MAS Is Issuing 5 Licenses For Digital Banks – We Explain What They Are (And Why you need to Care)
The Monetary Authority of Singapore (which regulates Singapore's banking sector, amongst other things) recently announced that it will be issuing 5 licenses for digital banks to function in Singapore. With all of new things, like cryptocurrencies, robo-advisors and digital insurers, there has also been quite a bit of hype and misunderstandings floated around.
Here's your definitive guide to being aware of what digital banks are – and what they are not.
TLDR: What is happening With Digital Banking Licenses?
The Monetary Authority of Singapore (MAS) announced in June 2021 that it will issue up to 2 digital full bank licenses and up to 3 digital wholesale bank licenses. Full bank licenses allow banks to accept deposits and serve retail customers like you and me, while wholesale bank licenses is going to be allowed to serve Small-Medium Enterprises and non-retail clients.
Applications for these licenses closed on 31 December 2021, where MAS received 21 digital banking licenses as a whole: 7 for digital full bank and 14 for digital wholesale bank.
On 18 June 2021, MAS announced that 14 applicants were shortlisted in the initial list of 21. These applicants are now invited the next stage of assessment, during which they would be asked to present their proposals via virtual meetings.
MAS could be evaluating applications based on the value proposition help with through the applicants, their assessment around the applicants' capability to run a prudent and sustainable business, as well as growth prospects and other contributions to Singapore. MAS has also specified that applicants must provide financial projections that show a path towards profitability within 5-years.
Based on timeline estimates, the earliest we are able to probably begin to see the first digital banks serving clients is from 2021.
Companies like Grab, Razer and Singtel have expressed they're reviewing the digital banking framework and are available to going through the feasibility of entering the digital banking market.
In addition, the digital full banks will be subjected to restrictions, such as deposit caps for individual customers and caps on the amount of deposits it can hold, starting at $50 million. The restrictions will be gradually loosened as the digital bank demonstrates its ability to manage risks and run operations robustly.
What Will it Mean To Have Digital Banks (Compared To Existing Banks)?
Essentially, digital banks really are a subset of traditional full banks and wholesale banks. In other words, they are licensed to offer a similar (but smaller) group of services and products that you simply expect from existing banks, including savings accounts, fixed deposits, payments, and loans.
So, if you are expecting something radically different, then you might be a little disappointed.
Digital banks are subject to the same capital requirements and regulatory requirements as banks today, including Know Your Customer (KYC) and Anti-Money Laundering (AML) processes.
Existing Banks Can Also Offer Comparable (Or Superior) Digital Banking Solutions
It is essential to know that although there is a lot of hype about the possibilities that digital banks can usher in, there's nothing to prevent incumbent banks from enhancing their digital banking services and offer everything a digital bank can. Including theoretically faster and much more convenient banking services, lower operating costs, better analytics and suggestions.
Incumbent banks also provide advantages just like a solid track record, a sizable existing customer base, and experience crafting products and marketing campaigns that resonate with Singaporeans.
While we enjoyed the options supplied by digital-first upstarts like Grab, ShopBack and Lazada, we ought to not forget concerning the problems these businesses have struggled with, even when these problems are relatively rare, such as incorrect crediting/deductions, downtimes, and non-existent unresponsive customer service.
You might tolerate and forgive such issues from startups providing less essential services, but if these digital banks make similar mistakes with your money, that will have serious ramifications. Incumbent banks, on the other hand, have decades of expertise operating mission-critical infrastructure at scale, and are well-poised to deliver reliable digital banking solutions.
Unique Advantages That Digital Banks Have
Interestingly, the advantages that the incumbent banks have over their new digital rivals will also be what holds them back, and potentially provide the digital upstarts a fighting possibility of getting ahead.
The incumbent banks need to cater to their existing customer pool, a lot of whom are positioned within their ways. Even if the banks desire to move to a paperless workflow, the need to still serve their existing customers who stubbornly refuse to change imply that they'd need to support multiple channels, that is very costly – financially as well as in terms of giving up speed.
Digital banks, however, can select the type of customer they would like to target, such as social networking savvy millennials and people who would rather bank completely digitally, and build services and products around their selected demographic. Whether they can build an enthusiast community of early digital bank adopters, every customer could be a powerful advocate for them.
Talent is yet another important determinant for achievement. Incumbent banks have thousands of employees, which is an asset. However, the organisational structure and recruitment efforts over the past few decades were tailored towards optimal performance in a traditional bank.
Digital banks have a clean slate and can build a company and recruit the mix of talent based on the new digital future they wish to build. We can expect these to recruit the great majority of information analysts, user experience designers, and community managers, while leveraging on cloud technologies and also the latest big data and cryptography strategies to power a contemporary, powerful and cost-effective infrastructure.
Incumbent banks have ample legacy systems that they are always in the entire process of upgrading, however this comes in a large financial and training cost. Furthermore, they might do not have the right mix of talent to compete at speed with a digital bank that is built from the floor up.
Competition Pushes Things as they are Forward, For The Benefit Of Users
Whether digital banks can meet their potential and promise remains to be seen. Simultaneously, incumbent banks could also potentially disrupt themselves and remain in front of the curve. In either case, customers in Singapore convey more and choices.