On 4 Dec 2020, after an 18-month long process, Monetary Authority of Singapore (“MAS”) finally awarded the two Digital Full Bank (“DFB”) and two Digital Wholesale Bank (“DWB”) licenses from a list of 14 eligible applicants. The two DFB licenses were awarded to a consortium of Grab & Singtel and Sea Ltd – both high quality names with deep experience in technology and consumer businesses. Additionally, an Internet Only Bank (“IOB”) license was awarded to a consortium of Standard Chartered and NTUC.
However, will their journey to profitability be easy?
Let’s look at the regulations and the guard rails in place to make this road a bit bumpy –
- Minimum paid-up capital of SGD 1.5 bn preferably within five years of operations
- Restrictions around credit limits (like 2x monthly income of individual) and deposits (to be solicited from person known to the parent group, cap of SGD 75,000 per customer)
- One physical place of operation with no access to ATMs
Now, let’s try to understand the implication of each of these regulations:
1) Minimum paid-up and ongoing capital of SGD 1.5 bn
We will get a bit technical here to establish broad facts. A minimum capital of SGD 1.5 bn can only be fully leveraged with a total Risk Weighted Assets (“RWA”) of SGD 10 bn at the regulatory required minimum Capital Adequacy Ratio (“CAR”) of 15% in the initial phase. This is a simple back solve of formula CAR = Capital ÷ RWA.
RWA has three components namely Credit RWA, Operational RWA and Market RWA. Now, credit risk weight of most unsecured retail assets is 75%, mortgage is 35%, and SMEs is 100%. Hence, a hypothetical loan book consisting of 1/3rd of each of these assets with another back-of-envelope 15% risk weight for operational and market risk for all assets would mean a risk weight of 85% for the entire portfolio. Hence, each of the digital bank would roughly need SGD 12 bn of loan book by the end of five years to get to a RWA of SGD 10 bn (=85% of 12 bn) to effectively utilize a capital of SGD 1.5 bn. This would also require a deposit book of SGD 14-15 bn after considering liquidity and cash requirements.
Let’s look at the challenges to get to an SGD 12 bn loan book in a matter of 5 years.
- Secured lending like mortgages / SME term loans are not the sweet spot of most digital banks across the world due to very tight pricing, underlying documentation, affluent customer profile, and relatively low focus on ‘instant’ approval. Digital banks typically attract deposits at a much higher cost of funds vs traditional banks especially for longer tenor for ex. Judo bank in Australia is raising 5-year term deposits at 1.6% versus 0.3% for the big four banks making it really difficult for digital banks to compete on pricing to attract sufficient customer base.
- Unsecured lending for both retail and SMEs is an uphill task especially in an affluent and overbanked society like Singapore. We have discussed this in more detail below.
2) Restrictions around doing business like credit limits / solicitation of customers
Singapore median income in 2020 was SGD 4,534 for 2020 and digital banks cannot extend unsecured loans of more than 2x their monthly income (vs. 4x for traditional banks) in initial phase. This effectively restricts the total unsecured cash loan, which is one of the most touted products of most digital banks across the world, to roughly SGD 9,000 per customer. If we need to deploy SGD 4 – 5 bn by the fifth year, we need to find roughly half a million borrowers in Singapore. By comparison DBS, which banks 5 mn customers in Singapore, has a total outstanding unsecured consumer loan book of SGD 5 bn in 2020 which is 1% of its total loan book.
Additionally, there is restriction around not soliciting customers which are not already known to the shareholders. While, this might not pose a serious problem for consumer-focused groups like Grab, NTUC and Sea but still some, especially affluent, customers may find it irksome to not be able to instantly sign up.
3) Restrictions around physical presence
A digital bank can have only one physical presence with no ATMs or CDMs (Cash Deposit Machines). This means that the bank would have only one place of operation and that office must contain the head office, any document collection/ processing back office, and any customer service centre or branch. So why is it important to have more physical presence?
Because still certain aspects of banking require physical presence, for example
- Access to cash:While I appreciate that we are heading towards a digital world, approximately half of total payments by volume in Singapore in 2020 were cash (this is post Covid) and cash is expected to constitute roughly 1/3rd of the total transactions even in 2025. Hence, customers would need at least one more bank account to get access to cash potentially relegating digital banks to a secondary bank status.
- Complex products requiring human touch:Mortgage and car loans are high value and require extensive asset and income related documentation and currently both banks and customers may not be fully comfortable to make the entire process online
- Perceived safety in branch-banking: We still have a small proportion of the Silver Generation not comfortable in using ATMs, 42 years after their introduction in Singapore, leave alone trying a fully digital bank. Millennials, the target segment of digital banks, would typically have much lower bank balances versus older generations who already be well penetrated by traditional banks
As an overall result, most customers would have digital bank as their secondary bank, where they transfer cash every month for a specific purpose and continue to keep their salary account in traditional banks. Just to put that in context, gathering SGD 15 billion as deposits mostly as a secondary bank would mean having 3 million customers each depositing SGD 5,000 in the bank. We can’t even count on having a few large customers as individual deposits are capped at SGD 75,000 making this really difficult proposition.
Also, each of the DFB must achieve this with two other competitors competing for the same customer and three incumbent behemoths which are already banking them and are way ahead in their digital journey.
Overall, while introduction of digital banks is expected to bring in more competition & innovation in Singapore banking system, it will be a tough road for new upcoming banks to become economically viable units in the medium term. Singapore, already a mature and well-banked market, have limited growth opportunities potentially making this a zero-sum game with incumbents. The digitally savvy incumbents have been preparing for this fight for the last 3 years and won’t go down easy. Hence, in my view, the only way to succeed would be to offer something disruptive rather than incremental to customers which traditional banks cannot offer.
Tanay is a seasoned M&A professional with more than 14 years of experience in advising Financial Institutions Groups around their M&A needs at reputed firms like Deloitte, Standard Chartered Bank and Ambit Corporate Finance. He has advised over 50 deals with value of USD 10 bn in South East Asia and South Asia with special focus on insurance, bank, non-bank funding companies, asset management, and brokerage clients.
 Source: Page 21, DBS Annual Report 2020
 ACI Worldwide Real-Time Payments and Global Data, May 2021