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MAS will issue up to five new digital bank licences. Are the incumbent banks under threat?
[pullquote]Digital banks have no physical branches, leading to a lower cost structure—and these cost savings can be passed on to customers. [/pullquote]
While there are reports that have said that the introduction of five new digital bank licences in Singapore is unlikely to threaten the dominance of incumbent banks such as DBS Bank, OCBC Bank and UOB, the increased competition will still cause uncertainty.
Digital banks have no physical branches, leading to a lower cost structure—and these cost savings can be passed on to customers. As such, customers will be able to enjoy more significant benefits when using a digital bank, including higher saving rates, and lower transaction fees. The interesting part is traditional banks are also leveraging technology to turn themselves into digital providers, but have to contend with backend legacy systems.
Most, if not all, traditional banks are still using legacy mainframes with monolithic core banking systems. This means that the banks are not fully digitalised and must improve a significant part of their core technology to increase their digital offerings to run full digital banking functions. Some newer technology can enable these financial institutions to have a fully digital banking core cloud platform at just one-tenth of the cost of legacy systems.
How are digital banks differentiating themselves?
[pullquote]… digital banks must establish themselves with a strong trust and governance structure, with distinct product offerings, that will be able to win the hearts of the customers, be it the millennials or the underserved SME market.[/pullquote]
Singapore has a modern banking infrastructure where the incumbent banks are serving its customers well through its web and mobile banking platforms. In contrast to countries such as China and India, there might be consumer reluctance in terms of changing banking and financial service providers, given that what they have at the moment currently works, not to mention they have been in business for many years.
As such, digital banks must establish themselves with a strong trust and governance structure, with distinct product offerings, that will be able to win the hearts of the customers, be it the millennials or the underserved SME market. They would have to place the customers first and incorporate newer technologies, such as artificial intelligence and data analytics, to serve customer needs much better than the traditional banks.
However, the greatest differentiating factor for digital banks would be in their banking infrastructure, which enables them to be agile, dynamic and competitive. In contrast, a recent Capgemini survey found that 87% of bank executives do not believe that their core systems can keep up with the demand for digital.
How will consumers and businesses benefit from the new digital banks’ entrance?
[pullquote]Besides the faster and more efficient onboarding of SMEs, we can look forward to a more comprehensive credit scoring, even for companies that are very new to the market.[/pullquote]
Customers will be able to enjoy greater benefits when using a digital bank, including higher savings deposit rate, lower transaction fees, and lower costs in investment products, to name a few. Additionally, digital banks can utilise artificial intelligence and data analytics to serve customer needs much better than the traditional bank.
Additionally, digital banks can also help reach those who have fallen through the gaps – customer segments which can be better reached and served with a digital banking platform. Segments such as SMEs, and micro company setups, are not as well served as the medium and large enterprises.
We are especially excited about the multiplier benefits of digital banking for SMEs. Besides the faster and more efficient onboarding of SMEs, we can look forward to a more comprehensive credit scoring, even for companies that are very new to the market. In addition, SMEs will enjoy faster turnaround approval timings for loans (regardless of size), not to mention better rates for the financial services required for business transactions.
What else does Singapore need to do to ensure that consumers and businesses can reap the full benefits of digital banking?
[pullquote]… people are still not entirely clear in their understanding of digital banking, and how this concept differs from mobile (internet) banking and even e-wallet capabilities.[/pullquote]
While Singapore is ready for digital banking, – especially given how we have seen mobile banking and e-wallets have taken off over the past few years – getting consumers to take full advantage of technology requires more than that.
Part of this is overcoming inertia. Singapore has a very well-established credit payment ecosystem as compared to other countries such as China (another country in which digital banking has taken off), where credit cards are less prevalent. It will likely take some time before the public ditches transaction methods that they have come to be familiar with and fully embraces cashless and mobile payments.
Education is vital for this to happen, as many people are still not entirely clear in their understanding of digital banking, and how this concept differs from mobile (internet) banking and even e-wallet capabilities. For example, using mobile payments for daily necessities is more of an e-wallet capability, which is rather prevalent in our country, while mobile banking is the ability to execute the majority of the banking services through an app, without physically going to a branch.
However, for digital banking, it’s a total transformation of how banking is done. Digital banking covers e-wallet, mobile banking, and more. With greater efficiency and cost-savings, such as opening a new account through facial recognition, instant customer verification, much lower costs of financial services, and personalisation of banking services, digital banking is the new era of customer-centric banking.
These factors will ultimately affect the future of digital payments, and banking and consumers will embrace these new technologies, as long as it provides them with greater convenience and security.
Does going digital means that the older, less tech-savvy generation will be left behind? Are there initiatives to get them acquainted with digital banking?
When it comes to digital, everything is connected, and banks can take advantage of digital channels to provide a seamless customer experience.
Banks need to rethink the whole customer experience and customer journey while they’re building digital assets. This includes researching and understanding how competitors are utilising digital properties and validating the usability and functionality of the digital functions being useful and convenient for the older generation.
What will become of traditional banks once digital banks are in full operation?
[pullquote]… we don’t expect the traditional banks to be severely impacted, given that they will adapt and also because the digital banks will be facing a couple of challenges in Singapore. [/pullquote]
Once the licenses are awarded, we expect to see the first digital bank launch in about 12 months, which is sufficient time to prepare their core technology set up, and hires for back and front office, among others.
However, we don’t expect the traditional banks to be severely impacted, given that they will adapt and also because the digital banks will be facing a couple of challenges in Singapore.
Firstly, Singapore has a modern banking infrastructure where these traditional banks have the trust of customers, as they are serving its pool of customers well through its web and mobile banking platforms. Customers may not see the need to change banks, especially when what they have at the moment currently works for them.
Secondly, the Singapore population is small, and the business case of running a digital bank in Singapore, with having similar capital requirements as traditional banks, puts these digital banks in a disadvantaged position.
Additionally, the current rules also state that digital banks can not engage in “value-destructive” behaviour to gain market share advantages of the digital bank offerings, which means that the initial technological advantages of these digital banks can be easily replicated by the traditional banks here, as the local banks here are also quite advanced in their digitalisation roadmaps.
Banks must establish themselves with a robust compliance and governance structure, with distinct product offerings to win the hearts of the customers.
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