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Challenge for digital banks to make a dent in Singapore retail market

Republic's high banking penetration and strict criteria make it difficult for smaller players, says Morgan Stanley analyst

With the considerable resources the Big Three banks have, digital full bank entrants with less financial firepower might find themselves hamstrung by the high capital requirement in addition to the additional investments they must pump in.


EVEN as excitement continues to bubble over the five upcoming digital banks in Singapore, not all industry watchers are convinced that the newcomers will have sufficient space to play in the local financing space.

This comes as there is a lack of a "significant gap" in the Singapore market, which has a high banking penetration especially in the retail segment, noted Nick Lord, head of Asean research, Morgan Stanley.

"The terms of the full banking licence - deposit caps (at the start) and later the S$1.5 billion capital requirement - plus the need not to engage in value-destructive competition to gain market share add additional challenges," he told The Business Times.

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Singapore has a bank account penetration rate of about 98 per cent, according to World Bank data. More than 90 per cent of those above 15-years have also made or received digital payments.

"We don't think digital banks will have a huge impact on the Singapore banks," he said.

Firstly, the two digital full bank licences that are able to take retail deposits also need to adhere to strict criteria that may be hard to stomach for smaller players.

When they start off at the "restricted stage", these digital retail banks are restricted in terms of the deposits they can receive. They can only collect deposits from shareholders, employees and other related parties at a cap of S$75,000 per person or a total deposit cap of S$50 million.

About three to five years after that, the cap on deposit restrictions are lifted once they meet regulatory requirements, but they will have to meet the minimum paid-up capital of S$1.5 billion.

"That's going to create some barriers as to what you can do, as you are limited at first," added Mr Lord. With the considerable resources that the Big Three banks - DBS, OCBC and UOB - have at their disposal, digital full bank entrants with less financial firepower might find themselves hamstrung by the high capital requirement in addition to the additional investments they must pump in at the start to build the bank.

Aside from the sizeable war chest that is needed, he also pointed out that demand in Singapore is still a question mark.

"It's not obvious to me, for mainstream banking, what the hole is in Singapore," he said. "What are you going to do that DBS or OCBC or UOB don't already do?"

He acknowledged there might be some pockets of under-served segments such as micro-SMEs, but it is unclear if demand is enough to justify the existence of digital banks, especially in the case of retail customers.

"Do I think the digital bank is going to massively empower the way that I bank as a retail customer?" he said. "No - because I don't see what it can offer me that the rest don't."

"At the end of the day, banking penetration in Singapore is incredibly high and people here are very well-served."

But when it comes to the Asean region, the proposition for digital banks becomes more apparent.

This comes as countries such as the Philippines and Indonesia have low banking penetration and a clear financing gap, he noted. Because of how dispersed people are in these markets, digital banking will certainly be a game-changer in the region.

However, whether the needs of these under-served segments will be met by stand-alone digital banks or incumbent banks' digital banking solutions remains to be seen, said Mr Lord.

He added that the impact of digital banks will differ by geography, depending on local regulations, how well incumbent banks already serve the local population, as well what they charge for that service.

Previously, other analysts including those from Moody's, Jefferies, Fitch Ratings and Maybank Kim Eng Research have also stated that Singapore's three local banks will be able to hold their own against the digital bank challengers.

DBS, OCBC and UOB have long invested in technology and are already far ahead when it comes to technology advancements. The three local banks have also made significant inroads in Asean, with UOB and DBS having digital banks in the region.

An earlier Jefferies report found that the incumbents "at best" face significant competition for 3 to 5 per cent of their asset base.

Applications for the digital banks closed on Dec 31 and results are likely to be in mid-2020. There are five digital banking licences - two retail and three wholesale - up for grabs.

The Monetary Authority of Singapore said it has received a total of 21 digital bank applications. So far, less than half of the digital bank contenders have gone public with their bids.