Will Fintech break the dominance of local banks in Singapore?

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DBS, OCBC and UOB dominate the banking sector in Singapore. The state regulator harnesses and supports Fintech, but it could do more.

By John Pennington, Edited by Joelyn Chan

Singapore is a flourishing financial centre, the third largest in Asia, and a thriving hub for Fintech development. However, the global economic environment is changing, and Singapore must adapt accordingly.

There are 123 foreign banks and five local banks, but it is the top three – the Developmental Bank of Singapore (DBS), the Oversea-Chinese Banking Corporation (OCBC) and the United Overseas Bank (UOB) – that dominate both Singapore and ASEAN. According to Brand Finance, they are the most valuable brands in Singapore. DBS leads the way with a value of around US$5.4 billion ahead of OCBC (US$3.64 billion) and UOB (US$3.62 billion).

Source: Corporate Finance Institute

According to Moody’s Investors Service, the government has a “strong incentive” to give the three largest domestic banks a “very high” level of assistance as they are integral to the nation’s economy. Fellow rating agency S & P Global said the three banks had “sound fundamentals” and awarded them the coveted AA- credit rating. They are the only banks in ASEAN with such a rating.

The financial sector is changing, as is the relationship between Fintech and the banks

Fintech is emerging as a greater challenge to traditional banks as funding and deals increase. Brands like Alipay, Lufax and Wepay are disrupting the way the financial sector works.

Source: CBInsights via Fintech News

Banks in Singapore have had to adapt to global changes, including economic slowdowns and reactions to political events. Staffing levels are up, but the rate of technological development has affected how the industry is growing. As a result, recruitment for technology-related jobs in areas such as compliance, cybersecurity and risk management has increased to fill positions and roles that did not previously exist.

Accenture reported that bank revenues would drop 33% by 2025 due to the growth of Fintech. In the words of Monetary Authority of Singapore (MAS) Chief Fintech Officer Sopnendu Mohanty, “Fintech firms are not here to challenge you. They are here to partner you.”

The MAS regulates Fintech in collaboration with the big three banks. “All three local banks have been active [in the regulation field],” Heng Swee Keat, Minister of Finance said. “We want to give the banks some flexibility to get into new areas and to partner with key people. We want to encourage innovation.”

This collaboration broke new ground as MAS anti-commingling regulations previously prevented banks from involvement in any nonbanking business. This decision proved how seriously the MAS take Fintech and how aware it is of the changing financial landscape. Today, CCRManager Pte Ltd is one Fintech firm that benefitted from MAS Financial Sector Development Fund (a fund contributed by local banks).

Big Fintech companies are changing paths

One of the best-established Fintech firms, Alipay is bringing its e-payments system to Singapore, which lagged behind others in developing and applying the technology. For now, it allows Chinese tourists to use a familiar payment system. By teaming up with local firms CC Financial Services and ComfortDelGro, Alipay already has 20,000 acceptance points. CC aims to acquire more merchants and grow the number of acceptance points further.

“If their initial ventures are successful, they will then look to further build partnerships and perhaps how they could possibly build up the online to offline infrastructure,” Michael Yeo, IDC Financial Insights research manager, assessed.

“To make going cashless a success in Singapore, we welcome solutions that are interoperable across banks, have universal acceptance and are easy to onboard and use without causing any confusion to consumers,” OCBC’s Pranav Seth said.

Others are now offering loans and investments

Slowly, Fintech companies are disrupting areas that were previously the sole preserve of more traditional institutions, such as real estate. Small banks rely on Fintechs to offer peer-to-peer lending solutions. Increased consumer options in the financial marketplaces should drive competition and innovation among providers. That should boost the financial sector as a whole.

Fintechs can often adapt and move quicker than traditional banks. Lufax is now moving away from lending and into the wealth investment market. Earlier this year, Lufax launched its first overseas platform in Singapore, attracted by the straightforward regulatory system. Singapore heralded the deal as something of a coup because Lufax chose them rather than Hong Kong.

Collaboration works, but should Singapore go further?

Collaboration between traditional banking houses and Fintechs is already happening. It has taken time; and central to collaboration is application programming interfaces (APIs).

APIs define how one application interacts with another and Mohanty described them as an “unstoppable force” and a “critical gateway”. Why? Because they effectively become collaborative bridges between the different systems the banks and the Fintech firms use. Once in place, they help speed up transactions.

However, what if the MAS removed the protective regulations and allowed Fintechs to compete with the big banks? We will be able to see an accelerated pace of development and innovation as the banks today comfortably collaborate with Fintechs to enhance their services.

Competition would bring more innovation, more investment to develop and harness new technologies and strengthen Singapore’s world-leading financial hub position yet further. The top three banks are well established and well protected. They have significant market share. They generate huge profits. However, it is questionable whether it benefits them to do more to boost the financial sector. The MAS ought to put them to the test; if Singapore wants to maintain its status as a global financial hub, it is time to remove the shackles and let Fintech drive its financial sector to another level.