect and link all your financial and bank accounts to obtain a holistic view of your financial health from a single dashboard.

Personal Capital’s financial planning dashboard

Fostering financial inclusion

Many of Singapore’s underbanked segments include low-income individuals and startups, which may be better served with a lower customer acquisition cost.

As these segments of the market are typically riskier and have less profitable transactions, they are typically ignored by the incumbents who have to contend with the already limited domestic market size.

DBS, for example, charges a S$5 fall-below service fee for minimum average daily balances below $3000 for their popular Multiplier account. Even most of UOB’s SGD deposit accounts require a minimum initial deposit of $500 and minimum average balance of $500 to $1000.

For riskier startups like crypto-currency firms, incumbents might also be unwilling to serve them. Tech in Asia reported that over 10 startups had problems maintaining accounts with local financial institutions, for example, Coinhako’s bank account with DBS was closed.

However, with a growing need to serve these underserved segments in a crowded financial space, digital banks have the potential to meet the needs of these niche areas of the market through advanced data analytics, automated processes and risk management algorithms.

Interoperability and open banking standards

For most people, handling and transacting money quickly and safely without any friction in experience is one of the biggest drivers for going digital.

Soon, as in the case of European banks after the open banking framework was introduced, digital banks will introduce APIs and adopt common standards that allow them to work seamlessly together. This will introduce integrated products and services, expand product offerings with other firms and increase customer stickiness from being a one-stop shop.

According to an Accenture Open Banking report, open banking APIs had allowed seamless payments from outside the banking apps. For example, UK bank First Direct has a service that allows its customers make peer-to-peer payments seamlessly within social media apps such as WhatsApp and Facebook Messenger.

Compete on user engagement

In a world of seemingly unlimited options competing for users’ attention across online and offline channels, user engagement – often seen as a pre-cursor to growth – is one important metric that digital banks would need to solidify in order to win market share from incumbents.

Super apps like Grab have tried ways to boost user engagement and time spent on the app through gamification techniques and partnering with brands like Hooq to bring on-demand video streaming right within the Grab app.

The right engagement starts from rapid onboarding all the way to creating personalised experiences from within the app based on the appropriate customer segments or user behaviour.

Digital banks in Singapore should provide easy sign-ups in a delightful onboarding flow that takes no longer than a day to be fully effective. With technologies such as electronic Know-Your-Customer (eKYC) that MAS is looking to reboot and MyInfo for simplified form filling, digital banks have no reason not to take the onboarding experience seriously.

I could also imagine that a customer browsing loan packages could be potentially targeted with an attractive loan offer at the right time with supplementary information on his demographic data and credit history automatically used to generate an offer.

Digital banks would consistently refine the product offering and features to optimise user engagement metrics.

Winning in Singapore is difficult as Singapore’s banking penetration is already high

Singapore’s banking penetration rate of 96% is close to its peak by most standards. In addition, our local banks have already established relatively strong digital storefronts and channels, giving little reasons for consumers to switch.

However, there are opportunities in little pockets of the market as wealth in the region continues to grow. Assets under management (AuM) in APAC is expected to double from USD 15.1 trillion in 2017 to USD 29.6 trillion in 2025 – faster than any other region globally and disposable income growth is expected to hit 25% over the next few years.

This sets the stage for digital banks or other digital wealth managers to offer highly personalised, high-touch wealth management solutions at scale through artificial intelligence, especially towards millennials who are poised to benefit from the largest inter-generational wealth transfer from the Baby Boomers.

Singapore also offers a gateway to the ASEAN market of 570 million people

There is still scope for digital banks to achieve scale in the region, which has typically generated higher returns. A McKinsey study showed that across Asia-Pacific, banks with greater scale tend to have better returns on equity.

According to Bain & Google, 98 million adults in the region are still underbanked with insufficient access to credit, investment and insurance and there are still 198 million adults who remain unbanked without a bank account. The opportunities for capturing market share in these underserved segments are still ripe.

In many SEA countries, physical infrastructure remains poorly developed and financial institutions cannot build enough branches or rely on reliable credit information to reach all customers.

Digital banks are positioned well to solve this and might be able to achieve the level of scale in the region which was not possible with traditional physical banks, reaping superior efficiency gains and returns on capital.

Eventually, all banks need to be digital banks

In light of continued margin compression, high capital requirements and increasing regulatory costs, the way forward for banks is digital – digital processes, digital infrastructure, digital experience and digital channels.

Bill Gates famously said it in 1994 that banking is necessary, banks are not. As innovations in technology continue to shape the way we transact with money, the reality is that banks that don’t pursue technology levers to grow will slowly fall behind.

I envision that incumbent banks, despite being bogged down by legacy systems and operational complexity, find ways accelerate their transformation journey through external tech partnerships and in-house tech incubators, while progressively incorporating new technologies such as APIs, blockchain, chatbots, RPA and artificial intelligence.

They are still supported by entrenched customer relationships and a multi-layered business model, although these elements might be the very last lifeline for incumbent banks, until digital banks win the trust of the public.


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