Thoughts on digital banks in Singapore

SILVIO STRUEBI

Partner, Head Banking APAC, Simon-Kucher Singapore

ALAN LIM

Senior Director, Simon-Kucher Singapore

STRUEBI, LIM

Thoughts on digital banks in Singapore

With the online-only banks now rolling out their operations in Singapore, are the local banks going to have to take notice and compete with them? New competition will favour product innovation and improve customer experience with banks. New competition will favour product innovation and improve customer experience with banks.

New players will drive healthy competition in the market. The development will stimulate banking innovation and everybody in Singapore will benefit from it. Incumbent banks have stepped up on their digitalisation efforts over the last few years. It will not be easy for new digital banks to carve out a space because Singapore is very mature banking market with a very high banking penetration overall (98%). It will be difficult for challenger banks to engage in head-to-head competition on basic products.

Strategies of digital banks may not primarily be to compete with incumbents, they are likely to serve different client segments and profitable niches

The purpose and positioning of the challenger banks are likely different compared to other markets with low banking penetration. Most banks that have acquired a digital banking license in SG are likely set-up to further support their growth through existing ecosystems or businesses with financial services products and embedded finance solutions (e.g., Grab, SEA, NTUC). The goal is to offer their existing customer base easy access to affordable banking services to drive higher ecosystem spent (e.g. providing funding to merchants) and reinforce existing closed-loop payment systems. There may be also another group of challenger banks that focus on profitable niches that banks are generally less willing to serve like sole-traders or Gig Economy (e.g. digital cross-border SME merchant business, insurance products).

Generally, based a recent Simon-Kucher study about Neobanking, it is imperative that challenger banks need to grow fast and be profitable within the first 5 years. Most challenger banks are spending high levels of cash investment especially on client acquisition (e.g. high interest rates or referral incentives). Client engagement and driving high product usage will be crucial in the long run to ensure profitable growth.

MAS have created favourable market conditions to stimulate a profitable digital banking growth

One key differentiator to other markets is the fact that the set-up is very different in Singapore. The development is regulatory driven where number of issued licenses is limited, hence competition amongst new players is naturally lower compared to the UK, US or LATAM. MAS’ eligibility criteria favour profitable growth as approved banks must showcase a clear path towards profitability within five years. Hence, we will less see a ruinous competition.

Are incumbent banks well positioned to take on the new challenge?

Incumbent banks have invested a lot in their digital capabilities and are well-prepared for the upcoming competition. Many banks like UOB, DBS or Standard Chartered Bank have launched so-called “digital speedboats” early in other markets to gain experience with digital-only banking, bringing back the key learnings to Singapore and Hong Kong. One aspect of their strategies is to develop new digital capabilities, test innovative concepts and to use digital channels to acquire customers for their branch channels.

Large banks clearly have built up their digital capabilities to compete with new players. In fact, most banks have transformed themselves very much like a tech firm, where they invest in new capabilities with smart analytics to better serve their clients. Midsized global retail banks often create new sub-brands (e.g. Mox, Trust Bank) to acquire new customers and pilot test new approaches. Furthermore, some of these banks focus building up as a Banking-asa-Service proposition and offer third party banks or other ecosystems like e-commerce platforms financial services capabilities (e.g. BukaTabungan, JV of Standard Chartered and Bukalapak). Smaller banks often integrate 3rd party solutions or focus on selective niches and special target groups.

Singapore banks are generally well positioned with national digitalised efforts. The SG government invested building up strong payment infrastructure both domestic payment networks (PayNow and crossborder payments networks like seamless payments to Thailand or Indonesia) at very low cost, achieving the “Asia Fintech Hub” agenda. Unlike other markets overseas, the infrastructure in SG is readily available and constant innovations have been provided. Hence, there may be less incentives for customers to switch banks.

In the digital world, holistic customer experience and customer ratings are extremely important. As an interesting observation, the rating for the SG banking mobile apps in the App stores are relatively high such as like DBS Paylah, UOB TMRW or Citi Mobile SG. This is a clear indicator that incumbent banks can compete with digital platforms with high customer satisfaction.

Generally, incumbent banks are well prepared. Nevertheless, digital banks have competitive advantages over incumbent banks like no legacy systems.