Banking on digital: tapping the unmet needs of SMEs, millennials, and the gig economy

SINGAPORE officially opened its doors to digital banking applicants from non-banking backgrounds, and there is certainly fervent interest. Even with the regulator limiting applications to two licences for a digital full bank, and three licences for a digital wholesale bank, new entrants are toying with ideas of joining hands with other non-banking players, and traditional lenders. Names that have shown interest include Grab, Razer, Singtel, and peer-to-peer lender Validus Capital. Other names bandied about include property firms and utilities providers.

By the end of this year, the Monetary Authority of Singapore (MAS) will round up all the applications, and by the middle of next year, award the licences. The new digital banks are then expected to start their operations by the middle of 2021.

With about a dozen new players flirting with the banking industry, questions are being asked on how digital banking aspirants should pursue the handful of licences available.

Singapore's approach has been focused on tapping unmet needs. In first announcing that Singapore will admit digital banks, Senior Minister and MAS chairman Tharman Shanmugaratnam in June took pains to discuss the "dual objectives" behind the move. In introducing competition, Singapore regulators also want to ensure that the Singapore banks - which collectively hold a market share of more than 50 per cent here - remain as "strong local anchors".

"We must allow for greater competition and spur greater innovation in finance - competition between new and traditional business models, new players and incumbents, and different ways of using technology to serve business and individual customers better. We must also retain strong local anchors and trust in the banking system. These dual objectives have guided our past liberalisation initiatives, and motivate our next moves," Mr Tharman told the crowd at the annual The Association of Banks in Singapore dinner.

"It is worth reminding ourselves of our real purposes in finance. Innovation in finance is not an end in itself. And competition in finance has to be more than a zero-sum game - it has sometimes looked like that, as trading desks compete against each other to be a fraction of a second faster and to knock the other out. Competition and innovation has to be aimed at serving the needs of society and the economy better, here in Singapore and abroad."

Recent reports already suggest that digital banks here will have their work cut out for them. A CGS-CIMB report showed that even when customers are offered a premium, the average fixed deposit amount that customers would be willing to place in new digital banks was small. Among those willing to place fixed deposits in two possible digital banks - Grab or Singtel - 67 per cent of respondents on average were willing to place less than S$20,000. Only 10 per cent would place more than S$50,000.

More customers may also be willing to park money with Singtel than Grab, with the poll results suggesting that the ownership composition of digital banks - whether government-linked or of conventional banking parentage - could be a key factor in ramping up on growth, even more so than from higher interest rates.

A PwC report said that Singapore's guidelines for digital bank licences are "carefully crafted" and are seen as more prescriptive. "Relative to other jurisdictions, the requirements are more comprehensive and as such, perceived to be more prescriptive. The strategy clearly is to de-risk while encouraging innovation and entrepreneurship," PwC said.

Among other things, there is an emphasis on "value creation" for the Singapore society, raising the overall competitiveness of Singapore as a financial centre with its focus on skills and in building up intellectual property. To add, a digital full bank, in taking in retail deposits, must be anchored in Singapore, controlled by Singaporeans, and headquartered in Singapore.

"The idea behind increased competition is to benefit customers, especially the underserved segments, as the new banks use technology to deliver more efficient banking solutions. Aside from this, it sets the scene around helping SMEs (small and medium-sized enterprises) gain access to financial products as they digitise, internationalise and benefit from ecosystems," said PwC.

The guidelines further clarified that digital banking aspirants must show a path towards profitability. MAS said any digital banking applicant that shows a "consistent" loss-making trend will not qualify. The applicant must provide a five-year financial projection of the proposed digital bank, which must show a path towards profitability, the regulator said in August. Even if it is not within the first five years, the applicant should indicate when the proposed digital bank is expected to break even.

PwC said this approach is unlikely to turn away genuine applicants. "Given all contenders will evaluate the opportunity with intentions to make profits, we believe that the formal requirement of a 'path towards profitability' is not something that will turn away applicants," it said. "Aspirants now know the requirements to more accurately estimate the efforts and investments needed to decide whether to proceed."

MAS has also said that applicants must show a "clear value proposition" to meet underserved needs using technology. Among other requirements, at least one entity - which holds a 20 per cent stake - in a consortium should hold a minimum three-year track record in operating an existing technology or e-commerce business.

The Business Times looks at three untapped needs that digital banking aspirants can try to address.

SMEs

The complaint that SMEs lack funding is well-worn. In Singapore, the 2018 SME Development Survey showed that 44 per cent are facing internal difficulties managing their finances. Some 50 per cent of SMEs found to be facing challenges in managing the finances labelled challenges in handling "cashflow, liquidity, and credit risk" as a key concern, up from 38 per cent in 2017.

This is not unique to Singapore. Figures from McKinsey & Co showed that 51 per cent of micro enterprises as well as SMEs in South-east Asia face a financing gap of about US$175 billion.

Peer-to-peer lenders here such as Validus Capital have brought new credit assessment models to the table, working with several large corporates in Singapore to tap the thousands of vendors that hold contracts with these blue-chip firms. These large corporates include ST Engineering, large shipyards, and the country's largest logistics and transport provider.

There is a win-win approach to this: these large corporates want to ensure that their small contractors and suppliers secure financing needed to complete projects on time. Having a blue-chip company standing behind the supplier means that Validus can price the loan based on the credit risk of the large corporate. This also opens up lending opportunities to small niche businesses. Validus customers includes a business owner who scuba dives into deep waters to repair ships. Another builds nuclear radiation detectors.

One issue is that many high-growth SMEs today do not have a piece of property to pledge as collateral to banks for loans. Even before the liberalisation of the banking industry through the issuance of digital banking licences, the Singapore regulator had in 2017 relaxed rules for financing companies. This allowed them to effectively extend collateral-free loans to small businesses.

Hong Leong Finance said in its latest annual report that the increase in limit for writing unsecured business loans has allowed it to better support the SMEs in their working capital needs. Among other things, it offered the option for a clean loan disbursement in multiple tranches, instead of a single lump sum, to match with cash flow timing needs of SME customers. (A clean loan refers to a security-free loan, but comes with a guarantor against the debt.) Against that backdrop, Hong Leong Finance is now one of the traditional lenders that has signalled some potential interest in becoming a digital bank, to soup up its offerings to SME customers further.

Gig workers

It is unclear how many gig workers are there in Singapore. The proportion of self-employed persons stood at about 14 per cent as a percentage of total employed in 2017, though such self-employed persons include individuals in "traditional occupations" such as taxi-driving, real-estate marketing, insurance or financial advisory. There are also full-time workers who also have a side gig, ranging from gym trainers to influencers.

In a 2018 article submitted to the Civil Service College Singapore's publication Ethos, Augustin Lee, the former deputy secretary at the Ministry of Manpower (MOM), reviewed the shifts in employment in Singapore's workforce. In it, he said "secondary freelancers" make up about 17 per cent of all freelancers, even as the report acknowledged that their numbers may grow "if fluid work arrangements become more prevalent".

Statistics show that there is a much-larger percentage of freelancers in Singapore - that is, 82 per cent as at 2016 - who choose to do so voluntarily, compared to other developed countries. A separate study by PersolKelly also showed that a large number of Singapore freelancers are mainly driven by flexibility in choosing to go freelance.

While many freelancers are doing gig jobs by choice, there are clear worries about financial security among gig workers. The same PersolKelly study showed that freelancers in Singapore join those in Australia in worrying about the loss in protection that typically comes with conventional employment. Such protection in Singapore's case usually includes medical insurance, and employer's regular contributions to a worker's Central Provident Fund account.

The 2018 Manulife Investor Sentiment Index, which was derived from a poll of 500 gig workers and regular employees, showed that Singaporeans in gig economy jobs have an average savings gap of 55 per cent wider than traditional "nine-to-five" employees. Singaporeans in gig jobs are also considerably less optimistic than their "nine-to-five" peers in terms of financial security, with about 60 per cent concerned about the unstable wages and the lack of protection.

Microinsurance is one product that has emerged in response to these demands. In August, Grab and NTUC Income launched a micro-insurance plan for Grab drivers, through which they pay a few cents out of each trip completed that would go towards premium coverage for 37 severe-stage critical illnesses over a 360-day period. Assuming a 53-year-old driver elects to pay 50 cents per trip to accumulate payment for premium coverage - based on current rates that can change in time - and completes 10 trips per day, it will take him or her about 47 weeks. (For comparison, a 33-year-old driver will take about six weeks to get the same amount of coverage.)

To be sure, it appears less onerous for self-employed workers to get products such as a credit card. Checks show that banks today now use two years worth of tax assessment notices as proof of income for self-employed workers.

But more can be done to boost financial inclusion for gig workers. The MOM article suggested that a national platform be set up in time to track the collection and payment of invoices for work done by freelancers, especially as a wide range of public services in Singapore are means-tested today. With this, freelancers can better manage their cashflow - presumably with the help of banking incumbents, and more interestingly, new entrants in the financial space.

Millennials

Millennials have been widely pursued by banks and fintechs, and this comes as Gen-Y customers are more open to testing new technology, and behave differently as consumers from their parents.

Products out there for millennials include a big wash of multi-currency cards available to these heavy travellers, with banks and fintechs muscling in over the last few years to capture millennial customers who are big on spending on "experience". Players in this forex game include DBS and UOB, as well as TransferWise and Revolut.

As a 2017 Deloitte study showed, more than half of millennials surveyed were open to offerings from non-financial brands. Many of these digital natives - both in Singapore and from across the globe - would also switch banks for a better technology platform. Collectively across Asia-Pacific, about 75 per cent of customers believe they should be able to accomplish any financial task on a mobile device, a Forrester report this year said.

Among digital consumers, new characters are emerging in building financial trust. The Forrester report showed that while banks are still ranked top, technology firms such as Google and Apple are among the top five brands that are trusted by digital consumers in Singapore. "The scepticism that non-traditional digital players won't make a big impact in the financial services sector is fast disappearing."

To be clear, millennials are looking for financial advice. According to Deloitte, 54 per cent of Gen-Y customers are seeking counsel on financial matters but are what are deemed "validators", consumers who would conduct their own research before validating their decisions with advisers. This comes as there is greater anxiety behind ensuring financial stability, with a Credit Suisse study showing that millennials are regarded as being most at risk of ending up poorer than their parents. The post-modern generation also has a general sense of distrust, and that is likely to apply to traditional institutions and industry incumbents, studies said. They may also be driven by what is deemed a sense of collective responsibility given their globalised mindset. Businesses should be measured for more than just their financial performance, according to Gen-Y consumers, the Deloitte study showed.

So against this backdrop, the Forrester report pointed out that digital consumers are more likely to engage with firms that prioritise helping them improve their financial well-being. Banks and fintechs are now looking to design their financial products according to lifestyle goals for consumers. The game may come down to the financial player that is best at adapting "self-driving finance", by using solid data analytics to align consumers to savings goals.

UOB's TMRW digital bank, which is targeted at millennials, has begun testing its version of "self-driving finance" in Thailand, with its product a result of partnering with fintechs. The bank aims to launch TMRW in Vietnam or Indonesia soon, targeting the mobile-savvy customers from Asean.

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