In a landmark announcement made on December 4, the Monetary Authority of Singapore (MAS) awarded banking licenses to four players, two of which will serve the retail banking market using a digital full bank license. Notably, both of the lucky winners — i.e., the consortium formed by Singapore Telecommunications (Singtel) and Grab Holdings Inc. (known for its ride-hailing and food delivery business), as well as SEA Holdings — are considered new to banking, although they have already made forays into payments and other financial offerings. Based on this exciting market development, we would like to offer our initial commentary about what may lie in store for the banking landscape in Singapore.
Q1. How will new digital banks change the market landscape in Singapore?
With the new digital banking players in Singapore, we will see a further fragmentation of the market. First, there will be an outflow of customer deposits from existing banks when customers initially fund their new bank accounts. Second, the new digital retail banks will launch new and simple lending products like credit cards and begin to generate interest income. If these new players can garner substantial deposit and credit balances, then it may have a serious effect on the competitive landscape in Singapore, but that will likely take time.
Q2. As newly minted lending institutions in Singapore, how would the digital full banking license recipients succeed?
Acting as banks, they must earn as banks, and that means … net interest income. Let’s dissect this. In order to give out loans, banks rely on customer-held deposits as well as external financing that costs them a certain interest expense, which drags on profit. It’s always better to maintain a relatively high proportion of customer deposits because they are safer and cheaper, allowing the banks to earn higher margins, and, therefore, more profit. For traditional banks like DBS, OCBC, and UOB, the proportion of such customer deposits on their balance sheets is roughly 90%, which means they are largely customer-funded — good for them. For the new digital banks to succeed financially, they would need to become prolific in their deposit-taking from regular customers and their overall funding strategy, which is not so easy to do given the level of trust and security that customers associate with the well-established banking brands.
Q3. Will customers make new digital banks their primary bank?
Digital-only banks will leverage a potentially better user experience, as well as smart engagement tactics to win new customers. However, there might still be initial hesitation by the customers to consolidate all their financial holdings at the new banks. For instance, one can safely assume that customers will not immediately decide to transfer their salaries and their life savings to the new digital banks, at least not until they feel a certain level of trust with these entities. Over the next few years, traditional banks will still have a strong advantage built up by decades of reputation and customer trust. But ice melts and rivers flow, and that is a fact of life the Singapore banking market will experience after gifting the consumer added choices.
Q4. How will the arrival of new digital banks impact the bank branch?
In a recent Forrester Analytics survey on Asia Pacific financial services consumer trends, we found that 55% of Singaporean online adults said they are not going to have a bank account with a financial institution that does not have a branch, while only 9% actually prefer using a bank branch for their day-to-day needs.[i] This is an interesting dichotomy because, on one hand, customers are holding on to their old “safety net” represented by brick-and-mortar institutions while clearly adopting new habits that are more aligned with digital banking. The way that this may play out after the wave of new incoming digital banks would ultimately decide the fate of the bank branch — whether the role of the branch will weaken faster or whether it will acquire a new mission.
Q5. What challenges will digital banks face?
Let’s split the answer to this question into three parts. The initial challenge is how to roll out the banking operation, which first and foremost would require expertise held by people who will manage and run the new entities. I suspect that all new licensees are going to be on a hiring spree for experienced bankers who can contribute their technical knowledge to the new enterprise. The second challenge is going to be the procedures and processes in order to operate and govern the banks, including compliance with the regulations set by the MAS. Remember, because these are brand-new financial institutions with no prior track record, they will be under tight oversight by the MAS and other regulatory bodies. The third challenge is about technology — data as well as privacy. There’s a tremendous amount of technology, data management, and risk management capabilities that need to be stood up rather quickly before even day one starts. Going well beyond e-commerce features and functionality, banking transactions and reporting requirements alone can be stifling. However, I think tech companies will probably excel in this area faster than the previous two, given their substantial technological and innovation capital.
Q6. How should digital banks differentiate themselves in terms of CX?
The last but arguably most important piece of the puzzle will be about customer care and experience. Customer care has to be humane and empathetic, and it needs to be of top-notch quality in order to differentiate the new digital banks from the incumbent competition. What made companies like Grab and Shopee (part of SEA Holdings) successful in the past, such as lightning-speed service, real-time order tracking, inventory visibility, and instant resolution of customer complaints, needs to be ported into their new banking customer care operations with the same or even higher level of quality. If their customer care fails and if trust is lost, there will be nothing stopping customers from walking away and going back to the old brands that they could trust despite whatever CX shortcomings. In the new digital banking age in Singapore, customers will be even more empowered, more ready to voice their feedback, and more powerful with their wallets.
[i] Source: Forrester Analytics Consumer Technographics® Asia Pacific Financial Services 1 Survey, 2020.