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Singapore virtual banks to service Asia's unbanked millions

Low-cost digital players offer loans to region's small and medium companies

People walk past office buildings at the central business district in Singapore. The city-state is opening the way for five new digital banks.   © Reuters

SINGAPORE -- Low-cost digital banks in Singapore are set to capture up to 2% of the country's domestic banking sector worth about $24.3 billion, according to an estimate by Moody's Investors Service.

Not required to open physical branches, the new breed of virtual banks are also expected to shake up the market for unsecured loans, and use Singapore as a platform to target Southeast Asia's small- and medium-sized enterprises as well as the region's 250 million unbanked adults.

"The commercial banks in Singapore are not as active in the unsecured space," said Simon Chen, a bank analyst at Moody's Investors Service in Singapore. "It's a small proportion of the banks' loan portfolio."

While initial government restrictions will prevent digital banks from growing their market share too quickly, Chen said "those restrictions will be subsequently lifted depending on how fast each of the new banks meet all of the requirements set forth by" the Monetary Authority of Singapore, the city-state's central bank.

The authority said last month that it would issue up to five new digital banking licenses, opening the sector to newcomers such as local ride-hailing giant Grab, with at least two fintech startups officially declaring that they will apply for a license.

The government is hoping digital banks will be able to offer their services much more cheaply to those retail and small business customers who have until now not been served by traditional financial institutions, which are also likely to face stiff competition from other disruptors such as Facebook's recently announced digital currency Libra.

While the new digital licenses are only for the Singapore market, they are expected to open doors across Southeast Asia, where, according to the Word Bank's 2017 Global Findex database, only 48% of Indonesians aged 15 years or older had a bank account, with 32% in the Philippines, and only 30% in Vietnam.

A 2016 report by the McKinsey Global Institute estimated that of the 39 million SMEs operating across Southeast Asia, just over half were either not being catered to by credit services or were being underserved.

"The banks in Singapore are very good when it comes to providing basic services," said Prajit Nanu, CEO of InstaRem, a Singapore-based money transfer platform that will apply for a digital banking license, who sees huge potential in SME lending.

"But if somebody in SMEs wants to do business outside of Singapore or if somebody wants a bespoke and customized product, that is where the banks struggle a lot," Nanu told the Nikkei Asian Review.

Currently operating in eight markets including the U.S., the European Union and Malaysia, Nanu said that obtaining a Singapore banking license and being able to build a range of financial products to SMEs there would give the company a platform to expand across Southeast Asia.

"We look at Singapore as 'a proof of concept market'," Nanu said. "Once we have built up the products then we will replicate the product in multiple ASEAN (Association of Southeast Asian Nations) markets."

Another Singapore-based fintech that will apply for a banking license is peer-to-peer lending platform Validus Capital, which currently connects SMEs with lenders and has facilitated around 5,000 loans since 2015.

With about $20 billion Singapore dollars ($14.7 billion) a year in "unmet financing needs" in Singapore alone, Executive Chairman Vikas Nahata said his company would be able to offer services including foreign exchange and deposits as "a one-stop shop" on a mobile phone.

Validus entered Indonesia in April, its first overseas market, and is also looking to expand further into new markets in Southeast Asia, including Thailand and Vietnam.

Other companies in the running for a digital banking license include ride-haler Grab, which already offers a range of e-payment services, and gaming hardware manufacturer Razer, which is also involved in online payments.

"We will study the digibank licensing requirements closely, and are keeping an open mind as we assess how best to pursue this," said Reuben Lai, head of Grab Financial Group.

Allowing nonbanks to become virtual banks is not a new concept globally, with Tencent Holdings' WeBank and Alibaba Group Holding's MyBank attracting millions of users since China started granting digital licenses in 2015.

In South Korea, messaging app Kakao has entered the banking business, and earlier this year, Hong Kong issued eight virtual bank licenses to companies including Alibaba's Ant Financial and travel booking site Ctrip.

Following Singapore's move, Malaysia's central bank is also creating a new regulatory framework that will allow nonbanks to become banks. More than 10 companies have already expressed interest there, Bank Negara Malaysia financial development and innovation department director Suhaimi Ali told The Star newspaper last month.

As fintech startups look to partner with non-banking companies in their pursuit of a digital license in Singapore, the granting of virtual banking licenses will also drive competition with traditional banks, who are also trying to reach out to the unbanked population through partnerships with regional startups.

Singapore's DBS Group Holdings formed a regional strategic partnership with Indonesian ride-hailing giant Go-Jek last November, while United Overseas Bank has formed a partnership with Grab.

"We believe the greater competition will boost financial innovation and encourage a more vibrant banking industry, which is likely to benefit consumers," DBS said in a recent note to investors.

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