Grab-Singtel digital bank is not a licence to print money

THE buzz over Singtel's win of a digital banking licence - together with its partner Grab - is understandable.

Singtel shares added 3 per cent on Monday, after spiking as much as 10.5 per cent to a six-month high of S$2.585 in intra-day trading. They added another 0.4 per cent on Tuesday.

But punters betting on Singtel's digital banking fortunes would be wise to exercise caution.

The all-digital bank is a new business model, with few success stories so far. South Korea's Kakao Bank is a rare example of profitability: The online lender broke even in 2019, less than three years after its launch.

One peer comparable to Singtel's ambitions is Orange Bank, launched by French telco Orange in 2017. But it looks to still be in a startup phase. Losses for Orange Bank, before interest, taxes, depreciation, and amortisation and after leases, was 160 million euros in 2019 - an increase from losses of 147 million euros in 2018.

DBS analyst Sachin Mittal recently warned in a report that the Grab-Singtel alliance may struggle with monetisation more than Kakao Bank, which was set up by the makers of instant messenger Kakao Talk.

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Incumbent banks here are more digitally advanced than their South Korean peers. The Singapore market is also smaller and more mature.

Mr Mittal also said Kakao's apps are "more entrenched as everyday apps" when compared with Grab.

This level of uptake was helpful for Kakao because its Kakao Pay services are integrated with its chat app. Kakao Talk had 45.8 million active domestic users as at end-September.

Limited track record

The competitive local environment may explain why both Singtel and Grab have made limited in-roads into the financial app space, although both have financial offerings. Singtel has an e-wallet product called Dash, while Grab has GrabPay.

Citi analyst Arthur Pineda noted that Singtel and Grab together have "a wide cross-sell platform" in their subscriber bases, as well as the data analytics capabilities and brand recognition to woo potential customers.

But Singtel's track record for its digital investments is hardly stellar.

Dash, which was launched in 2014, has a million users. It has helped Singtel generate remittance revenue, but seems unlikely to have made a difference for shareholders.

Singtel's international group segment clocked a 60.7 per cent year-on-year rise in revenue for the 12 months to March 31, 2020, which it attributed to an increase in remittance and payment services on Dash.

But that took the loss-making segment's annual turnover - which also includes direct carrier billing, the Via cross-border mobile payment alliance, and e-sports sponsorship revenue - to just S$10 million.

Getting to scale

The Grab-Singtel partnership plans to start by targeting young professionals, gig workers and micro-businesses. That means the new digital bank will initially have a small asset base and balance sheet. It also means contending with incumbents' offerings at tight margins.

DBS' My Account, for instance, already has no minimum balance requirements or fall-below fees - perfect for, say, low-income gig workers.

Jefferies analyst Krishna Guha said in a note that the challenge for Singtel and Grab will be "to scale up retail deposits meaningfully".

The two companies could do so by combining the customer bases of both Dash and GrabPay, and then scaling customer acquisition up further - possibly with monetary incentives.

But both partners may also decide to continue operating their separate e-wallets, with an option to eventually phase them out, Mr Guha noted.

If Singtel decides to run its e-wallet in parallel with the joint-venture bank, it risks being distracted - spread thin on multiple fronts.

The game changer, however, may be using the fresh Singapore licence as a stepping stone to build a digital bank covering the region.

Singtel could look to "secure digital banking licences in other markets (possibly within its regional telco footprint)", CGS-CIMB analysts said. Jefferies named Malaysia and Indonesia as two possible overseas markets.

Grab-Singtel does not plan to launch its bank until early 2022, and analysts are not expecting major earnings impact until maybe 2025.

Benefiting from a regional presence may take even longer. Singtel shareholders may therefore need to temper their expectations.