Singapore’s financial regulator, The Monetary Authority of Singapore, recently announced plans to grant up to five digital bank licenses. Applications which are open to non-bank participants will commence next month.
As many as three licenses will be digital wholesale bank licenses allowing vendors to provide small and medium enterprises (SMEs) and other non-retail segments with banking services.
While up to two of the licenses will be digital full bank licenses that will allow licensees to provide a wide range of financial services and take deposits from retail customers.
The Asset met with one potential aspirant Vikas Nahata, co-founder and executive chairman of Validus Capital. His firm is currently Singapore’s largest peer-to-business lending platform. It was founded in 2015 and is backed by Dutch development bank FMO, as well as Temasek Holdings’ Vertex Ventures.
Earlier this year the digital business lender launched in Indonesia through its domestic business entity Batumbu, marking Validus’ first Southeast Asian expansion outside of Singapore.
Nahata is enthused by the prospect of entering the Singaporean banking market. He sees an opportunity for the banking newcomers to fundamentally redesign the way banks work.
Much of the traditional banking practices are becoming obsolete, not least the bricks and mortar branch network. That model typically required prominently located retail outlets creating a real estate obligation for the institutions. This is something digital or virtual banks will not be burdened with.
While the contenders for the new licenses will be built on and operated with cutting-edge technology, for Nahata, the customer is key.
Paraphrasing the late Steve Jobs, founder and chairman of Apple, the Validus Capital executive emphasised his firm’s approach will be to start with the customer experience and work backwards to the technology.
He empathizes with the incumbent banks in Singapore whose respective leaders have expressed their views on the issuance of new licenses and level playing fields.
DBS Bank CEO Piyush Gupta recently told the media he would only see a problem in Singapore if virtual banks are allowed to operate on more lenient terms than the incumbents, for example in terms of the capital they are required to hold. "The real challenge is if the regulators create an unlevel playing field, and let the new bank licensees come in and do banking on different terms," Gupta said.
Vikas Nahata agrees with the response. “It's prudent to have the numbers, the percentages, the ratios, everything similar, this is not an issue for a digital bank,” Nahata says. “I think it will be the business approach that will differentiate digital banks from the incumbents,” he adds.
The new digital players are also finding no difficulty in attracting senior bankers to their businesses. According to Nahata, his firm’s employees are made up of approximately 40% seasoned experienced bankers who have substantial SME experience.
Many of them migrated to the digital lender due to constraints on fulfilling their potential for business in a dated banking environment.
Where traditional risk modelling scenarios might reject loan requests because they don’t fit the conventional parameters or lack collateral, Nahata and his team innovated solutions.
Utilizing big data and algorithms calibrated to meet specific SME requirements, his bankers have found more space to work with clients by introducing unique services such as predictive lending. And the demand is by no means a niche.
“The unmet need in Singapore for SME financing is close to S$19-S$20 billion (US$14-US$14.74 billion),” says Nahata.
But could the introduction of a number of new banks mean pressure on earnings for the incumbents and a race to the bottom on fees and charges?
Nahata believes not and points to the guidelines the regulator published.
“They said we don't want something that is cannibalizing or using venture capital money to undercut the market and indicate a kind of losing proposition for everybody,” he says.
On the Singapore regulators’ timing coming in the wake of Hong Kong issuing a number of digital/virtual bank licenses, Vikas Nahata believes the timing is appropriate.
“Subsidies for SMEs are great, and they are important, but we cannot have countries where the SMEs have to be on crutches all the time,” Nahata says.
“You have to make them self-sustaining and one of the things they need is a whole digital transformation,” he adds.