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A new approach to digital banks

Tapping unmet needs and leveraging data for better services will level the banking field.

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Non-bank applicants such as ride-hailing firm Grab co-launched a microinsurance scheme for its drivers in August 2019.

BY YEAR-END, Singapore's Monetary Authority of Singapore (MAS) will round up all the applications for a digital banking licence, and by the middle of next year, award up to two licences for a digital full bank, and up to three licences for a digital wholesale bank. The new digital banks are then expected to start their operations by the middle of 2021.

Interest has been bubbling up from several fronts. The Business Times earlier reported that Hong Kong's AMTD Group is eyeing a digital banking licence in Singapore, following its digital banking march in its home market. Earlier in May, the firm tied up with Chinese electronics giant Xiaomi to secure a virtual banking licence in Hong Kong. The combined entity, Insight Fintech, will focus on integrating artificial intelligence, Big Data, cloud computing and blockchain into traditional banking services in its initial phase of operations. BT understands that the virtual bank in Hong Kong is expected to launch by early 2020.

AMTD joins its peers in Hong Kong's digital banking space - namely Ping An Insurance's OneConnect and Standard Chartered Bank (StanChart) - that are also circling digital banking opportunities in Singapore.

Other likely non-bank applicants for the digital bank licence include Singtel, Grab and peer-to-peer lending platform Validus Capital.

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Unmet needs

Singapore's approach has been focused on tapping unmet needs. In first announcing that Singapore will admit digital banks, Senior Minister and MAS chairman Tharman Shanmugaratnam in June took pains to discuss the "dual objectives" behind the move. In introducing competition, Singapore regulators also want to ensure that the Singapore banks - which collectively hold a market share of more than 50 per cent here - remain as "strong local anchors".

Analysts meanwhile have said that the game here is to use data to find new ways to assess credit needs. There are three untapped needs that digital banking aspirants can pursue.

SMEs

The complaint that SMEs lack funding is well-worn. In Singapore, the 2018 SME Development Survey showed that 44 per cent are facing internal difficulties managing their finances.

Some 50 per cent of SMEs found to be facing challenges in managing the finances flagged "cashflow, liquidity, and credit risk" as a key concern, up from 38 per cent in 2017. This is not unique to Singapore. Figures from McKinsey & Co showed that 51 per cent of micro enterprises as well as SMEs in South-east Asia face a financing gap of about US$175 billion.

Peer-to-peer lenders here such as Validus Capital have brought new credit assessment models to the table, working with several large corporates in Singapore to tap the thousands of vendors that hold contracts with these blue-chip firms. These large corporates include ST Engineering, large shipyards, and the country's largest logistics and transport provider.

There is a win-win approach to this: these large corporates want to ensure that their small contractors and suppliers secure financing needed to complete projects on time. Having a blue-chip company standing behind the supplier means that Validus can price the loan based on the credit risk of the large corporate.

This also opens up lending opportunities to small niche businesses. Validus customers include a business owner who scuba dives into deep waters to repair ships; and another which builds nuclear radiation detectors.

Gig workers

It is unclear how many gig workers there are in Singapore. The proportion of self-employed persons stood at about 14 per cent as a percentage of total employed in 2017, though such self-employed persons include individuals in "traditional occupations" such as taxi-driving, real-estate marketing, insurance or financial advisories. There are also full-time workers who also have a side gig, ranging from gym trainers to influencers. Data showed that such "secondary freelancers" make up about 17 per cent of all freelancers and may increase if fluid work arrangements become commonplace.

The 2018 Manulife Investor Sentiment Index, which was derived from a poll of 500 gig workers and regular employees, showed that Singaporeans in gig economy jobs have an average savings gap of 55 per cent wider than traditional "nine-to-five" employees. Singaporeans in gig jobs are also considerably less optimistic than their "nine-to-five" peers in terms of financial security, with about 60 per cent concerned about the unstable wages and the lack of protection.

Microinsurance is one product that has emerged in response to these demands. In August, Grab and NTUC Income launched a micro-insurance plan for Grab drivers, through which they pay a few cents out of each trip completed that would go towards premium coverage for 37 severe-stage critical illnesses over a 360-day period. Assuming a 53-year-old driver elects to pay 50 cents per trip to accumulate payment for premium coverage - based on current rates that can change in time - and completes 10 trips per day, it will take him or her about 47 weeks. (For comparison, a 33-year-old driver will take about six weeks to get the same amount of coverage.)

Millennials

A 2017 Deloitte study showed that more than half of millennials surveyed were open to offerings from non-financial brands. Many of these digital natives - both in Singapore and from across the globe - would also switch banks for a better technology platform. Collectively across the Asia-Pacific, about 75 per cent of customers believe they should be able to accomplish any financial task on a mobile device, a Forrester report this year highlighted.

Among digital consumers, new characters are emerging in building financial trust. The Forrester report showed that while banks are still ranked top, technology firms such as Google and Apple are among the top five brands that are trusted by digital consumers in Singapore.

The Forrester report pointed out that digital consumers are more likely to engage with firms that prioritise helping them improve their financial well-being. Banks and fintechs are now looking to design their financial products according to lifestyle goals for consumers. The game may come down to the financial player that is best at adapting "self-driving finance", by using solid data analytics to align consumers to savings goals.

UOB's TMRW digital bank, which is targeted at millennials, has begun testing its version of "self-driving finance" in Thailand, with its product a result of partnering with fintechs. The bank aims to launch TMRW in Vietnam or Indonesia soon, targeting the mobile-savvy customers from Asean.