Digital banks seen debuting strongly in 2022, but 'long and difficult' path to profitability

Singapore

IT HAS been over a year since Singapore announced its 4 successful digital bank contenders.

Several Covid-19 variants, regulatory travails and fund-raising rounds later, the aspiring new banks are marching full steam ahead towards a 2022 launch - with a common, ambitious goal to chase down pockets of underserved segments in an already well-banked market.

Industry watchers expect the well-capitalised debutants to compete strongly in Singapore, but turning a profit could take well over 5 years as incumbents bring their A-game and macro uncertainties prevail.

To recap, a Grab-Singtel consortium and tech giant Sea each bagged a digital full-bank licence, while Ant Group and a consortium led by Greenland Financial Holdings - a subsidiary of Chinese developer Greenland Group - secured digital wholesale bank licences.

The new entrants have been laying the groundwork through 2021, undertaking capital injections and infrastructure investments, as well mass hirings and the launch of micro financial products.

The Grab-Singtel joint venture, known as GXS Bank, has hired around 200 new staff. There are still plenty of openings advertised online, recent checks by The Business Times found.

Grab's recent US$40 billion Nasdaq debut has been disappointing. But public listing in the US will ultimately allow the group to raise money more easily for its digital banking and fintech businesses, Forrester analyst Meng Liu told BT.

Its close rival Sea raised about US$6 billion in September - less than a year after a US$2.6 billion fundraising in December 2020.

China squeeze

There were, however, some speed bumps over the past year.

Stephen Tracy, chief operating officer of market research group Milieu Insight, flagged that Ant Group's failed IPO and regulatory hurdles may have wiped out resources that would have otherwise gone towards building its digital bank operations.

Ant is looking to serve Singapore-based small- and medium-sized enterprises (SMEs) doing business with China. Merchants here that use Alipay are potential customers for Ant's banking services.

On the other hand, Forrester's Liu believes that Beijing's tightened grip on Ant was "exaggerated in terms of influence". Its China business was only "slightly" affected, he said, adding: "Even without an IPO, Ant is still extremely profitable, so I don't worry about their success in Singapore at all."

He is more concerned about the Greenland consortium as China's real-estate scene is becoming a sunset industry, with most developers expected to be "struggling" in the next 5 years.

"I would be concerned about Greenland's digital bank performance and operation," said Liu.

But Zennon Kapron, director of fintech research and consulting firm Kapronasia, noted initial assessments by the Monetary Authority of Singapore would have included stress-testing to ensure the winners are able to execute.

Ecosystem play

The extra competition will push incumbent banks in Singapore to revamp their digital interactions with customers beyond digitalising or providing more digital touch points, products and services.

"Being digital alone will no longer suffice as a point of differentiation," said Prasenjit Chakravarti, Accenture's banking lead for South-east Asia.

Instead of the traditional, vertically-integrated banking business models and value chains, he said banks must reimagine partnerships with merchants or players across the ecosystem to drive new value and create compelling, personalised services.

The newcomers, meanwhile, are expected to rely on existing ecosystems to win customers.

"Particularly for the digital full banks, it will be important to see how much they will be able to leverage their parent platforms in terms of data-sharing and network," Maybank research head Thilan Wickramasinghe told BT.

Profitable digital banks Kakao Bank, WeBank, MYbank had a huge benefit in the form of low costs of acquisition and activation due to their associations with their parent companies, which had lots of potential customers and data on which the banks could leverage, said Dennis Khoo, former head of UOB's TMRW digital group.

Professor Jan Ondrus from Essec Business School reckoned GXS Bank has the advantage over Sea, thanks to the loyalty of Grab and Singtel's respective large customer base. "By being both leaders in their industries, consumers tend to stick to them."

Sea could lean on its e-commerce arm Shopee to grow, but may face a challenge convincing consumers that an e-commerce platform can be a trusted financial partner.

"Shopee is a new kid on the block with a lot to prove compared to Singtel," said Prof Ondrus.

But he noted that Shopee's marketplace of buyers and sellers could benefit from additional financial services to improve their exchanges; Sea could tailor incentives for both segments to get onboard the new digital bank.

In the wholesale banking scene, it remains unclear how the competition will play out as Ant Group and Greenland have yet to reveal much of their cards.

"We can only speculate that they will try to be cheaper and more flexible than traditional banks," said Prof Ondrus, stressing that this will require a good understanding of the small business segment.

One platform, many services

Consumers and small businesses can look forward to more micro products and services by the new digital banks - all delivered on a single platform.

"We're already seeing some exciting evolutions in fintech, such as the emergence of buy now, pay-later (BNPL) and the democratisation of investing through mass-market retail trading apps, cryptocurrency and robo-advisers," Milieu's Tracy observed.

But these innovations tend to be fragmented, with individual players offering services in isolation.

"Digital banks will help to bridge the traditional services, such as cards and accounts, with newer innovations such as BNPL and crypto trading, all available on a single platform," said Tracy.

A Grab spokesperson told BT that its new digital bank will provide customers with core banking services such as savings as well as other products like loans and wealth management.

Over time, said Maybank's Wickramasinghe, accelerated product innovations and tech investments should support the evolution of a hyper-personalised marketplace where banking will no longer be a standalone activity, but integrated into customers' day-to-day life.

Sticky situation

A McKinsey survey in September found that over 70 per cent of Singapore consumers are open to migrating to digital-first banks.

But opening new virtual bank accounts does not mean consumers will close their primary accounts immediately.

"Consumers will keep their primary bank account open and test the digital bank offerings before migrating entirely. Retail banking services are pretty sticky, it requires a lot of work to switch bank accounts," Essec's Prof Ondrus said.

The new banks are expected to burn cash in the first 2-3 years to acquire customers, and hopefully achieve enough scale thereafter to operate sustainably.

"In terms of just how long it will take to reach a point of profitability, that remains to be seen. But it could easily be more than 5 years away . . . It will be a long and difficult journey," said Milieu's Tracy.

Globally, most digital contenders have yet to record a positive bottom line. Out of around 200 digital banks, only 4 were profitable in 2019.

"Despite high growth performance in terms of transaction volume and users, most providers remain unprofitable," said Frost & Sullivan analyst Dewi Rengganis. This is due to high operational costs, especially in research & development, sales and marketing - all costs that are seen as investments for future growth.

In Q3 2021, Sea's mobile wallet payment volume jumped 111 per cent to US$4.6 billion. But its net loss widened to US$450.1 million from US$340.8 million a year ago.

Creating stickiness is incredibly costly. The winners will be those that rely less on subsidies and rewards and focus on long-term value, said Kapron.

SMEs may convert fully to virtual banks more quickly than retail customers, given that most small businesses here are underserved by the incumbents.

From a macro view, the launch of digital banks is expected to change the economics of banking in a meaningful way - with higher costs of acquisition, lower profitability per client, increased attrition, lower engagement, and higher spend on digital marketing and mobile app enhancements to keep pace, said Accenture's Chakravarti.

In the near term, some consolidation can be expected with bigger players acquiring the smaller ones for more capital and market share.

Added Frost & Sullivan's Rengganis: "Strong-funded players will continue to dominate the markets, while small-funded players with not enough businesses will eventually go out of business."