SINGAPORE will issue up to five new licences to digital banks and begin taking applications from August, in one of the biggest liberalisation steps taken by the city-state in years.

The maximum of five new digital-bank licences to be issued in time will comprise up to two digital full-bank licences, and up to three digital wholesale bank licences. They must all meet the same capital requirements as local banks. This is in addition to any digital banks that the local banking groups may also establish.

This was announced on Friday night by senior minister and the chairman of the Monetary Authority of Singapore (MAS) Tharman Shanmugaratnam at the annual Association of Banks in Singapore (ABS) dinner.

“The new digital bank licences mark the next chapter in Singapore’s banking liberalisation journey,” said Mr Tharman.

The digital full-bank licence will allow licensees to provide a wide range of financial services and take deposits from retail customers. A digital wholesale bank licence will allow licensees to serve SMEs and other non-retail segments.

The aim, The Business Times (BT) understands, is to tackle the segments that may be underserved, such as small businesses. This is done without compromising the anchoring position of the local banks, which hold a significant market share collectively, to prevent systemic risk.

BT also understands there have been informal talks with potential applicants – from both Singapore and overseas – that are keen to tap this new licensing framework.

Application for the digital full-bank licences is open to companies headquartered and controlled by Singaporeans. Foreign companies can apply for these full-bank licences if they form a joint venture with a Singapore company. Applicants must have a track record in operating an existing business, or in technology and e-commerce fields. They must also show clearly how they can tackle unmet needs, and show it has a sustainable digital banking business model. Any competition deemed to be “value-destructive” will not qualify.

At the first stage, the digital non-wholesale bank – that is, the digital full bank – will operate as a restricted bank.

This restricted digital full bank will have an initial paid-up capital of S$15 million. Aggregate deposits will be capped at S$50 million and an individual’s deposits will be capped at S$75,000. To add, the bank can only accept deposits from a small group of persons such as business partners, staff and related parties. With that, it will have to participate in the deposit insurance scheme, which protects deposits of up to S$75,000 per depositor in the event of the bank’s failure.

Such a digital bank – at its restricted stage – can only offer simple credit and investment products. It cannot offer complex investment products such as structured notes, and cannot engage in proprietary trading. It will also be restricted in banking operations in no more than two overseas markets, and must be incorporated in Singapore. Its liquidity requirement will stand at 16 per cent of minimum liquid assets.

Once MAS deems that the restricted digital full bank performs to show, among other things, good quality of loans, and a well-managed business, the restricted digital full bank will be graduated to a full functioning digital bank by the regulator. No timeline has been set by MAS on this front. But at that point, a graduated bank will need to meet the minimum paid-up capital requirement of S$1.5 billion, and face the same liquidity requirements as local banks, which means a 100 per cent in net stable funding ratio, and 100 per cent in liquidity coverage ratio.

The application for up to three digital wholesale bank licences for SMEs and other non-retail segments is open to all companies – both Singapore and foreign ones. For such applicants, the minimum paid-up capital is S$100 million. They cannot take Sing-dollar deposits from individuals, except for fixed deposits of at least S$250,000. But they can open and maintain business deposit accounts for SMEs and corporates.

This comes as Hong Kong in March opened its doors to virtual banks, with some arguing that it is playing catch-up to the digital banking trend.

Singapore – a heavily banked country – has already seen several of the traditional banks here investing heavily in digital capabilities in recent times. The local banks are also fairly well-entrenched, with Singapore’s top three banks estimated to hold a combined market share of just over 50 per cent. The market will watch if virtual banks – with their nimbleness but a much smaller asset base – will be able to wrest market share from the big guns here.

Hong Kong has already issued eight licences, with the most recent batch of four licences given out to entities linked to China’s top technology companies including Ping An, Ant Financial and Tencent. The earlier batch of licences went to applicants that are joint ventures between traditional banks and non-bank entrants. These virtual banks in Hong Kong are roughly expected to begin operations in six to nine months.

The article was contributed by The Business Times.

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