Singapore's digibank experiment is right balance of innovation and prudence
THE buzz behind digital banking in Singapore speaks to the belief that small-and-medium-sized enterprises (SMEs) here and in the region can be better served by technology and the use of alternative data to back smaller forms of unsecured lending that has been largely shunned by the incumbent banks.
The latest step by Singapore - marking the biggest liberalisation move in the financial sector since 1999 - is also a risk-adjusted experiment in injecting innovation.
The calibrated approach by the Singapore regulators suggests a targeted look at addressing funding needs but not one that creates disproportionate risk, judging by the more prescribed rules as well as the high capital requirements for digital bank aspirants.
For SMEs in Singapore, there are funding gaps that need redressing. A report by the Singapore Fintech Association and Ernst & Young showed that while bank loans are the top source of funding for local SMEs across all vintages, just about half of the SMEs with a credit history of less than three years have access to bank loans. Once they cross the three-year mark, nearly 80 per cent of such SMEs report success in accessing bank loans.
The perennial problem has been that small but fast-growing SMEs may struggle to pledge property as collateral to banks for loans. Banks also find it expensive to serve such smaller SMEs. As it is, even before the digital banking initiative taken by Singapore, the Monetary Authority of Singapore (MAS) had in 2017 relaxed rules for financing companies. This allowed them to effectively extend collateral-free loans to small businesses.
An emerging player in this area in Singapore is Grab, which has rolled out loans to SMEs in Singapore. Grab would not say how big of a market it has captured thus far, except to say that most of its SME customers are from the food & beverage and retail segment, speaking to its merchant base that swelled from having GrabFood in its network.
In Singapore, half of its SME borrowers have been operating for five years or less, and about half were granted loans of no more than S$30,000. Six in 10 have an annual revenue of under S$1 million.
It is worth noting the interest shown by China companies for a digital banking licence here.
China tech companies have had a headstart in their home markets, using real-time cashflow data and other forms of alternative data to assess the creditworthiness of small businesses that they lend to. As at mid-2019, billionaire Jack Ma's Ant Financial has lent some two trillion yuan (S$398 billion) to some 16 million small companies via MYbank, which is only four years old.
Ant Financial is now one of 14 applications for the digital wholesale bank licences in Singapore, with wholesale banking applicants making up two thirds of the 21 applications in total. MAS will only issue up to three such licences, and up to two digital full bank licences that will permit such a bank to take retail deposits.
The China players' interest in Singapore is clear: besides Ant Financial, Chinese tech firms such as Tiktok's ByteDance, Xiaomi Finance, and Meituan Dianping's Yillion Group, are looking to enter the Singapore banking market. They are joined by Hong Kong-listed supply chain finance company Sheng Ye Capital, which has experience in financing firms in China.
Their interest mirrors the situation in Hong Kong. To be sure, the applications are not directly comparable due to differing capital requirements, among other things. But, of the eight licensed virtual banks in Hong Kong, seven are set up by China companies.
This speaks to the wider interest in Asean, as China companies look beyond their home market for growth. Varun Mittal, global emerging markets fintech leader at EY, told BT that one the key motivation for seeking a Singapore digital bank licence is that "it is easier to demonstrate proven track record and regional connectivity to other regulators in Asean where digital banks are going to be available in coming time".
Malaysia has already announced draft guidelines and other markets in this region are likely to follow up with their own versions of digital banks.
Singapore is a small market but it has always been a base for Asean-focused financial companies. As it is, a Singapore-based fintech venture builder FORUM has seeded, and is due to start this year Tonik Bank, a digital-only bank in the Philippines.
But to capitalise on Singapore's standing in the region does not come easy. Digital wholesale banks here must hold S$100 million in capital, while a digital full bank is expected to put up S$1.5 billion in capital at its fully graduated stage.
In Hong Kong, the minimum capital requirement for digital banks is set at HK$300 million (S$52 million); it's even lower in the UK at five million pounds (S$8.89 million).
Most digital banks in the UK are loss-making; the Bank of England last year also flagged certain risky behaviour from challenger banks despite overall resilience. Among other things, most challenger banks were "overly optimistic" about the potential impact of a stress scenario on their business. EY's Mr Mittal pointed out that in the event of an economic downturn, new digital banks could face operational challenges ahead.
Against this backdrop, Singapore has prescribed that digital banking aspirants in Singapore must show a path towards profitability over the next five years of operations and indicate when the proposed digital bank is expected to break even, even if the break-even point is not within the first five years of business.
This is meant to deter predatory pricing but also speaks to the risks that digital banks can pose to financial stability. Singapore has as well set specific guidelines on how consortia partners should cover liabilities in the event of a failure by certain minority partners in the group.
The prescribed approach - which has nonetheless attracted significant interest - is an important takeaway for Singapore's digital banking move. Singapore is open to using technology to tackle untapped funding needs, but a messy bank failure - unlike the breezy narrative behind startup innovation - is a scenario regulators are loathe to have. Only serious contenders need apply. Otherwise, it's thank you. Next.
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