How might virtual banks change the banking landscape

  • By Benjamin Yeo

Banking in Singapore has been relatively commoditised and homogenous over the past decade, with little points of differentiation between the big local banks, but this could change with the emergence of virtual banks, according to RFi Asia client insights manager Benjamin Yeo. There could be lessons for Australia. 

Following the wave of challenger banks globally, Singapore is about to shake up its banking sector for the first time in decades as The Monetary Authority of Singapore (MAS) announced in June 2019 that it would be issuing 5 digital banking licenses in 2020. 

This initiative aims to boost the banking system in Singapore through incorporating innovative use of technology and increasing market diversity.

The current pandemic has set the stage for the new entrants as RFi data observes an increased reliance on digital platforms when performing financial tasks. 

The issuance of these virtual banking licenses would allow technology players and non-bank firms to disrupt the banking landscape in Singapore, challenging the traditional incumbents by solely offering digital banking services. 

RFi group has been studying the impact of challenger banks around the globe over a period of time where new providers have emerged, with the likes of Monzo in the UK, ING in Australia, Kakao Bank in Korea and the latest wave of virtual banks entering the Hong Kong banking space. 

Trust remains a major barrier to adoption

Banking in Singapore has been relatively commoditized and homogenous over the past decade, with little points of differentiation between the big local banks. 

There is therefore positive sentiment in the market around the entrance of the new players. The increased competition, especially among the technology players, has heightened expectations around monetary incentives and the interface of digital channels. 

Until virtual banks become the ‘new normal’, RFi expects demand for virtual banks to come mostly from products with low levels of commitment such as transactional deposit accounts, insurance (travel and motor) and cards. 

This is already reflected in Singapore’s adoption of unbundled fintechs which, according to the latest RFi data, have been taken up by 57 per cent of consumers.  

These simple solutions have made their way into the market despite low levels of comfort with fintech providers, currently sitting at 40 per cent.  

This counterintuitive finding demonstrates that the right propositions can overcome concerns for simple products from new market entrants. 

Consumers who have used fintechs cite ease of use, cost savings and time savings as the central tenets that motivate them to try fintechs.  

For more complex financial holdings, dealing with the issue of trust will be a major barrier impeding these virtual banks from gaining a significant foothold in the market.  

RFi data from June this year shows that consumers rate banks a 7.6/10 vs. 6.1/10 for fintech and new digital banks for trust to keep their money safe.

Opportunity for virtual banks to build experience and trust

Evidenced by the rise of Stashaway in Singapore, there is demand for online investments in Singapore.  

Successful returns can build trust in keeping money safe, as does MAS licensing.  

More than 70 per cent of consumers find smart automated investing and roboadvisory appealing.  

That percentage, and the level of appeal, rises amongst less investment savvy millennials. 

These younger consumers also tend to be sceptical of financial advisors from insurance providers/banks. 

This brings about the appeal of and opportunity for DIY investments from virtual banks. 

Coupled with the current low rate environment and security provided by MAS regulation, virtual banks have an opportunity to compete with the incumbents in the deposits and investments space, earning them a trust dividend with consumers to build upon into more complex financial relationships.

Changing expectations 

The introduction of virtual banks in Singapore is expected to increase the expectations of consumers when it comes to pricing and quality of digital platforms. 

Until the brand is established as a stable and credible player, trust will remain an issue faced by virtual banks and fintech players globally. 

Some technology players have chosen to set up with strong household names such as Singtel and EZ-Link, which would help to ease the doubts of consumers. 

While not an immediate threat to primary relationships, RFi expects virtual banks to start to chip away at the incumbent’s market share over time. 

Incumbents should identify and address key consumer pain-points so as to starve off the growing risk of attrition to the incoming digital banks. 

For starters, quality of digital service touch points and the addition of the ‘human touch’ will be advantageous lines of defence.