Singapore Issues First Digital Banking Licenses: Potential for Regional Expansion

• The Monetary Authority of Singapore (MAS) has approved the country’s first digital banking licenses, which will make financial services more accessible to underserved segments, such as SMEs.
• Digital banks offer the same banking services as traditional banks but operate without physical infrastructure.
• There are two types of digital banking licenses – digital full bank license (DFB) and digital wholesale bank licenses (DWB).

In early December 2020, the Monetary Authority of Singapore (MAS) announced that four entities were awarded digital banking licenses.

While digital banks offer the same banking services as traditional banks, they operate without a physical setup, enabling customers to control their finances from their computers or smartphones. MAS awarded the licenses to:

• A consortium of Singapore Telecommunications Ltd (Singtel) and Grab Holding Inc (Grab);
• Sea Limited;
• Ant Financial; and
• A consortium of Greenland Financial Holdings Group Co. Ltd, Linklogis Hong Kong Ltd, and Beijing Co-operative Equity Investment Fund Management Co. Ltd.

There are two types of digital banking licenses – digital full bank license (DFB) and digital wholesale bank license (DWB).

The DFB license enables an entity to offer deposits, loans, and investment products through its online platform. DFB license holders can only serve retail and corporate banking services while DWB license holders can only serve businesses, namely small and medium enterprises (SMEs).

MAS expects the four digital banks to commence operations by early 2022. This is the first time Singapore has approved setting up wholly digital banking operations.

What were the eligibility criteria to apply for the digital banking licenses?

Applicants for the DFB and DWB licenses met the following criteria:

• At least one entity of an applicant group had a track record of three years or more in the e-commerce field or technology industry;
• All key persons are fit and proper;
• Demonstrate the ability to meet the minimum paid capital at the onset and the minimum capital funds required on an ongoing basis;
  • For DFB, the initial minimum paid capital of S$15 million (US$11.2 million) before progressively raised to S$1.5 billion (US$1.12 billion); and
  • For DWB, the paid-up capital of S$100 million (US$75 million)
• The sustainability of the digital bank’s business model (a five-year financial projection of the digital bank, which shows the path to profitability. The financial projection must be reviewed by an independent expert);
• Submission of a feasibility study for the orderly exit of the digital bank; and
• Shareholders of the digital bank must provide a letter of responsibility and a letter of undertaking in respect to the operations of the digital bank.

Specifically, for DFB licenses, the applicant must be ‘anchored’ in Singapore, controlled by Singaporeans, and headquartered in the country.

MAS also assesses whether the applicant can incorporate innovative technology to meet customer needs that differentiate it from existing banks, as well as the entity’s understanding of local regulatory compliance and risk management plans. Finally, MAS evaluates the growth prospects of the digital bank, such as its potential contribution to jobs, skills development of the local workforce, and regional expansion plans.

How will this impact the regional financial and banking sector?

The approval of digital banking licenses promises to strengthen Singapore’s banking and finance sector, ensuring it remains resilient, innovative, and competitive, especially as regional rivals Hong Kong approved eight digital banking licenses in 2019.

Their low-cost structure, and efficient set up and operating systems could enable digital banks to quickly expand in ASEAN. Many will utilize Singapore as their base for expansion into other regional markets.

How will digital banking support SMEs?

Digital banks will make financial services more accessible to underserved segments, such as millennials and SMEs. The biggest market potential in ASEAN will be Indonesia, which has some 42 million underbanked and 92 million unbanked adults. Despite this large number, the country’s digital economy is set to reach US$124 billion by 2030.

Forming strategic partnerships, particularly with payment solution platforms or e-commerce marketplaces, will be the fastest route to establishment and expansion for digital banks.  This will provide digital banks with access to a broader customer base, and thus, allow them to provide more customer-centric products and services compared to traditional banks.

This includes adopting alternative credit scoring assessments to issue microloans to many underserved SMEs in the region, in addition to potentially offer deposit accounts for individuals without the need for minimum deposit amounts.

Ultimately, the emergence of digital banks will force traditional banks to accelerate the digitalization of their core business process and the retraining their talent to brace for this change. The use of digital technologies, big data, and advanced analytics will be of huge significance for these banks in their efforts to continue to be the bank of choice for their customers.

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