Last year, the Monetary Authority of Singapore announced that it would be issuing digital bank licenses, as the city-state seeks to liberalise its banking sector. Applications for the licenses closed in December, with the names of the successful applicants to be announced in mid-2020. With up to five licenses on offer and 21 applicants – comprising technology and telecommunication companies, fintech firms and e-commerce firms, and financial institutions – the demand is clear. But what’s the lawyers’ diagnosis?

WHAT ’S THE EXPECTED IMPACT ON SINGAPORE AS A MARKET?

Peiying Chua, a Singapore-based partner at Linklaters who specializes in financial regulations, has been keenly watching the developments. She tells Asian Legal Business the framework marks an exciting new chapter in Singapore’s banking industry. Given the early interest, it’s unsurprising that Chua expects greater competition on the horizon, both from digital banks and fintech companies.

“While market practice appears uneven, various incumbent banks have begun to digitalise their core business models and to embrace new technologies to provide a better customer experience. They will likely find themselves under ever-greater pressure to enhance and deliver on their digital strategy, by putting the customer at the heart of every digital strategy instead of the traditional focus on product and channel delivery,” she says.

Chua expects a greater number of, partnerships and alliances to be formed in the future. “New digital bank players with access to vast consumer behavioural data (e.g. e-commerce players) and artificial intelligence platforms are likely to partner with incumbent banks or technology companies to acquire and grow their customer relation-ships,” she predicts.

But while greater competition is expected, there is also opportunity, both in Singapore and in Southeast Asia more broadly. “The MAS has stated that the new digital banks will need to have a clear value proposition in serving the underbanked or underserved segments. There is enormous potential in Southeast Asia, with most of its population being underbanked e.g. millennials and SMEs,” Chua offers.

HOW WILL THE NEW LICENSES BE REGULATED?

As expected, MAS will be regulating the new framework, with the digital bank licensees being generally subject to the same requirements as traditional banks and striking a balance between liberalisation and “ensuring that prudential safeguards for financial stability and user protection are maintained” Chua notes.

There will also be a “phrase-in period” for digital full banks “intended to minimise risk to retail depositors and mitigate the risk of untested business models,” she says, noting that during this phase certain restrictions will be imposed on the digital full bank. For example, “it will be subject to an aggregate deposit cap of S$50 million ($37 million), which applies primarily to SGD-denominated deposits taken from individuals; also, it will not be allowed to widely solicit deposits from the public and can accept only certain depositors such as its shareholders and related entities,” notes Chua.

HOW WILL LAWYERS BE INVOLVED?

It’s not just applicants like Grab & Singtel and Razer Youth Bank that view digital banking licenses as a fount of new work. Lawyers in Singapore will also have a significant part to play. “We expect to play a key role through the entire design, structuring, licensing and ongoing compliance process, including training senior managers on the importance of culture and setting the tone from the top while being regulated as a licensed bank,” says Chua.

Compliance “by design” is also critical, she says. “From experience, to build a robust and sustainable business plan, digital banks need to ensure that key regulatory obligations will be met by the digital bank to avoid regulatory problems at a later stage. It is important to engage professional advisers including lawyers at an early stage when designing the relevant systems and “hardware” (e.g. framework, policies and procedures) so that regulatory obligations can be considered when building these frameworks. The “software” (e.g. culture, leadership and behaviour) is also hugely important,” Chua says, adding that some players may not be used to “the regulatory spotlight.” “It would be useful for digital banks to train senior management and talent at all levels to bring them along the journey as they get used to running a bank,” she says.

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