Digital banking licences pave way for transformation

The banking and financial services industry (BFSI) is headed towards a revolution. The Monetary Authority of Singapore (MAS) is due to issue digital banking licenses to up to five new players within the second half of 2020. These licenses will allow non-bank entities to offer banking products and solutions. The licensing process, halted temporarily due to the Covid-19 pandemic, resumed in full force in June with a decision imminent. Applicants for the licenses are big players with serious ambition, capital, and a wide customer base such as Sea, ByteDance and a consortium featuring Grab and Singtel.

The approval of these digital banking licenses in the near future is the latest signal in an industry primed for change. Coupled with global developments, such as the move to open banking, a more efficient and customer-centric banking experience is in the offing.

Over the last decade, many services that warranted a bank visit, such as money transfers and loan applications, have already moved online. For consumers, this has made banking significantly more convenient by cutting down on travel time and queues. In countries where petty crime remains a problem, the move to digital banking has also made the movement of large amounts of money safer. International banking and money transfer have also become much cheaper and faster due to the rise of digital services. When travelling, too, consumers no longer have to look for physical bank branches in foreign countries.

For banks, the growth in digital banking has pushed down physical infrastructure costs such as space rental for branches, ATMs etc. On the flip side, however, there is a need to beef up staff and technology to adequately support digital enquiries. Traditional banks must also ensure that new digital offerings do not cannibalise their existing services.

The entry of new players in the market, with the potential to offer newer, more attractive products and services, will create greater competition. More importantly, challenger banks will level the playing field and compel banks to push the envelope when it comes to innovation. Banking giants who do not innovate fast enough will need to give way to innovative, more nimble companies seeking to cater Asia’s growing millennial consumers or traditionally underserved segments such as SMEs.

In this new BFSI landscape, a varied set of challenges awaits. Legacy banks need to hasten their digital transformation and compete with companies that already have digital at the core of their services. For neobanks, the challenge lies in creating robust security and compliance processes, which traditional banks have been accustomed to for decades. These include regulations such as Know Your Customer (KYC) and the Basel III framework, for instance.

So, how can these different players prepare themselves for the future?

The digital journey ahead for traditional banks

Customers today have greater expectations and want more choices than ever. They demand fast access across devices, freedom from tedious forms and a personalised experience from their bank. In fact, customers consistently rank banks with personalisation capabilities as best in class.

To stay competitive, traditional players must be more aggressive in adopting technology as a pathway to better customer experience and optimise their digital strategy. Aside from the big banks, this also includes the smaller players in the ecosystem such as credit and remittance agencies, who will also come under threat with the launch of new licences. Using technologies such as data analytics, blockchain, and even AI, such players can automate credit decisioning, identity verification and a myriad of other tasks, reducing friction and enhancing efficiency.

Technology such as machine learning can help banks maximise their data to better target customers across age groups and net worth. DBS Bank, which launched a personalised financial planning solution in April 2020, is among the first to capitalise on technology’s capability to customise solutions for all their internet and mobile banking customers.

Other more exciting solutions are also on the horizon. Already available robo-advisory solutions for wealth management, for instance, use advanced technology to deliver a lowcost, easy-to-use investment solution for younger investors. Traditional banks, with their entrenched customer base and deep heritage in the markets they operate, have the right ingredients to capitalise on data intelligence to set themselves apart.

Optimising digital banks for compliance

Unlike traditional banks, many of the digital license hopefuls such as the Grab-Singtel consortium and Sea are already accustomed to building a frictionless online customer experience. The challenge for them now is to be cost-efficient while adhering to the strict data privacy requirements, security regulations and risk management frameworks that established banks work around every day. These players will also need to overhaul internal audit processes and review their cross-border compliance with central banks across the region, to avoid falling foul of the law. With no physical infrastructure, the audit processes will need special handling, as will anti-money laundering (AML) and KYC programmes.

There are several factors to be considered to build a high-performing, secure, and experience-focused design that is resistant to fraud. At the core of this is security, which should not be overlooked as more transactions move online. The cost of cybercrimes to the world economy will be in excess of $6 trillion annually by 2021, according to a report by Cybercrime Ventures. That means a robust security is key to a resilient banking system.

Next is managing the use of data adequately. Privacy concerns amongst users are significant, with 66% of online users in Singapore expressing concern about how companies use their data. Any organisation aspiring to serve digital consumers in Singapore must take proactive measures to ensure ongoing compliance and build trust amongst users.

Digital banks can look to solutions like Customer Identity and Access Management (CIAM) to manage and verify user identity and prevent unauthorised access to data. Service providers who have partnered up for the digital licenses, like Grab and Singtel for instance, can also leverage CIAM to manage customer identities across their business units such as transport, food delivery and telecommunications. CIAM can also help the two companies scale their banking offerings across multiple customer bases and integrate an ecosystem of partners.

Once players achieve this integration, customers can expect a seamless experience that allows them to pay their phone bills, withdraw money, and call for a cab all in one app, increasing customer retention and lifetime revenue. This also removes the hassle of signing up for multiple accounts and filling in disparate customer-onboarding forms, which inevitably leads to a poor customer experience.

A long fight awaits

We are in the early stages of the digital banking revolution and the space will be closely watched with bankers and regulators working hand in hand to keep digital services safe. On this cusp of change, those that have resisted going digital are now being forced to embrace a new mindset, while fresh doors have opened for non-bank players.

It is time traditional banks realise that they must put the customer experience and innovation at the heart of their digital transformation. At the same time, for non-bank, digital licence hopefuls, a tough fight awaits.

After all, securing the licence is just step one. What remains to be seen is how the winners stay competitive and dynamic, and who has the chops, business sense, and longevity to thrive in the digital future.