SINGAPORE: As digital banks look set to make their debut here later this year, observers say it may be an uphill task for them to build a customer base against more established conventional banks.
While digital banks may find success in appealing to a digitally savvy customer base, traditional banks - which already have advantages such as a strong brand and an established customer base – have already started their own process of digital transformation, they noted.
Last year, the Monetary Authority of Singapore (MAS) announced it would issue up to five digital banking licences to non-bank players.
Of these, up to two of the licences will be for digital retail banking, which will allow firms to provide a range of financial services as well as take deposits from customers.
Another three will be issued for digital wholesale banking, which allows licensees to serve small-and-medium enterprises, as well as other non-retail sectors.
MAS announced earlier this year that it had attracted "strong interest from a diverse group of applicants" - including e-commerce firms and technology companies - receiving 21 applications as of Dec 31, the last day for firms to apply for a licence.
"The majority of applicants are consortiums, with entities seeking to combine their individual strengths to enhance the digital bank’s value proposition," said MAS.
Successful applicants will be announced in June this year, and they are expected to start business by the middle of next year.
WHAT ARE DIGITAL BANKS AND WHO DO THEY BENEFIT?
Digital banks – also known as virtual, challenger or neo banks – are not a new concept, Singapore Fintech Association president Chia Hock Lai points out.
He notes that China issued licences to five virtual banks in 2014, while Japan Net Bank – Japan’s only online-only bank - has been operating for two decades.
Just like conventional banks, digital banks are able to perform transactions such as accepting deposits, facilitating payments and selling investment products, said Mr Chia.
“The key difference is that digital banks only allow such financial services to be conducted over smartphones, websites and other digital means,” he added.
Freed from the costs of having physical branches - such as hiring staff and paying for rental of space – digital banks are able to offer their financial products to consumers at lower costs, he said.
They should also be able to offer other advantages, such as better deposit savings rate as well as the ability to maintain accounts without minimum balance fees, Mr Chia suggested.
Big data and the use of artificial intelligence (AI) could also help digital banks tap on a wider range of data sources – including social media activity – to evaluate credit worthiness, he said, adding this would allow more to tap on their financial services.
“Digital banks will challenge the status quo and potentially make the conventional banks move faster in many areas - a win for consumers and businesses,” said Mr Li Jianggan, the chief executive officer of tech investment firm Momentum Works.
Mr Chia agreed, noting: “For example, HSBC waived minimum balance fees for their Hong Kong clients in August this year in response to the pending launch of digital banks in Hong Kong.”
In a report by research firm Forrester released in December, its e-business and channel strategy senior analyst Zhi-Ying Barry said one segment that could be better served by digital banks are small and medium enterprises (SMEs).
Conventional banks have failed to keep up with the evolving needs of these businesses, she said.
“They do a poor job of helping business owners get loans, manage cashflow and payroll, and receive financial insights and advice.
On the other hand, digital banks can use “advanced data and technologies” to focus on markets such as SMEs which traditional institutions might consider unprofitable or risky.
“For example, (China-based digital bank) WeBank’s microlending product uses emerging technologies such as big data and AI in risk analytics and modeling to broaden (SME) access to loans in China.”
NOT ALL SMOOTH SAILING
Still, digital banks are not without their limitations, said Mr Chia.
The lack of physical branches mean digital banks do not have the human touch necessary when a customer wants to work out a complex loan arrangement, he said.
They may also suffer from a lack of access to ATMs, as well as less comprehensive services, such as a lack of insurance and brokerage accounts, compared to conventional banks, he added.
Digital banks may also find it an uphill battle competing with the incumbent traditional banks.
“Traditional players like DBS and UOB are already very entrenched in the local market with strong and highly trusted brands, a huge customer base and strong capital,” said Mr Chia, adding these banks have also started their own digital transformations.
Digital banks need to be build trust, said Ms Barry.
She noted a Forrester survey found only 51 per cent of respondents saying that felt safe using their financial information online.
Even in a mature market like Britain, digital banks have only garnered a market share of about 7 per cent since 2010, he noted.
He noted that Metro Bank – a British digital bank founded in 2010 – only reported its first annual profit after seven years in business.
“Most digital banks elsewhere are not profitable yet,” said Mr Chia.
Noting in certain parts of the region, as many as half of all working adults are reported to be unbanked, he added: “The new companies are likely to achieve more success with the digitally savvy young consumers, especially those in the rest of Southeast Asia.”
Open banking – a term referring to the use of technology to allow consumers to port their information across financial institutions – will allow consumers to transfer their banking needs to digital banks more easily, said Mr Li.
However, this trend is likely to be slow-growing as completely changing banking relationships is not an easy process for most consumers, he noted.
Several big names have already thrown their hats into the ring for Singapore’s digital bank arena.
The largest player so far might be China’s Ant Financial, owned by billionaire Jack Ma, the founder of internet giant Alibaba.
Valued at US$150 billion, an Ant Financial spokesperson told CNA that it had applied to MAS for a digital wholesale banking license, as part of its commitment to “promoting financial inclusion globally”.
Razer Fintech, the financial technology arm of gaming hardware firm Razer, has formed a consortium – which includes companies such as Sheng Siong Holdings, insurer FWD and vehicle marketplace Carro – to apply for a digital full bank licence.
Meanwhile, ride-hailing giant Grab formed a joint venture with telco Singtel to bid for a full digital bank licence.
Both Grab and Singtel have dipped into financial services in the past, with both companies offering e-wallet platforms – which Razer has also introduced.
Momentum Works’ Mr Li notes the advantage these companies have is that they already have platforms with customers performing financial transactions, and thus do not have to spend time and money acquiring a customer base.
“If you look at the Grab-SingTel consortium, chances are most of the digital savvy consumers and many of the small businesses are already customers of one or both of them,” he said.
“If you do not already have a lot of customers through other existing use cases, you can’t be competitive and profitable.”
Digital banks are here to stay, said Mr Chia.
The influx of non-bank companies into digital banking is likely to continue to influence the direction of banking and finance, which is also being shaped by factors such as changing demographics, the emergence of new technology as well as regulatory reform, he added.
“Digital banks are part of the evolution as the digital natives and digitally savvy Gen Xs increasingly prefer digital channels to consume financial services, for their convenience, very often lower costs and better user experience."
In March 2020, the inaugural CNA Digital Economy Leadership Summit 2020 will bring together some 200 key decision makers from Government, diplomatic circles and the private sector from around Asia, to explore key issues that include: How to grow and innovate in a digital economy, as well as how to manage talent and ensure sustainability in the digital economy.
More details are available at: cna.asia/leadership-summit