New chapter in banking begins as applications open for digital banks

SINGAPORE, Aug 30, 2019, The Business Times. Ride-hailing firm Grab is “confident” of meeting the digital banking licence requirements that include “a path towards profitability” on a five-year projection, the unicorn told The Business Times on Thursday, reported The Business Times.

The requirements, spelled out on Thursday by the Monetary Authority of Singapore (MAS), also state that a digital full bank, in taking in retail deposits, must be anchored in Singapore, controlled by Singaporeans, and headquartered in Singapore. MAS plans to award the licences by the middle of next year.

“We are evaluating the framework and we are aware of the various criteria. We are confident we will meet the criteria to apply for the digibank licence,” said a Grab spokesman, when asked if the SoftBank-backed firm can meet the profitability track, while being anchored in Singapore.

The response comes as the regulator officially opened up applications for no more than two licences for a digital full bank, and up to three licences for a digital wholesale bank.

The regulator made it clear that any digital banking applicant that shows a “consistent” loss-making trend will not qualify.

“The applicant must provide a five-year financial projection of the proposed digital bank, which must show a path towards profitability. The assumptions of the financial projection must be reviewed by an external and independent expert,” said MAS in a statement.

Even if it is not within the first five years, the applicant should indicate when the proposed digital bank is expected to break even, even as MAS does not prescribe a definitive time period by which the proposed bank must break even or achieve a certain level of profit.

“However, an applicant with a financial projection that shows a consistent or increasing trend of net loss will not meet the criterion of demonstrating path to profitability,” said MAS.

Among the known suitors in the startup universe, Grab – which is valued at more than US$10 billion – and Vertex-backed peer-to-peer lender Validus Capital have openly signalled their interest in applying for the licence.

Besides local names, European digital bank startups such as Revolut are expected to be taking a closer look, as well as Ping An Insurance’s fintech arm OneConnect.

Asked about meeting the profitability requirement, Validus co-founder and executive chairman Vikas Nahata told BT that “it is possible”. “However, it is too early to comment on how soon it can be done.”

Sam Kok Weng, Financial Services Leader, PwC Singapore, said contenders for the digital banking licences have been evaluating their interest with the intention for a profitable business.

“The formal requirement of a path to profitability will not necessarily turn away applicants. Considerations of a consortium have been based primarily on the value proposition and synergies the partners can bring to the table, and that should continue to be the key focus.”

MAS said applicants must show a “clear value proposition” to meet underserved needs using technology. Among other requirements, at least one entity – which holds a 20 per cent stake – in a consortium should hold a minimum three-year track record in operating an existing technology or e-commerce business.

Digital full banks – which can take retail deposits – also cannot access the existing ATM networks of banks.

Under MAS’s digital bank licensing framework, the digital banking entity must be incorporated in Singapore, and will be subject to the same anti-money laundering requirements applied to incumbent banks. Successful applicants need to show contributions to Singapore’s financial centre, such as job creation.

At a restricted stage, it will first face a deposit-taking cap at up to S$50 million in total. Deposits per individual will be capped at S$75,000.

The restricted bank can only accept deposits from a small group of persons such as business partners, staff, and related parties. With that, it will have to participate in the deposit insurance scheme, which protects deposits of up to S$75,000 per depositor in the event of the bank’s failure.

To add, the restricted digital bank at the start can only offer simple credit and investment products to retail customers. It will also be restricted in banking operations to no more than two overseas markets.

MAS said this restricted phase – which is mandatory to minimise risk to retail depositors and mitigate risks of untested business models – is expected to be one to two years, though MAS holds the final say on when the restriction would be lifted.

In other words, from the third year of operations, a restricted digital bank that takes retail deposits and that meets MAS’s requirements should be free from the initial S$50-million deposit cap, and be graduated to a full functioning digital bank by the regulator.

This also means that an applicant for the digital full bank should be able to meet the minimum paid-up capital of S$1.5 billion within three to five years’ time from commencement of business, the regulator said. At the restricted stage, the minimum paid-up capital stands at S$15 million.

Any exceptions will be made only for applicants that provide “strong justifications on the longer time required”, MAS said.

Digital wholesale banks take deposits from SMEs and other non-retail segments. The application for a wholesale bank licence – up to three may be issued – is open to both Singapore and foreign ones. For such applicants, the minimum paid-up capital is S$100 million. They cannot take Singdollar deposits from individuals, other than fixed deposits of at least S$250,000. But they can open and maintain business deposit accounts for SMEs and corporates.

In preventing “predatory practices”, MAS will monitor market dynamics and if needed, “impose additional supervisory requirements or restrictions to deter any value-destructive behaviour,” MAS said.

“The aim is to deter unsustainable banking practices, and to preserve a level playing field among banks.”

BT understands that roughly a dozen new players are flirting with the banking industry, amid the new wave of digital liberalisation.

New entrants are toying with ideas of a consortia with other non-banking players, and traditional lenders. With Singtel already signalling some interest publicly, its telco peer M1 has left the door open to the option. Other names bandied about include property firms and utilities providers.

With Singapore being a small market, analysts said the prize is in tapping the larger Asean market. Malaysia plans to introduce a digital bank licensing framework by year-end. Other Asean regulators are also paying attention to digital banking developments, said Wong Nai Seng, South-east Asia leader for the Deloitte APAC Centre for Regulatory Strategy.

Mr Wong said Singapore can serve as a test bed for the new digital banks to pilot their operations before expanding into other markets in Asean, contributing to financial integration within the region. “With these Singapore pilots, the digital banks can demonstrate to regional regulators the viability of their business models as well as their risk management and compliance capabilities,” he added.

Applications will stay open till end of this year. MAS expects to award the licences in mid-2020, with the new digital banks expected to start operations by the middle of 2021.