Fully-digital banks will launch in S'pore soon. Here are their potential risks & benefits.

MS Explains: Digital banks should make banking cheaper and more innovative, though risks remain.

Nigel Chua | December 10, 2020, 08:22 PM

Imagine this: You've had a great meal. You pay for it contactlessly, through your smart watch. You've paid on credit, and when the bill arrives and you make payment, it's done with a few quick taps on your smartphone, without a single sheet of paper needing to be printed.

That's what the future looks like — for now at least — with Singapore's new digital banks in the picture. The Monetary Authority of Singapore (MAS) has awarded four licenses so far, and more may follow in future.

Hold on, you might be asking. That doesn't seem too different from what we have now, in 2020.

So what's the big deal with digital banks, and what benefits might they bring, and what risks should we watch out for?

We try to answer these questions.

What is a digital bank?

Existing banks in Singapore do already have comprehensive digital services, and many of its younger (or more tech-savvy) customers already do most of their banking online.

But one of the requirements for these new digital banks provides includes a restriction that they are only allowed to operate one physical place of business.

As opposed to traditional banks, which have digital services which complement their physical banking locations such as bank branches and ATMs, digital banks will run the vast majority of their operations online.

Customer service, as well as depositing and accessing cash, will all take place online. Yes, digital banks won't even have ATMs. Which means that their customers will not be dealing with any physical currency when it comes to transactions with such banks.

It's also entirely possible that a digital bank will opt to let its customers transact without physical credit cards.

Benefits for consumers

These restrictions might make it sound like digital banks are just conventional banks, except that they are more limited in their offerings.

But digital banks could also roll out new, innovative products and services.

They are also likely to put a different spin on many of the existing banks' offerings (like deposit accounts and loans), by making them cheaper, more convenient, or catered to specific niche groups.

Here's what digital banks' potential customers can potentially enjoy in the future.

1. Cheaper banking

Digital banks are restricted to one place of business. Which means that they are (mostly) free from things like rent, facilities management, physical security, and so on.

Banks that provide physical services spend a fair bit on physical infrastructure like bank branches, ATMs, paying for security officers to escort money to and from ATMs, and so on.

These are part of the banks' cost of business, and would be factored in, in some way, in its consumer offerings.

Digital banks, which will not have such physical infrastructure, can pass on the savings to the consumers in terms of offering higher interest for deposit accounts, lower interest on loans, lower fees for services, and so on.

But how the digital banks choose pass on the cost savings to its customers is up to them.

How much of the costs savings are passed on is also up to them, though they will probably need to offer products that are similar to, if not better than those offered by existing players, in order to stay competitive.

On that note, the introduction of digital banks also increases competition in the banking sector, and will likely put pressure on established banks to continue to improve their offerings to keep customers from switching over to the new players.

The increased competition that digital banks bring to the sector could thus bring benefits to all end-users of banking services, even those who do not take up any of their offerings — for example, by ensuring that no one bank or group of banks is able to exert monopoly power over a certain type of offering.

2. Greater convenience

Since a digital bank runs almost entirely online, customers will not be required to turn up at a physical bank branch — there won't be any physical branches, either way.

But this may not be a huge benefit for most, given that the transactions that can only be done at physical bank branches and ATM machines are mostly those involving physical cash or cheques.

Thanks to digital transformation by existing banks, even services like opening a new account or applying for a credit card can be done entirely online, with authentication via SingPass.

In other words, banking has already become much more convenient over the years.

But digital banks, like the one to be set up by the Grab-Singtel consortium, also promise "transparent and convenient financial services embedded in [...] everyday activities".

It's not difficult to imagine how Grab, already a big part of Singaporeans' lives, particularly through its ride-hailing and food delivery services, can further simplify banking and bring convenience to customers.

Its in-app digital wallet, which currently requires regular top-ups from users, could be linked directly to a deposit account.

3. Access to credit

Aside from maintaining deposit accounts, extending credit in the form of loans or through credit cards — to individual consumers and to companies — is another significant part of banks' business.

Digital banks are likely to allow consumers who are "underbanked" to access such credit.

These consumers do not have "full access" to traditional financial services such as credit cards or long-term savings products, according to a 2019 report by Bain & Co., Google, and Temasek, which also says that 38 per cent of Singapore's population falls into that category, while another two per cent are unbanked.

The Grab-Singtel consortium said in a statement that it would focus on "consumers and small businesses, starting with time-starved young PMETs, gig workers with flexible incomes, and micro-SMEs who face limited access to financing".

Again, it is not difficult to imagine how their digital bank would tap on Grab's existing pool of gig workers, including its private-hire drivers and delivery riders, offering them access to credit that they might not get under traditional bank rules, given that their income tends to be less regular.

Creditworthiness assessment

At least one forum letter writer had his credit cards revoked by his banks, as he is between jobs in the current Covid-19 pandemic.

This could have been part of the bank's assessment of its customers' creditworthiness, a process where a bank decides whether or not a customer is worth lending to (based on how likely it thinks the customer is to eventually repay the debt).

Even if the letter writer has been able to pay his bills although he is not currently employed, his bank might still think that he is someone with a high risk of defaulting on his credit card payment, even though his track record might suggest otherwise.

And the letter writer is likely not alone in his predicament, with unemployment in Singapore reaching its highest point in the last 10 years in June.

A digital bank might have a different way of assessing creditworthiness, using artificial intelligence (AI) to crunch more data and get a more comprehensive view of the customer's situation. It might come to the conclusion that the letter-writer is indeed likely to still pay his credit card bills, even without regular income from a job.

These more comprehensive creditworthiness assessments — if used — could ensure that this group of customers continues to have credit cards and their associated perks (like cashback on groceries and daily needs), while keeping the bank's risk manageable.

An existing bank could also tap on the same AI and technology, but a report by Deloitte's Asia Pacific Centre for Regulatory Strategy points out that digital banks may have an edge in terms of the data they are able to collect and access — such as your profile, your web surfing behaviour, and online shopping history — from their shareholders and partners (though this would need to be done in compliance with prevailing privacy laws such as the Personal Data Protection Act, of course).

Sea, one of the two entities to receive a digital full bank license, is more likely than not to use data from its existing platforms, which include e-commerce platform Shopee and gaming platform Garena.

The company said in a press release that it would "draw on insights about the needs of [...] users from across Sea’s digital ecosystem".

A digital bank, with access to more data, might also have more success in identifying the customers that are likely to end up bankrupt, who will end up defaulting on their payments. The bank can then reject their credit card applications, deny them loans, and so on.

This in turn brings costs down for the bank as it would reduce the amount that it stands to lose with customers defaulting on loans or credit repayment.

The two digital banks set to be launched by the Grab-Singtel consortium and Sea are digital full banks (DFBs) that have MAS approval to serve retail and non-retail customers, and allow them to open deposit accounts.

There are also digital wholesale banks (DWBs) which will mainly serve "non-retail segments" of the banking market such as SMEs.

Wait, what's the catch?

Digital banks will bring about benefits, but they are not without their own risks, and will therefore be subject to stringent government regulations.

They could also face limits in how much they are able to do here.


Compared to conventional banks, digital banks will be a lot more difficult to rob — at least in a physical sense — since they will only have one place of business that will likely comprise of a whole bunch of computer equipment, servers, and so on.

But they will still be prone to getting hacked.

With all of their transactions happening online and through mobile devices and apps, digital banks will also need to take precautions against phishing, cyber-attacks, and data leaks.


One question that might be on your mind is: "Is my money safe with a digital bank?"

Digital banks are also required to meet regulatory standards imposed by MAS.

For digital full banks, this would include requirements relating to technology risks, money-laundering and terrorism financing risks, among others.

Additionally, MAS is stipulating an "entry phase" of one to two years for digital full banks where each individual customer's deposits will be capped at S$75,000, and the banks' aggregate deposits will be capped at S$50 million, among other restrictions.

The S$75,000 here is not an arbitrary number. Under the Deposit Insurance Scheme, up to S$75,000 by the Singapore Deposit Insurance Corporation Limited (SDIC). Meaning SDIC will pay customers the insured amounts if their bank or finance company fails.

Digital bank applicants also have to submit a "feasible exit plan" to MAS laying out possible scenarios, various exit strategies and solutions, as well as clear trigger points which will execute the plan in the event that the business has to be wound up.

This plan will facilitate an orderly wind-up of its banking business and ensure adequate protection for its customers.

Risks and regulatory matters should not be overstated, however. The Deloitte report points out that digital banks are "less encumbered by legacy systems and processes" and can build their systems according to cybersecurity demands and regulatory requirements from the ground up.


There are also limits on how much digital banks will be able to expand their operations here.

If you like the feeling of being served by an actual physical human being once in a while, then digital banks may not cut it for you.

Also, digital banking might also not be for those who are less technologically-literate, as the banks will not have fall-back physical options.

For example, a digital bank customer will likely not be able to seek help from a human at a help desk, or on the phone. Also, those who are less tech-savvy could be more susceptible to scams.

Furthermore, the current prevalence of digital services and products offered by existing players is likely to continue expanding.

Whether digital banks' offerings will be able to win over customers from 2022 onwards, when they are expected to launch, remains to be seen.

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Top image from photos by @eduschadesoares on Unsplash and by Nigel Chua