Digibank aspirants have viable path ahead, despite Covid-19 challenge: analysts

Singapore

DIGITAL bank aspirants in Singapore still have a viable path ahead despite the uncertainties wrought by the pandemic, for the simple reason that there is a flexible timeline for them to set up shop fully.

But analysts also point out fresh hurdles: These new entrants must assure regulators of sound fundamentals and a sustainable model to attract deposits, as well as support businesses looking to recover from the current crisis.

Digital banks will likely commence operations at the end of 2021. Current economic and credit challenges "should be less of an issue" by then, said Eugene Tarzimanov, vice-president and senior credit officer at Moody's Investors Service.

This means that they will be less impacted by the credit distortion accompanying government relief measures.

Chia Tek Yew, KPMG Singapore head of financial services advisory, told The Business Times that digital banks' first wave of operations will likely be deposit gathering and services such as payments and wealth management.

Mr Chia expects lending, deemed a riskier but higher-margin product, to be rolled out over the longer term. "Most of the (crisis-related) loans will be paid off in two or three years. By the time the digital banks are ready to lend, we might be back into the next cycle of borrowings," he said.

But attracting low-cost funding in the form of deposits is expected to be a key challenge for the new players, said Chew Seow-Chien, a partner at consultancy Bain & Company.

While attractive rates can be expected at launch, these will likely be limited promotional tactics, due to growing pressure to ensure business viability amid macro uncertainties.

"As the number of new players will be limited and (the regulator) will be closely watching their actions to ensure overall banking sector viability, I don't think we will see prolonged, aggressive rate competition for deposits. The key question is what levers they can pull, to compete for deposits," said Ms Chew.

Against this backdrop, Singapore's new digital banks are likely to compete on convenience and enhanced customer experience to appeal to the younger crowd.

A research by Bain & Co found that while incumbents in Singapore attract high customer loyalty overall, younger customers below 25 tend not to recommend their banks - as measured by negative levels of advocacy in net promoter score (NPS).

Customers who have active engagement with their banks on digital channels showed higher NPS.

Ms Chew said a few possible ways for digital banks to attract deposits include making banking more "seamless" by integrating multiple services onto a single platform, leveraging data to provide personalised offers, and having a community or social angle to the offerings - such as peer recommendations or products with a sustainability component.

As for business customers, she said digital banks may provide a one-stop shop by packaging banking solutions with other services such as human resources and accounting software.

To ramp up customer acquisition, the new players may also tap the assets and customer base of their consortium members. Notable consortiums in the running include Grab-Singtel for a full-bank licence, as well as the AMTD-led consortium comprising Xiaomi, SP Group and Funding Societies for a wholesale bank licence.

"Digital banks can leverage on technology and access to high frequency data from their shareholders and commercial partners to support real-time decision making," said Wong Nai Seng, South-east Asia lead for the Deloitte Asia-Pacific Centre for Regulatory Strategy.

This will help them to better identify customers' financial needs and manage their risks to "be more agile in a volatile operating environment".

In particular, technology and cyber resilience are relevant for digital banks as they "do not have the luxury of manual or analogue fallbacks", said Mr Wong.

Cyber attacks have also emerged as a growing concern due to the surging adoption of digital financial services in recent months.

As remote account opening goes mainstream, account takeover and new account application fraud have therefore become key areas of cyber crime in the virtual banking space, said Frederic Ho, vice-president of identity verification firm Jumio Corporation in Asia-Pacific.

Noting that even biometric data can be impersonated, Mr Ho told BT that digital banks must invest in robust security systems - without compromising on user experience - to grab market share effectively.

The main objective is to roll out a product that has the "highest level of security with minimal perceived effort", he added.

"Customers should feel like nothing much was required of them to open an account. But in the backend, digital banks must ensure that all security checks are executed in that short window of customer onboarding," said Mr Ho.

Moody's Mr Tarzimanov told BT that the Monetary Authority of Singapore (MAS) would expect digital banks to adhere to the same cybersecurity standards as the incumbents.

Overall, applicants should also be prepared to face tougher scrutiny on their business plans.

"The financial viability of their other businesses and cashflow situation will be important factors in the consideration (for a digital bank licence)," said Bain & Co's Ms Chew.

Among the applicants, Grab was one that had its core ride-hailing business take a direct hit from the virus outbreak. The firm - seen as a front-runner in the digital bank pursuit - had in June retrenched about 360 staff, or 5 per cent of its headcount.

In response to queries by BT, Grab said its digital banking plans have not changed because of the pandemic. Its transport business was profitable in "several markets" over the past 12 months.

A Grab spokesperson told BT that the firm's transport business is "slowly recovering" across South-east Asia, though the rate of recovery will be mostly dependent on when government lockdowns end.

KPMG's Mr Chia is expecting MAS to look into Grab's fundraising plans for the proposed digital entity.

"Conversations will be about how the pandemic has affected business and fundraising plans, because I doubt any of the full-bank applicants have got S$1.5 billion in the bank waiting to start a business," he noted.

Under MAS's digital bank licensing framework, full-bank applicants are required to meet a minimum paid-up capital of S$1.5 billion at their graduated stage.

As at June 18, 14 of 21 digital bank applicants have met the eligibility criteria required and will progress to the next stage of assessment. The eligible applicants comprise five digital full banks and nine digital wholesale banks. MAS said it is on track to award the licences later this year.

Amid Covid-19 uncertainties, the regulator has asked eligible applicants to update their proposals to demonstrate financial strength. These include reviewing financial projections and source of funding, MAS's deputy managing director Ong Chong Tee told media at the release of MAS's annual report last week.

Applicants are also to provide an independent review of their business assumptions.

While the economic impact from Covid-19 will pose fresh challenges, observers do not expect MAS to limit the final number of licences as the new players will play a key role in rejuvenating the economy.

Bain & Co's Ms Chew said: "The conditions are ripe for players who can leverage technology and data to develop innovative financial solutions to reach underserved segments and serve unmet needs."

KPMG's Mr Chia is also expecting consumers to shift out of the incumbent banks when the economy picks up. "As people regrow their wealth and the economy recovers, instead of banking exclusively with the incumbents, I would expect more people to progressively move to digital banks that give them the right convenience and recognition as an individual."