China digibank players are old hands in search of fresh pastures

Singapore

THE influx of Chinese players coming in to compete in the wholesale banking space is no surprise, given China's headstart in the digital banking scene, and the fact that many of them are looking beyond their slowing home market to growth regions such as Asean, say industry watchers.

But even as the digital wholesale bank licence allows foreign entities to take a majority stake, these observers say that the dominance of any one country when it comes to financing small and medium-sized enterprises (SMEs) - the backbone of Singapore's economy - is a risk that regulators will consider in their assessment.

Jayaprakash Jagateesan, chief executive of RHT Fintech, told The Business Times: "The strong interest from Chinese players in the wholesale space is simply because these players have deep expertise and the highest level of experience in serving a large market - they are way ahead of the curve in serving the Chinese market with fintech."

The Monetary Authority of Singapore (MAS) announced on Tuesday that 14 applications for the digital wholesale bank licences have been received, out of which only five have been reported so far.

And of the five, four applications involve Chinese companies.

Jack Ma's Ant Financial and TikTok-owner ByteDance are among the contenders, with both players putting in separate applications.

Singapore's iFast Corporation formed a consortium with two major Chinese partners - Yillion Group and Hande Group.

Yillion operates one of four digital banks in China, while fintech company Hande is founded by Cao Tong, the former president of WeBank, China's first digital bank founded by Tencent.

Xiaomi Finance, a subsidiary of Chinese electronics company Xiaomi Corporation, is in a consortium with Hong Kong's AMTD Group, peer-to-peer lending platform Funding Societies and Singapore utilities provider SP Group. Last year, Xiaomi partnered with AMTD Group to land a virtual banking licence in Hong Kong.

Industry watchers say that, with their extensive experience and tech capabilities, the Chinese players are the ones to watch.

Alex Chua, chief executive of Goldbell Financial Services, said: "I believe that the Chinese are the biggest players in mobile banking and a lot of the expertise comes from there.

"They've done it for the past 10 years. They are not building the infrastructure from scratch."

This comes as China tops the world in fintech adoption by both consumers and SMEs, going by the EY Global Fintech Adoption Index 2019.

Mobile payments is particularly entrenched in the country, which is dominated by Ant Financial's Alipay and Tencent Holdings' WeChat Pay.

Cyrus Daruwala, managing director for financial services and fintech at IDC Financial Insights, concurred that these Chinese tech companies have a "big advantage" over the rest.

"They have the scale, they have proven business plans and they also have deep pockets to fund a long-term business."

There are also push factors for Chinese players to edge into Singapore's digital banking scene.

"We expected the Chinese big boys to make a move to Asean and Asia. Two factors have hit them: the crowding and competition in China, and the stipulated slowdown (of the Chinese economy)," said Mr Daruwala.

All these conditions, together with the desire to grow outside China, likely drove these players to look at opportunities outside their home market, he added.

Asean, with its significant underbanked segments among the millions of SMEs, is a region of opportunity for these Chinese tech firms.

Goldbell's Mr Chua said: "Singapore is not the end goal for these companies - it's Asean. If these players get the approval of MAS, it is easier for them to go to Asean because they have already passed such a high bar."

Despite the obvious strengths of the Chinese players, they bring with them factors such as concentration risk.

Mr Chua said: "Healthy competition is always good when the country is heavily dominated by local players, as it brings in new perspectives and new ways of looking at risk.

"But we need to be careful that local businesses do not become heavily dependent on external financing needs from any one particular country."

Varun Mittal, Global Emerging Markets Fintech Leader, EY said that if all the wholesale bank players come from the same country, and there is a financial downturn in their home market that affects them, it could also affect their business here. This applies to any single one country, not just China.

He added that this is not the same as the "debt trap" scenarios played out in large-scale infrastructure projects, where China provides financing to fiscally weak countries such as Pakistan and Cambodia, which are likely to have difficulty repaying.

The digital wholesale banks will have to put in capital of S$100 million, and the MAS has strict guidelines for responsible lending and the reserves they must keep, Mr Mittal pointed out.

"For the MAS, the strength of the financial system is non-negotiable. Banks are as strong as their weakest link," he said, adding that it is not an issue of where the banks come from.

Applications for the five digital banking licences - two for full banks and three wholesale - closed on Dec 31, 2019.

For digital wholesale banks, there is a capital requirement of S$100 million, and foreign entities are allowed to take a majority stake.

Digital full banks, which allow licensees to collect deposits from retail customers, require the entities to be Singaporean-controlled, with an eventual capital requirement of S$1.5 billion.

MAS is expected to announce the results of the digital banking applications by mid-2020.

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