What To Expect From Singapore's Digital Banks?
So the race for Southeast Asia begins
MAS has just announced FOUR winners:
Digital Full Bank
Grab + Singtel
Greenland Financial Consortium
In my previous post on who might win, we also projected Bytedance and iFast's consortium to be winners - I'll stick to my guns and believe they may still be in the running for 5th.
Well done to those that have won! Now, what are some of their first moves?
I strongly believe the Fintech startups would need to re-strategize from the entry digital banks too - it's like the start-ups are now incumbents that would be facing the competition.
Once there were traditional banks that had inefficiencies FinTech companies could exploit to form markets of their own. Now, digital banks have the chance to start from a fresh slate, learning from what works of these FinTech companies and offering a whole, compelling banking experience. Let's take a look.
Apply directly from an app. In the case of WeChat, you can do that from WeChat Pay. Apparently it gives from 500-300,000 yuan, in less than 5 seconds. You get the money in less than a minute. Sounds crazy, but already possible.
Looking across borders, Cashalo from PH offers cash loans for consumers and linking up with an e-wallet. Say you used Lazada and have a Lazada Wallet, loan funds would be disbursed into your Lazada Wallet directly.
Use of the loan is controlled via the wallet of a platform (E-commerce, Superapp etc). One can only use this loan to purchase items or services from any of their partners. This can be beneficial for the digital banks with existing ecosystems, such as Grab, SEA and Ant.
For Singapore, we see some implementations of this by Grab, for selected vendors and partners.
Peer-to-peer (P2P) Consumer Lending
Could P2P lending be facilitated through digital banking infrastructure? If they have the licenses to do so, these could be another product offering in a wide suite of services.
In the US, LendingClub and Upstart, amongst others, offer personal loans financed via a P2P system. Digital banks can front a portion of the risk, while consumers take the rest and have a share in the returns. This also extends for SMEs, which are covered below.
Alternative Financing For SMEs
Alternative financing is a thing, as even though Fed interest rates are historically low, the interest charged by traditional banks are still too high given the economic conditions, and scrutiny on lending due to increased capital requirements of banks, which are likely to be more difficult to obtain.
The situation is that more SMEs are looking at unsecured loans just to get by. If you haven't read already, there is a sharp increase in the number of loan shark victims... But the Singapore Government has its own way to address the problem, by collaborating with local banks and providing financing to SMEs directly.
For Weiyedai by WeBank, it's only 15 minutes to receive funds, and with the possibility of it being unsecured. 1 second disbursements were even heard of!
Validus operates in Singapore, Indonesia, Vietnam and Thailand, offering business financing with P2P offerings as investments to the public. Products are in the form of mini-debt products that are usually unsecured for convenience of the SMEs.
This service smooths out SMEs' cashflow, though these are usually not touched by the traditional banks for relatively 'small' notional value. In the companies' model, the wider public is to assume the risk via P2P as a form of investment.
As an investor, be warned that the risk of loss is high given its investment nature for SMEs to use this route of 'fast-cash' is due to an urgent need (SME about to go bankrupt...). A company could be in that state for many reasons, but be aware that there are very real risks of losing money in these. On the flip side, it could be an interesting portfolio addition for some.
Digital banks could offer something similar, and with a higher capital base, can offer to take on a larger part of the risk on behalf of the investors instead. This would be an interesting space to watch.
MatchMove's bought a portion of MoolahSense, helping to ramp up its "Spend.Send.Lend" initiative and financing for SMEs. MatchMove has an interesting proposition, where it gives lending capabilities to many others.
Akin to Infrastructure-as-a-service (IaaS), digital banks can open up their APIs to provide the same service to help boost their organic growth. This strategy could work similar to tapping on the open-source community to maintain a code-base - in this context, a lot more independent lenders can help boost a digital bank's lending portfolio by finding customers and tapping on a rich infrastructure.
Why fight head-on with other banks, when smaller, independent banks can tap on your infrastructure and products to help grow your portfolio?
Yawn right? Well no, Tencent offered rates 16x higher than PBOC's one-year deposit rates! The fund was called LiCaiTong. And of course it was very popular.
Although this was short-lived, if an intense price war ensues, we can see quite favorable rates or products from the new entrants to attract fund flows in.
Buy Now, Pay Later
This trend has been catching on. There are even some start-ups specializing in this, but if payment companies or banks already offer this, there isn't much you can fight against. 0% installments are very, very hard to beat. Now add on extra perks by the banks for doing so, and you have a great bargain.
Banks usually dissuade this as this would not be counted in a cashback calculation. This barrier is not required from digital banks due to their already low cost of operations. The lesson to learn: Large margins give you extra leeway to do crazy things!
You may have heard of startups specializing in providing interest-free installment services based on where you buy them from. There is Hoolah, but they require a 30% upfront payment first (or rather, three payment periods of 33% each!).
PayLater by GrabPay works out-of-the-box, but only for partner merchants Grab is working with. Well, nothing stopping a digital bank when they can do similar API connections right? In fact, several banks already offer this, but this is subject to arrangements with the bank. For example, purchases with Harvey Norman via DBS/UOB.
One can expect more variations of these, also being provided by e-commerce platforms when you check out.
Invest With Spare Change
Finished your shopping? Your online wallet has some left over 'change'. Why not put that in our 5% interest bearing product? This already exists too. Alipay's Yu'e Bao, only needs a minimum of 16 cents (USD) to participate. You won't get that high of an interest rate as it was a promotion, and the assets under management has fallen significantly due to more regulation. Put your spare change to hard work!
Other than the crazy interest rates where you can just park your cash, having the concept of a 'wallet' instead of a deposit allows digital banks to have access to capital for higher returns on investment. Think of the traditional bank's spread lending from PBOC and then to their customers.
Now, extend that idea further, where they can get transaction fees and FX rate differences from retail customers using it to trade actively or passively from the wallets. Net-net, the money has not left the digital banks, if they own the products. (iFast, I'm looking at you). Think about it. They get to make money off your savings, and another time when they trade or invest. Woah.
Get Points For Trading
Following Rakuten's reward model, trading with Rakuten's trading platform gives you points back, which you can use in the rest of their ecosystem. Pretty cool if you could use it in Grab/Lazada or Shopee, or in Rakuten's case exchange points for your Bubble Tea binge.
But There's Some More Things...
It's not just digital banks in Singapore making waves. The competition is going to be global. Here come the FAANGs...
Apple partnered with Goldman Sachs (GS) to provide Apple Card. The Card is giving 2% daily cashback for any purchase with the iPhone or Apple watch when using Apple Card, and 3% if its specific items: an Apple product, App Store games, Music, or Apple TV, and some partners too.
It's them again, this time offering bank accounts with their partnership with Citibank. Launching in 2021, Google plans to add 11 new partner financial institutions as account providers. No fees, no minimum balances, and peer-to-peer payments for all your contacts, already synced with your Gmail.
Amazon and Goldman Sachs
GS is not just helping apple. Amazon's 3rd party sellers are getting help too. Providing a digital underwriting platform while Amazon provides the data is a synergistic move, and from a small scale, can have impactful reach in the near future. GS is also doing a Point-of-sale financing arrangement with JetBlue, an airline in the US.
As mentioned earlier, Banking-as-a-service are some areas the new digital banks in Singapore can diversify. Nothing stopping the competition from implementing their own globally!
How Would Incumbents Respond?
We may see a battle between traditional banks, FinTech start-ups and the newly minted digital banks.
Tech giants entering the fray threatens all companies old and new, as the unique value propositions of FinTech become more commonplace. In addition, consumers may lean towards choosing providers with more credentials i.e. FAANGs' branding and cash coffers.
A price war is likely to occur as the new entrants are all heavily funded, with lots of technological capability behind them, until a few cannot keep up. This is where we may see gaps in service quality (customer service, technology reliability, product performance, etc), and start to see leaders and laggards in the ecosystem.
A race to the bottom means newer, more attractive products for consumers and businesses while eating into the finances of each bank to win market share away from everyone else.