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Virtual bank licences for fintechs? MAS still weighing pros and cons

Regulator is reviewing how 'unique' such offerings might be, and how potential risks will be contained

The MAS draws a line between digital-only banks and the digital banks that incumbent banks set up.


IN DECIDING whether to issue virtual bank licences to fintech firms, the Monetary Authority of Singapore (MAS) is reviewing how "unique" such offerings might be, and how potential risks will be managed and contained.

The Singapore regulator flagged this as an issue, saying on Tuesday that it is still studying whether to admit digital-only banks that are not offshoots of incumbent banks. MAS makes this distinction because since 2000, Singapore-incorporated banks have been allowed to set up banking subsidiaries that pursue digital-only business models.

The attention on virtual banking licences comes on the heels of Hong Kong's recent move to start issuing virtual licences. But the firms that have been granted such licences there include those that have partnered financial institutions.

Singapore banks already have digital banking outfits in some shape or form, with bank branches having made the leap from brick-and-mortar setups into ubiquitous smartphones - and bank chief executives here appear confident of their competitive stripes.

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DBS' CEO Piyush Gupta said during a Bloomberg interview on Monday that the offering of banking licences to virtual banks should not pose a problem to Singapore banks as long as they update their digital offerings.

It would be a problem if virtual banks are allowed to operate on more lenient terms than the incumbents, such as in capital, he told Bloomberg.

"The real challenge is if the regulators create an unlevel playing field, and let the new bank licensees come in and do banking on different terms," he said. However, he pointed out that most regulators "don't seem to be inclined" to do that.

This comes as banks in Singapore have already expanded in the region using digital-only strategies.

Since the launch of its digibank India in April 2016, DBS has acquired over 2.5 million customers - while requiring just a fifth of the headcount needed by a traditional brick-and-mortar setup, said a DBS spokesman.

Tapping its experience in India, DBS introduced digibank Indonesia in 12 months instead of 24, launching digibank Indonesia in August 2017. It has more than 460,000 customers to date.

OCBC's CEO Samuel Tsien told The Business Times that it is inevitable that fintech firms consider operating as banks here, given the rapid evolution of fintech over the past several years.

"However, the operating model of such banks cannot be a one-size-fits-all, regardless of the operating environment," he said.

"Singapore's domestic market is small. Almost every Singapore resident is well-banked," he said, adding that such digital offerings should therefore take a regional approach.

OCBC sees most potential in Indonesia, as the bank looks to use digital banking to target 10 per cent of the 45 million people in the emerging affluent segment there. It aims to reach at least one million customers over the next three years with its service.

Meanwhile, UOB is the first foreign bank in Thailand to launch a mobile-only bank aimed at millennials. Its mobile-only bank there, known as TMRW, will be built from scratch and will mine transactional data to bring personalised functions to customers.

Dennis Khoo, head of group retail digital in UOB, said that the future of banking in the digital world will be shaped by how banks can offer a differentiated customer experience.

He added that banking goes beyond technology; fintech firms must ensure that they have all the elements and responsibilities of risk management and regulatory compliance in place to offer banking services.

"For example, regulators must consider the capital that financial institutions are required to hold to ensure that the customer's interest is always protected and to mitigate risks to Singapore's banking system and reputation," he said.

A banking analyst also pointed out that there are risks involved in setting up a fresh bank, and these include cyber security, know-your-customer onboarding, and credit as well as liquidity risks in managing deposits and doling out loans.

As it is, reports from global regulators are asking questions about systemic risks. Among other things, they question how large fintechs will function during a credit crunch, especially if credit withdrawal decisions are made automatically.

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