11 July 2019

Monetary Authority Of Singapore to Issue Digital Bank Licenses

BY :Yong Kaichang

Introduction[1] 

The Monetary Authority of Singapore (MAS) recently announced that it will issue up to five new digital bank licenses[2] . This is in addition to any digital banks that the Singapore banking groups may also establish under the existing internet banking framework introduced in 2000. This move extends digital bank licences to non-bank players.

A digital bank is the full digitization and online provision of all traditional banking activities and functions that historically were only available to customers in a physical bank branch location. It involves the full, end-to-end automation of all banking processes that go beyond online or mobile banking, providing customers with greater convenience and time and cost savings.

The five new digital bank licenses will comprise:

(a) up to two digital full bank licences, which allow licensees to provide a wide range of financial services and take deposits from retail customers; and 

(b) up to three digital wholesale bank licences, which allow licensees to serve small and medium-sized enterprises (SMEs) and other non-retail segments.

Summary of digital full bank framework 

 Eligibility (headquarter and control)

 Open to companies headquartered in Singapore and controlled by Singaporeans. MAS will presume there is control if the Singaporean and/or his related parties hold the largest shareholding and have management control over the joint venture.
Foreign companies are eligible if they form a joint venture with a local company and the joint venture meets the headquarter and control requirement.

 Eligibility (business)

 The applicant or its parent group must:

• have a track record in operating an existing business in their respective technology or e-commerce fields (MAS will not consider applicants with no existing businesses);

• provide clear proposition on how it can serve existing unmet and underserved needs; and

• demonstrate that it has a sustainable digital banking business model (MAS will not allow any bank to engage in value-destructive competition to gain market share, and will assess the reasonableness of the applicant’s business plans and financial projections).

 Safeguards

 A digital full bank will be required to:

• incorporate in Singapore (this will enhance MAS’ regulatory and supervisory oversight and, in the event of failure, offer better protection to depositors by enhancing the resolvability of the bank);

• participate in the deposit insurance scheme provided by the Singapore Deposit Insurance Corporation (this will protect deposits of up to S$75,000 per depositor in the event of the bank’s failure);

• comply with the same suite of prudential rules as incumbent banks, including ongoing risk-based capital and liquidity requirements; and

• submit a viable exit plan to facilitate an orderly wind-up if necessary.

 Phasing-in

 To minimize risks to retail depositors, MAS will phase in the permissible activities of the digital bank via a two-stage process:

• First stage: Restricted Digital Full Bank (Restricted DFB)

At the point of entry, the digital bank will commence as a Restricted DFB and will be subject to the following restrictions during its initial one to two years:

o Deposit caps: Aggregate deposits will be capped at S$50 million and individual’s deposits will be capped at S$75,000. In addition, it can only accept deposits from a small group of persons such as business partners, staff and related parties.

o Business restrictions: It can only offer simple credit and investment products, and will not be allowed to offer complex investment products. It will also not be able to engage in investment banking activities. It should not establish banking operations in more than two overseas markets.

o Lower minimum paid-up capital: S$15 million at entry point.

Once the digital bank has demonstrated ability to manage its risks well, the business and deposit restrictions will be relaxed and minimum paid-up capital will be raised in proportion to its risk profile as assessed by MAS and how it is delivering on its value propositions.

• Second stage: Digital Full Bank 

o The Restricted DFB will graduate to become a full functioning digital bank with all deposit caps lifted, once it has met all relevant milestones and has been assessed to pose no significant supervisory concerns. At this time, it will need to meet the minimum paid-up capital requirement of S$1.5 billion.

o In assessing the digital bank’s readiness to graduate to become a full functioning digital bank, MAS will consider factors such as its business and financial performance, quality of loans, products and customer service, ability to serve needs of identified segments, risk management and compliance track record, and if the business is generally well-managed and profitable.

o MAS will not prescribe a time period within which the Restricted DFB must graduate to Digital Full Bank. Nonetheless, the Restricted DFB must have a viable plan to meet the requirements to become a Digital Full Bank.  


 Business restrictions

 

• 1 physical place of business only.

• No minimum account balance and fall below fees.

• Compliance with unsecured credit rules

• Allowed to offer cashback services through electronic funds transfer at point of sale (EFTPOS) terminals at retail merchants, but no access to automated teller machines (ATMs) or cash deposit machines (CDMs) network.

Summary of digital wholesale bank framework

Eligibility (headquarter and control)

 

Open to both Singapore and foreign companies.

 Eligibility (business)

 Similar to those of a digital full bank applicant.  

 

Safeguards

 

A digital wholesale bank will have to be locally incorporated. A viable exit plan must be provided during the application stage.
Other key requirements:

• Minimum paid-up capital: S$100 million.

• Deposit restrictions: It will not be able to take Singapore dollar deposits from individuals, except for fixed deposits of at least S$250,000. It is however free to open and maintain business deposit accounts for SMEs and corporates.

• Capital and liquidity rules: Same as existing wholesale banks.


 

Phasing-in

 No phase-in requirements as per digital full banks, but MAS will impose appropriate activity restrictions in its initial years of operations to mitigate the risks of untested business models.[3]

 Business restrictions

•1 physical place of business. 

• To only conduct activities within the proposed business scope.


Timeline

MAS expects to invite applications in August 2019, and will provide more details on the eligibility and admission criteria at that time.

The next step in the liberalization of Singapore’s banking sector

Singapore’s latest move to issue digital banking licenses is the next step in the liberalization of its banking sector in the era of the global digital revolution in finance.  

In contrast with its nearest counterpart Hong Kong, Singapore is taking a more gradual, progressive and calibrated approach. To date, Hong Kong has granted eight virtual bank licenses[4] , the counterparts to digital bank licenses to be issued in Singapore. The requirements for Hong Kong virtual banks and Singapore digital banks share many similarities, such as the requirements to be locally incorporated, to have a credible and viable business plan, and to provide an exit plan in case the business is unsuccessful. However, certain key differences exist. For example, Hong Kong has no foreign ownership restrictions for its virtual banks, whereas Singapore requires its digital full banks to be controlled by Singaporeans. Also, Hong Kong does not draw a distinction between digital full banks and digital wholesale banks, and does not have fixed phase-in requirements for its virtual banks. [5]   

Singapore’s new digital bank license scheme is primed to be particularly attractive to non-bank/non-financial institution players, who were previously inhibited from investing in the banking sector due to high infrastructure, maintenance and overhead costs. Non-bank/non-financial institution players may see this as an opportunity to diversify and/or to create new synergies with their existing business portfolios.    

The scheme is also expected to be particularly appealing to foreign investors, particularly from China. Chinese outbound investment activity in South East Asia has increased significantly as a result of the Belt & Road Initiative, particularly in recent months as a hedge against fallout from the ongoing US-China trade war. Consequently, new opportunities have emerged to serve the banking and financial needs of the new wave of Chinese investors in South East Asia. Singapore is a global financial hub situated in South East Asia.This scheme can help Chinese investors expand and diversify their business presence in Singapore, introduce advanced digital banking features and technologies used in China into the Singapore market, and provide a springboard for their further business expansion into neighboring countries in South East Asia.     


 

[1]This article is a general introduction to the subject matter in question and should not be construed as legal advice. If you have any specific or further questions, please feel free to contact us to discuss. 

[2]For more information, see: (a) MAS’ media release “MAS to issue up to five digital bank licenses” dated 28 June 2019 (https://www.mas.gov.sg/news/media-releases/2019/mas-to-issue-up-to-five-digital-bank-licences); (b) Annex A - Digital Full Bank Framework (https://www.mas.gov.sg/-/media/Annex-A-Digital-Full-Bank-Framework.pdf); (c) Annex B - Digital Wholesale Bank Framework (https://www.mas.gov.sg/-/media/Annex-B-Digital-Wholesale-Bank-Framework.pdf); and (d) Annex C - Liberalisation of Singapore’s banking sector in last 20 years (https://www.mas.gov.sg/-/media/Annex-C-Liberalisation-of-Singapores-Banking-Sector-in-last-20-years.pdf).

[3] See Reply to Parliamentary Question on terms of operations for virtual banks published on the MAS website on 8 July 2019(https://www.mas.gov.sg/news/parliamentary-replies/2019/reply-to-parliamentary-question-on-terms-of-operations-for-virtual-banks).


[4] See Hong Kong Monetary Authority’s (HKMA) press release dated 9 May 2019 (https://www.hkma.gov.hk/eng/key-information/press-releases/2019/20190509-3.shtml). 


[5] For more information, see HKMA’s revised Guideline on Authorisation of Virtual Banks dated 30 May 2018 (https://www.hkma.gov.hk/media/eng/doc/key-information/press-release/2018/20180530e3a2.pdf). 


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