Third-party payment platforms in Singapore: Are local banks getting in a stew over nothing?

Singapore may not see its own WeChat Pay nor Alipay soon. Its high banking penetration level is the greatest problem for third-party payment platforms.

By Tan Jie Ying, edited by Anne Hwarng

In 2015, DBS CEO Piyush Gupta said the banking industry’s greatest threat was competition from outside the traditional financial sector. This competition takes place primarily in the domain of online commerce and transactions.

Two years later, Singaporean authorities still share this sentiment.

“Banks are facing increasing competition from online and non-financial players that have leveraged their large user base to provide digital wallets, payments and remittance services,” said Finance Minister Heng Swee Keat at the Association of Banks in Singapore (ABS) dinner this year.

This makes the Monetary Authority of Singapore’s (MAS) most recent regulatory move timely and necessary. At this year’s ABS dinner, MAS announced banks will soon no longer require regulatory approval before investing in “permissible non-financial businesses.” It will be easier for banks to conduct or invest in these non-financial businesses that refer mostly to e-commerce and e-payment platforms.

MAS’ most recent move should be seen as an attempt to make local banks more competitive vis-à-vis non-financial players. But are non-financial players truly posing a strong challenge to banks in Singapore? Or are they merely a note in the symphony?

Large user base is a fertile ground for service expansion

Competition from outside the traditional financial sector is less challenging than it appears. A look at China’s Alipay and WeChat Pay arrives at this observation.

It all begins with gathering a considerably large user base. A large user base substantially raises the likelihood of success when the platform decides to tie other products to its existing primary service. This explains the astounding success of Alipay and WeChat Pay in terms of their digital payment service. At the end of 2016, Alipay had 450 million monthly active users; WeChat Pay had 806 million.

But the success of the two companies is built on different foundations. WeChat Pay depends heavily on the peer-to-peer component in order for its digital wallet service to gain traction among its users. In contrast, Alipay is experiencing a popularity surge as an e-payment platform thanks to Alibaba’s Taobao.

Their success in the area of digital payment enables them to easily tie other finance products to their payment platform. Alipay, through its parent company Ant Financial, recently unveiled an initiative that enables user access to digital “shops” set up by financial institutions. WeChat Pay offers a range of payment services – from paying utility bills to booking and paying for movie tickets – all of which can be done without exiting the WeChat app.

Third-party payment players in Singapore appear lacklustre in comparison. SmoovPay focuses exclusively on boosting its credentials as a payment gateway. But even as SmoovPay succeeds in offering competitive prices for its e-commerce clients, its niche for e-commerce payment is hardly sufficient for it to follow in Alipay’s tracks.

MAS is also doing well in maintaining the exclusivity of banks in the financial sector. Investments in non-financial businesses will be capped at 10% of a bank’s capital funds. This is to ensure banks maintain their niche in central financial businesses and capacities. But this provision easily constitutes a fly in the ointment for non-financial players seeking to gain traction by offering other financial services.

Is Singapore’s regulatory regime conducive to having its own WeChat Pay and Alipay

Singapore’s regulatory regime keeps a tight rein on how financial services are offered in the country. MAS is piloting a national Know-Your-Customer (KYC) utility based on MyInfo for financial services. MyInfo is a government-led digital repository for citizens’ personal data. This entails a more efficient KYC as it uses more reliable data derived from government sources to strengthen anti-money laundering (AML).

WeChat and Ant Financial are not subject to KYC in their provision of financial services. WeChat users sent more than one billion red packets to each other during Chinese New Year in 2015. Alipay user transactions amounted to US$642 million in the same period.

“Nobody would have thought a billion dollars could be moved so fast, and none was AML or KYC compliant,” said CEO and founder of Trulioo Stephen Ufford.

KYC obligations put the brakes on innovative expansion on a cursory glance. They take away time that could be spent on the creation of new devices to be spent on getting past bureaucratic red tape. As Rentokil Initial’s Head of Treasury James Kelly lamented, “collating data can be nigh-on a full day’s work.”

But fulfilling KYC obligations is imperative, and not necessarily inefficient. Lacking regulation in an emerging market boosts business and investment, but is not sustainable in the long run. In China, US$13 million was reportedly stolen from QR code users in March this year thanks to the lack of KYC regulations.

Payments UK possibly found a way to resolve this dilemma. Payments made through telecom operations for purchase of digital content up to €50 per transaction or €300 per month are exempted from Second Payment Services Directive (PSD2) requirements. This rule is intended to regulate Europe’s payments industry more effectively.

Singaporean authorities can perhaps learn from Payments UK. They can start by exempting transactions below a certain threshold from KYC obligations. This helps regulatory authorities to focus attention on heavier transactions that inevitably require more oversight for AML. Meeting KYC obligations is not necessarily inefficient or obstructive towards innovative expansion.

High banking penetration level will keep WeChat Pay and Alipay out of Singapore

Third-party payment platforms are appealing in China particularly because many parts of the country remain unbanked. This means the appeal of third-party payment platforms becomes a matter of institutional dynamics that cannot be easily rectified. For this very reason, it will be challenging for third-party payment platforms to gain traction in this local bank dominated landscape.

Alipay and WeChat Pay are doing well to reach out to the unbanked. They offer a diversity of financial-services products – storing capital, investment products, generating rebate – that many Chinese consumers otherwise have no access to. More importantly, all these services are made available to Chinese consumers without any “minimum investment” conditionality. Many banks in China have since been forced to adapt as a result.

Singapore’s high banking penetration level spells out a harder time for third-party payment firms seeking to blaze their own path. MAS’ insistence on maintaining its banks’ exclusivity in the financial industry only serves to reinforce this difficulty.

Singapore will not see its own WeChat Pay nor Alipay, at least not in the foreseeable future. Unless banks in Singapore are willing to relinquish their privileged position in the financial sector, third-party payment platforms will continue to be pressed against their throats.