The latest news on digital banking is that the Monetary Authority of Singapore (MAS) has decided to issue up to a maximum of five digital banking licenses, comprising up to two full-bank licenses and three digital wholesale bank licenses. I had flagged out this risk earlier when I wrote about two key risks facing DBS Group Holdings Ltd (SGX: D05), and it seems that the regulator has gone ahead to liberalise the banking industry. Should investors in our local banks feel worried about the impending competition?
Characteristics of the new digital licenses
First off, it’s important to understand the requirements surrounding these new licenses. Digital full-bank licenses are open for application by companies headquartered and controlled by Singaporeans, as well as foreign companies, but only if they form a joint venture with a Singapore company. The applicants must have a track record in operating an existing business, or in technology or e-commerce fields.
In the initial stage, the digital full-bank will operate as a restricted bank, with initial paid-up capital of S$15 million. Aggregate deposits will be capped at S$50 million while individual deposits are capped at S$75 million. The bank will have to apply for the deposit insurance scheme and may only offer simple credit and investment products, along with a host of other restrictions. Over time, if the regulator is satisfied that the restricted digital full bank performs, the license will be “graduated” to a fully functioning digital bank license.
Companies which have expressed interest in applying
Already, four companies have expressed interest in applying for the digital banking license. One of the four is Singapore Telecommunications Limited (SGX: Z74), which said it is “exploring the feasibility of such an opportunity”, another is Grab (backed by Japan’s Softbank Group). Grab has already partnered with Japan’s Credit Saison last year to provide loans in Southeast Asia.
The third potential entrant is Razer Inc (HKG: 1337), which has been growing its financial technology business over the years and has processed billions of dollars in digital payments using its Razer e-wallet. Razer also recently announced a partnership with Visa Inc (NYSE: V) to introduce a pre-paid Visa solution through Razer’s app. A fourth company, remittance start-up InstaRem, is also throwing its hat into the ring. InstaRem currently powers payments for three of the top 10 Southeast Asian banks.
Competition or collaboration opportunity?
Naturally, the three local banks should be worried about increased competition for deposits with this new ruling. Though DBS and United Overseas Bank Ltd (SGX: U11) have both said they welcome the liberalisation of the market, in reality, this will introduce more uncertainty for them as there are now more players jostling for a piece of the action. In order to remain competitive, the local banks may have to hike their deposit rates while providing more competitive loan rates to businesses and individuals, both of which would negatively impact its net interest margin.
On a positive note, there could also be opportunities for the banks to collaborate with the new digital banks and financial technology firms to explore novel and new ways of serving customers. All three local banks have been actively embracing technology in their banking systems and processes, and are open to exploring ways to work with the new entrants.
Investors should remain cautious and watchful
Investors in the local banks should remain cautious and continue to monitor the developments and news surrounding the digital bank licenses, as these have the potential to disrupt the comfortable oligopoly which the incumbents have at the moment. There is definitely some cause for worry, though, at this preliminary stage, it is uncertain how much market share may flow to the new digital players.
The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore recommends shares of DBS Group Holdings Ltd, United Overseas Bank Ltd and Visa Inc. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.