The arrival of digital-only banking to Singapore: Should traditional banks be worried?

Singapore’s regulatory body is debating giving out licenses to digital-only banks. How does this affect the established banking regime as well as possible customers in the country?

By Preetam Kaushik

Singapore’s financial regulatory body, the Monetary Authority of Singapore (MAS) is reviewing the possibility of allowing digital-only banks with non-bank parentage into Singapore. This comes at a time when digital financial technology (fintech) is on the ascendancy worldwide.

What are digital only banks?

While almost all banks provide online services, digital-only banks, also known as neobanks , are virtual banks that operate entirely online without any physical infrastructure. Germany’s Fidor Bank, China’s WeBank and the Monzo Bank in the United Kingdom are all examples of digital-only banks that allow customers to control their finances entirely from their smart-phones or computers, without brick and mortar establishments.

Unlike established banks, digital-only banks are typically start-ups that have tailored their banking propositions to the demands of the digital world. For instance, N26 was founded in Germany in 2013 by two friends, and currently they have over 1 million customers and growing all over Europe.

What has the global experience of digital-only banking been?

Worldwide, digital-only banks, in the form of licensed start-ups or start-ups that have ties with other licensed banks are transforming the banking industry. The global spread has been uneven though, with Europe home to 44.4% of all digital banking start-ups, followed by the Americas at 27.7% and Asia at 17.7%

As with other industries like transport, tourism and even medicine, the value and scope of virtual services in the field of banking is growing.  According to  emarketer.com, 77.6% of all millennials in the United States are expected exclusively use digital banking services by the end of 2022.  Another survey shows that 9% of all British adults have opened an account with a digital-only bank. The phenomenon finds greater purchase with the younger generation, with 15% of British adults born after 1996 having a digital-only bank account.

Earlier this year, Hong Kong started giving out licenses to virtual banks in an attempt to catch up with regional fintech giants like China and Japan. Malaysia’s central bank, Bank Negara is targeting the release of virtual bank licenses by the end of 2019.

The benefits of digital-only banking

Digital-only banking brings a host of advantages over traditional banks. For instance, having no physical infrastructure or presence means that digital-only banks have minimal operational costs. This translates into lower, as well as fewer, transaction fees. Digital-only banks are also more likely to pay higher interest rates on savings for the same reason.

Another hallmark of digital-only banks is a superior user experience. Digital-only banks depend on “real time intelligence” and are better placed to provide a more personalised customer experience. This can mean more detailed and specific electronic spending alerts or location- Based Offers.

Digital banks have also embraced multiple-channel customer service solutions, like in-app chats and bots. Finally, digital-only banks are more convenient. Opening an account is simpler than in traditional brick and mortar establishments, and banking services are designed entirely for an easy to navigate mobile experience.

Source: Infosys

In a survey by Infosys, 64% of the respondents felt confident enough to transact via digital-only banks.  By all indications, digital-only banks are likely to take centre-stage in the global banking landscape in the near future.

Should Singapore’s established banks feel threatened?

Digital-only banks aren’t likely to upstage Singapore’s established banks with physical branches anytime soon.

While the numbers of “omni-digital” consumers (those who prefer digital banking) are rising, a survey by PricewaterhouseCoopers (PwC) in 2018 showed that 65% of the surveyed consumers still feel it’s important to have a local branch, with 25% stating they are unwilling to open an account with a bank that doesn’t have at least one local branch.

Traditional banks with physical branches provide customer experiences with familiar faces and a personal touch that digital-only banks cannot replicate. Further, most traditional banks already have a digital presence and provide net-banking services to their customers, who can then manage their banking needs online or through physical branches.

What possible implications would it have for Singapore?

The Deputy Managing Director of the MAS, while speaking at the German-Singaporean Financial Forum in April 2018, stressed the importance of regulators implementing fit-for-purpose regulations and to only take regulatory steps when the risks cross a certain threshold. 

Bringing in digital-only banking to Singapore will increase consumer choice but is unlikely to disrupt the traditional banking regime. As Piyush Gupta, Chief Executive Officer of DBS Group, pointed out, the only way in which digital-only banks can create problems is if they are allowed to operate on more lenient terms than the established banks, which would go against the MAS’s philosophy.

“To my mind, that’s just basically giving a few more banking licenses,” Gupta added.