Fri, Sep 25, 2020 – 2:51 PM
THE addressable loan market for Singapore's upcoming digital banks is estimated to be worth S$220 to S$243 billion, with these digital-only entities likely to catalyse loan growth in underserved segments, according to DBS Group Research.
But even with such market potential, DBS analyst Lim Rui Wen reckoned that, over the medium term, open banking developments may be a bigger disruption force to traditional banks than the entry of digital banks.
As the Monetary Authority of Singapore (MAS) spearheads efforts to make open APIs (application programming interface) available – and facilitates data portability in the interim – open banking may enable consumers to aggregate their banking, insurance and investment information across banks and financial institutions on a single platform.
This may allow for easier comparability and a higher level of competitiveness in the banking industry, said Ms Lim in a report on Thursday night.
She noted that the new digital banks are likely to require more effort to acquire and develop meaningful customer stickiness to turn a profit, given that a large part of the population and businesses in Singapore are relatively well-banked. With only 3.2 million of the population aged 20 and above, the total addressable retail customer population remains small.
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MAS had also in 2019 reduced the limit on unsecured credit facilities to 12 months' income to lower outstanding consumer debt here.
The incumbents have not been sitting still in the face of fresh competition. Singapore banks have embarked on an extensive digital transformation journey in the last decade, and are likely to continue working on delivering value propositions to match those that digital banks can offer.
"We do not expect main bank accounts to be switched away from incumbents just yet," said Ms Lim.
While it is possible for new digital banks to gain a small market share of 1-5 per cent of the unsecured retail and SME (small and medium-sized enterprise) loan market in the initial years, this may not translate into immediate profitability. This comes as digital banks may initially embark on tactical promotions featuring higher fixed deposit rates to attract customers.
Though they will eventually be able to turn profitable after stomaching initial losses, operating leverage may not be as high in Singapore due to a smaller population.
As such, a platform-based lending model, which is capital-light, is likely to see higher profitability than a traditional lending model, said Ms Lim.
Under this model, the digital bank acts as a platform to connect customers to various financial providers, and earns commissions on such transactions.
For example, China's Ant Group's take rate on its lending platform is estimated at 2.5 per cent. The funds are from other financial institutions; Ant Group merely serves as a lending platform with a credit scoring system based on alternative data analytics and an internal credit score.
"We believe that a platform-based model is likely to deliver higher profitability and is much more scalable, requiring less capital and operational expenses, compared to a traditional deposit-taking and lending banking business model," said Ms Lim.
That said, the viability of this banking model also depends on the willingness of other banks and financial institutions to partner the new digital bank to provide capital for its lending business.
Incumbents may believe they are better off leveraging on their traditional lending capability, as well as their credit cards and unsecured loans businesses, rather than a new digital bank, said Ms Lim.
"We believe that an evolved business model is likely to see the new digital bank concurrently offering traditional banking services as well."
Amid stiff competition, digital banks can still bring strategic value to Singapore's banking scene by leveraging on the aRead More – Source