A new breed of technology-driven financial institutions is set to shake up the banking landscape in Singapore.

There is a brave new world that is about to open up in the staid old world of banking. It is virtual, but handles real money. It is disruptive, but adheres to traditional banking regulations. And it offers banking anywhere, anytime, on any device as long as the device is connected to the Internet. Welcome to the virtual bank.

Since the beginning of this decade, billions of dollars have been ploughed into fintech companies worldwide. More than US$39 billion has been invested into fintech companies in 2018 alone, according to research published by data provider CB Insights. The virtual bank is the latest offshoot in the world of fintech and is now ready to take off in Singapore.

Applications Now Open

On 29 August 2019, the Monetary Authority of Singapore (MAS) announced that it will begin to accept applications for virtual bank licenses until 31 December 2019. These licences are open to banks as well as non-banking companies. However, firms that apply would need to conform to criteria that includes minimum capital requirements and will be asked to comply with the same regulatory regime as incumbent banks.

For the first time in Singapore, non-banks will be able to accept deposits and provide financial services to retail customers. Companies that have signalled interest include Razer, Grab, Liquid Group, MatchMove Pay, OCBC and Singtel. With applications now open, virtual banking is set to take off in Singapore by mid-2021.

Disrupting Banking

How have other countries fared in this new world of banking? So far, results have been mixed. In the US, the two leading virtual banks offer credit cards, loans and accept personal deposits. They hold billions of dollars in assets. In the UK, virtual banks began offering small business loans and savings two years ago. South Korea’s two virtual banks – one of which enrolled 300,000 customers in a day when it began operations in mid-2017 – started off well but lost a combined US$78 million in 2018.

Virtual banks could pose a significant threat to Singapore’s Big Three banks. New licensees may be backed by rich benefactors. They will likely have significant ‘beyond-banking’ strategies that might be hugely disruptive. As an example, Revolut, a digital bank in the UK, has joined forces with cloud-based accounting platform Xero, enabling customers to link their business accounts with their accounting system, automatically export and import spreadsheets, and track the financial health of their business almost in real time.

New entrants are likely to come in unpredictable ways. They are likely to target millennials, value conscious mass affluent customers and other underserved segments of the market such as small enterprises. Traditional banks have to learn to innovate or face disruption. Singapore’s three largest incumbent banks have progressed significantly in their digital transformation journeys. The biggest, DBS Bank, views itself as a technology company that is in the business of banking. However, it needs to now go beyond digital and leverage on the power of data and exponential technologies such as artificial intelligence (AI) and blockchain to scale.

Key Strategies

Regulation and security are crucial considerations in banking. The average cost of a banking security breach is US$3.86 million. Virtual banks need to comply to increasingly stringent regulatory and compliance requirements and deploy strict security controls. Here are some suggested strategies.

For new entrants:

  • Clearly define a disruptive value proposition that will enable you to grab market share in a highly saturated banking marketplace. A new value proposition may call for forging new partnerships, supply chains, and ecosystems.

  • Build, acquire, or lease the right banking technology platform. A lightweight, cloud-based core system built on a modern technology stack that can use exponential technologies, such as AI, IoT and blockchain will be ideal.

  • Address regulatory, compliance, and security considerations in your own operations and demand the same across your new banking ecosystem.

For incumbent banks:

  • Deepen customer engagement and sharpen value propositions. Understand that customer data can be a competitive weapon. Leverage the power of existing relationships and data to create highly personalised customer experiences that will be challenging for new entrants to match.

  • Extend your propositions beyond banking to become more relevant to your customers. Partner with fintech and other non-banking companies.

  • Deploy AI to augment your bank’s ability to respond quickly to changing market conditions and customer expectations.

  • Become a ‘cognitive enterprise’ by

  • Offering clients extreme convenience.

  • Extending your portfolio beyond traditional banking if possible.

  • Deploying new technology to radically lower your cost to serve clients.

  • Offering world-class security. Once trust is lost, re-establishing it can be very expensive.

About The Writer

As Country Managing Partner of IBM Global Services, Arun is responsible for the company’s consulting, systems integration and application services business in Singapore. He is an advisor to chief experience officers (CXOs) and helps them define and implement their digital transformation journeys. Arun’s core expertise is in bridging the divide between digital strategy definition and execution of strategic digital projects to rapidly realise business value.

This article was first printed in MillionaireAsia Issue 53 - September 2019

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