Singapore's digibank aspirants may find the going tough

The rush for a digital banking presence here has so far attracted 21 bids for five licences on offer, but those who get the licences may find the going rather tough.

Mr Cyrus Daruwala, managing director at IDC Financial Insights Asia-Pacific, reckons the cost of attracting new clients, capital and technology, and regulatory requirements will pose significant challenges. Adding to this will be the strength and dominance of bricks-and-mortar incumbents.

Mr Daruwala told financial presenter Ryan Huang on MoneyFM 89.3's Morning Drive radio show that things may not go exactly to plan for the new players.

Nevertheless, the rush for digital banking licences has seen players from a wide range of sectors, including property, e-sports, telecoms, video sharing, online car marketplaces and even a ride hailing firm forming partnerships.

They include names like Ant Financial, Grab, Singtel, Razer, a consortium linked to Osim founder Ron Sim, Temasek-linked Sheng Ye, Hong Kong financial player AMTD, SP Group and Sea Group.

The Monetary Authority of Singapore (MAS) is offering two digital full banking licences with an initial paid-up capital of $15 million and three digital wholesale banking with capital requirement of $100 million.

This follows similar moves in Hong Kong and China, where digital banks are focused on the under-banked segments of the market.

"If you look at our three local banks and the likes of Citibank, HSBC and StanChart, who have been in Singapore for a good 100 years, you will know that you need the entire regulatory regime to 'okay' you," said Mr Daruwala.

"Just because Singtel has 700 million customers across Asean and various alliances doesn't mean that it has 700 million active bank customers ready to go," he noted.

"Ant Financial - with its 1.5 billion active users - cannot simply on-board customers to its digital banks. Data can't be simply transferred. It's not permitted. Personal data protection is a huge block of law. That means they'll have to on-board each customer independently. A costly business."

Still, he is not surprised that 21 players have rushed for digital banking licences in Singapore.

"A lot of them think that because they were successful either in gaming or e-commerce, in China and other markets, they would make good for a digital bank in Singapore, which is a launchpad for Asean."

The biggest stumbling blocks are capital adequacy and capital requirements.

"Where are they going to raise capital? There are strict requirements. You also need to look at total deposits. MAS has capped it to between $50,000 and $75,000. So even if you've got 100,000 new customers at $7.5 million in total deposits, that's not going to make you a bank."

There are also the costs of technology and deployment: "As and when they become a bank, they'll be governed not just by MAS, but also the Bank of International Settlements, the central bankers' bank. They mandate your capital adequacy, which can be between 13 per cent and 15 per cent, so you can lend, say $850,000 of your $1 million deposit.

"Then comes access to the interbank arrangements. Say, 100,000 depositors want to pull out their cash during a bank run. Where are they going to get that capital from?

"So, all these nuances are going to test the newcomers to the limit."

For retail banking players, the combination of capital adequacy requirement and caps on lending can curtail net interest margins.

"Interest rates for lending especially are capped and monitored by the monetary authority. A fully qualified bank can charge you 1.2 per cent to 2.2 per cent. But if you have $100,000 in deposits on which you pay 1.2 per cent in interest, then allowed to lend only 85 per cent of this, you can be in a pickle."

But the situation for the wholesale side is brighter: "In wholesale banking, there is a gap in the market. These could be SMEs, who don't need a bricks-and-mortar (branch) as long as you have the service capability, or the towkay who wants to do some basic transactions. So, I'm more bullish that these guys in the corporate and SME businesses may do well in retail and consumer banking."

But both segments will face formidable competition from well-established incumbents: "UOB, OCBC, DBS have good mobile banking apps. The new kids will have to actually break the mould. They will have to build an ecosystem. That means that every time you walk into a 7-Eleven, you can pay your utility bills and withdraw cash. If they successfully build an ecosystem... then maybe they will succeed.

"Other than that, they've got competition even in the mobile app space. I think they will have to come up with a nifty new and very broad ecosystem where you don't really touch your wallet and your phone does all the paying for you."

Still, the experience in Hong Kong, which is similar to Singapore, has not been encouraging because the territory is over-banked, he said.

"That's something that we should learn from. A small percentage of consumers, putting in deposits is not going to make you a successful bank. The new players may end up going after the unbanked construction workers or domestic helpers. These are very small-ticket items."

On the other hand, he noted that the digital bank that DBS launched in India and Indonesia has close to about 2.5 million new customers.

So who stands the best chance in Singapore? "My guess is Singtel and Grab. Grab has deep pockets and has done microlending. It's able to monitor capital inflows and outflows. Singtel is going to help with the onboarding, and they've got a security layer which will enable them to be cyber-secure specialists in that field."

He is also positive on Ant Financial: "They have the experience of running a bank, and they have the experience of taking deposits and giving micro loans. So they built the ecosystem using AI and robotics. I suspect people like those, with deep pockets, may be successful."

All the rest, he reckons, could be "gobbled-up" by the incumbents in time to come.

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