The evolution of banks in Singapore: things you need to know about the regulation of digital banks
25 May 2022 | Applicable law: Singapore
On 28 June 2019, the Monetary Authority of Singapore (“MAS”) announced that it will issue up to five digital banking licenses(1). This was a revolutionary move by the MAS as digital bank licenses were extended to non-bank players and allowed banks to operate in Singapore with minimal physical presence.
The MAS recognises that the banking landscape is undergoing a fundamental transformation driven by three key forces: (i) pervasive mobile internet access; (ii) the rise of big data; and (iii) the growth of platform ecosystems as a major new business model in finance. Hence, the digital banking framework was introduced to retain Singapore’s position as one of the leading financial centres in Asia, and to allow for greater competition and spur greater innovation in finance.
The MAS hopes that competition and innovation from digital banks may be able to better serve the needs of society and the economy in the following ways: (i) financing the growth of infrastructure in emerging Asia, and increasingly of climate-resilient, low-carbon investments; (ii) financing growth enterprises and small-medium enterprises (“SMEs”); (iii) reducing costs and improving convenience for consumers; (iv) helping people to plan early and achieve financial security in their later years; and (v) creating good jobs in the finance sector.(2)
The digital banking framework is in addition to any digital banks that Singapore banking groups may already establish under the existing internet-only banks (“IOB”) framework. Under the IOB framework introduced in 2000, Singapore-incorporated banking groups can set up banking subsidiaries to pursue new business models, including IOBs. This allows a bank to decide whether it wants to engage in such activities within the bank or through a separate subsidiary. Singapore-incorporated banks can also choose to have a joint-venture partner in setting up the subsidiary, so long as the Singapore-incorporated banking group retains control over the venture.(3)
1. What is a digital bank and how does it differ from a traditional bank?
A digital bank can offer similar services to traditional banks, except that it is only allowed to operate one physical place of business. Unlike traditional banks, a digital bank will not have physical branches, automated teller machines (“ATMs”) or cash deposit machines (“CDMs”), and all banking services will be done online.
2. Who is allowed to operate a digital bank?
Currently, the MAS has awarded 4 digital bank licenses to the following applicants:(4)
(a) Digital Full Bank
- A consortium comprising Grab Holding Inc. and Singapore Telecommunications Ltd.
- An entity wholly-owned by Sea Ltd.
(b) Digital Wholesale Bank
- A consortium comprising Greenland Financial Holdings Group Co. Ltd, Linklogis Hong Kong Ltd, and Beijing Co-operative Equity Investment Fund Management Co. Ltd.
- An entity wholly-owned by Ant Group Co. Ltd.
In considering the applicants for digital bank licenses, MAS would have considered whether the applicants had a strong value proposition and innovative digital business model to offer digital banking services.(5)
3. What are the types of digital bank licenses available?
There are two types of digital bank licenses under the digital bank licensing framework – a digital full bank (“DFB”) license and a digital wholesale bank (“DWB”) license.
What are the key differences between DFBs and DWBs?
The key differences between DFBs and DWBs are the type of banking activities which they can carry out and the type of customers they can offer their products and services to.
Are DFBs allowed to offer the same services as traditional full banks?
A full functioning DFB is allowed to offer the same services as a traditional full bank. However, to minimise risks to retail depositors, permissible activities of a DFB will be phased in via a two-stage process. A DFB will first commence business as a restricted DFB, which is subject to restrictions on deposits and product offerings. A restricted DFB also has a lower minimum paid-up capital requirement compared to a full functioning DFB. Once a restricted DFB has met all the relevant milestones and has been assessed to pose no significant supervisory concerns, it will progress to a full functioning DFB. While MAS does not pre-determine a time period within which a restricted DFB must progress to a full functioning DFB, it generally expects a DFB to be fully functioning within 3-5 years from commencement of business.(9) A high-level summary of the phased approach is set out in the following diagram.
4. How do you apply for a digital bank license?
Applications for a digital bank license must be made to the MAS during the stipulated application period. The first application period took place between 29 August 2019 and 31 December 2019. As the Singapore market is relatively small, only four digital bank licenses have been awarded for now. MAS will continue to monitor market developments and review the need to issue more digital bank licences in the future.(16)
Applicants for the DFB or DWB license must meet the following requirements(17):
(a) Track record. At least one entity in the applicant group has 3 or more years of track record in operating an existing business in the technology or e-commerce field.
(b) Fit and proper criteria. The following persons are fit and proper(18):
- applicant group and their directors;
- substantial shareholders(19) and 12% controllers(20) of the proposed digital bank; and
- directors and executive officers(21) of the proposed digital bank, when identified(22).
(c) Capital requirements. Demonstrates the ability to meet the applicable minimum paid-up capital requirement at the onset and the minimum capital funds requirement on an ongoing basis. This can be done by submitting a written confirmation from shareholders of the proposed digital bank on commitment of funds.
(d) Value proposition. Provides clear value proposition, incorporating the innovative use of technology to serve customer needs and reach under-served segments of the Singapore market.
(e) Sustainable business model. Demonstrates that the proposed digital bank’s business model is sustainable. The applicant must provide a five-year financial projection of the proposed digital bank, which must show a path towards profitability. The assumptions of the financial projection must be reviewed by an external and independent expert.
(f) Orderly exit plan. Submits a feasible plan that can facilitate the orderly exit of the proposed digital bank.
(g) Commitment from shareholders. Shareholders of the proposed digital bank commit to providing a letter of responsibility and a letter of undertaking that MAS may require in respect of the operations of the proposed digital bank.
5. Are digital banks regulated differently from traditional banks?
Generally speaking, DFBs are subject to the same regulatory requirements as existing full banks, whereas DWBs are subject to the same regulatory requirements as existing wholesale banks. These include requirements relating to technology risks, money-laundering and terrorism financing risks, and the conduct of non-financial businesses.
As an existing digital bank license holder, what are my ongoing regulatory requirements?
Banking Act 1970 (“Banking Act”)
(a) Minimum capital requirements
All banks including digital banks are required to meet the prescribed minimum paid-up capital requirement and minimum capital funds requirement on an ongoing basis. Digital banks will also be subject to the risk-based capital adequacy requirements set out under Notice 637 (Risk Based Capital Adequacy Requirements for Banks Incorporated in Singapore).(23)
(b) Changes in shareholding
Any person who wishes to become a substantial shareholder, 12% controller, 20% controller or indirect controller of a licensed bank will be required to obtain prior approval from the Minister-in-Charge of MAS(24). In particular for DFB applicants, any in-principal approvals (“IPA”) granted by MAS would be on the basis of the shareholding structure provided to MAS at the application stage. As such, if the change in the shareholding no longer meets the eligibility criteria for Singaporean control, the IPA may be revoked.
(c) Overseas expansions
Pursuant to section 12(3) of the Banking Act, a DWB is required to obtain MAS’ approval to open a new branch, agency or office in a place outside Singapore.
Digital banks should refer to MAS’ Framework for Impact and Risk Assessment of Financial Institutions to better understand how MAS assesses the impact of financial institutions(25), and the types of risks that are generally applicable to financial institutions.
(a) Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT)
Financial institutions operating in Singapore are required to put in place robust controls to detect and deter the flow of illicit funds through Singapore’s financial system. Such controls include the need for financial institutions to identify and know their customers (including beneficial owners), to conduct regular account reviews, and to monitor and report any suspicious transaction.(26)
Digital banks will be subject to the same AML/CFT and sanctions-related requirements applicable to the incumbent banks, including MAS’ Notice 626 on Prevention of Money Laundering and Countering the Financing of Terrorism and its corresponding guidelines(27).
MAS has issued a set of Guidelines on Risk Management Practices – Technology Risk(28) which sets out technology risk management principles and best practices to guide the financial institutions to establish sound and robust technology risk governance and oversight, as well as maintain IT and cyber resilience. MAS has also issued Notice 644 (Notice on Technology Risk Management)(29) on the requirements on maintaining high availability, recoverability, data protection and incident reporting, and Notice 655 (Notice on Cyber Hygiene)(30) on the essential measures that banks must take to mitigate the growing risks of cyber threats.
Furthermore, in the wake of recent SMS-phishing scams, MAS and the Association of Banks in Singapore (“ABS”) are also introducing a set of additional measures to bolster the security of digital banking.(31)
(c) Outsourcing Risks
As a digital bank may from time to time enter into arrangements with third party service providers to outsource certain business and support functions, it is also required to have in place the relevant governance and risk management processes to identify and manage the risks arising from these outsourcing arrangements. Digital banks should refer to MAS’ Guidelines on Outsourcing(32) that sets out MAS’ expectations of a financial institution that has entered or is planning to enter into an arrangement to outsource any of its business functions to a service provider.
Conduct of non-financial businesses
In September 2017, MAS sought public feedback on its proposal to refine its anti-commingling framework for banks in two key aspects: (i) to streamline the conditions and requirements for banks to conduct or invest in permissible non-financial businesses; and (ii) to allow banks to engage in the operation of digital platforms that match buyers and sellers of consumer goods or services, as well as the online sale of such goods and services. Digital banks should, when planning to conduct any non-financial businesses, consider MAS’ Consultation Paper and Response to Feedback Received on its Review of Anti-Commingling Framework for Banks(33), which sets out MAS’s policy towards banks’ conduct of non-financial businesses.
Securities and Futures Act 2001 (“SFA”) / Financial Advisers Act 2001 (“FAA”)
Digital banks will also be expected to meet the relevant regulatory requirements under the SFA and the FAA and submit the relevant forms where it intends to carry out regulated activities under the SFA(34) or financial advisory services under the FAA(35). When submitting the relevant form, the digital bank is not required to resubmit information that was already provided in its application to set up a digital bank (unless there have been any changes to the information previously provided).
6. Regional Developments
Digital banks are termed as “virtual banks” in Hong Kong, and defined as “a bank which primarily delivers retail banking services through the internet or other forms of electronic channels instead of physical branches”.(36) As at 31 December 2021, the Hong Kong Monetary Authority has issued a total of 8 virtual bank licenses.(37)
On 2 July 2021, Bank Negara Malaysia (“BNM”) announced that it had received 29 applications for its digital banking license and is set to issue up to 5 digital banking licenses in early 2022.(38) Similar to Singapore’s approach towards DFBs, BNM implements a phased approach towards its digital banking license holders, such that a simplified regulatory framework is applied during its initial three to five years of operations, to allow the license holders to demonstrate its viability and sound operations, and for BNM to observe attendant risks.(39)
The Financial Services Authority (Otoritas Jasa Keuangan) of Indonesia issued new regulations in August 2021 to introduce its digital bank regulatory framework, which allows for digital banking to be carried out by way of an establishment of a new digital bank, or a transformation of an existing conventional bank into a digital bank.
The Central Bank (Bangko Sentral ng Pilipinas) of the Philippines (“BSP”) issued its Guidelines on the Establishment of Digital Banks in December 2020 for the inclusion of “Digital Banks” as a distinct classification of banks and to set out its corresponding licensing framework in its existing Manual of Regulations for Banks. Similar to Indonesia, the guidelines allow for the establishment of a new digital bank, or the conversion of an existing bank to a digital bank.(40) However, BSP announced that as at 1 September 2021, it would stop accepting applications for digital banking licenses for 3 years, to allow the authorities to monitor the digital banking industry. The number of digital banking licenses issued will be capped at 7.(41)
This article has been produced for general informational purposes only. The information contained in this article should not be construed as legal advice and is not intended to be a substitute for legal counsel on any subject matter. No recipient of this article should act or refrain from acting on the basis of any contents in this article without seeking appropriate legal or other professional advice.
(6) The information in this table is presented on the assumption that the DFB is a full functioning DFB.
(7) Generally, the permissible activities for a digital wholesale bank are outlined in the Guidelines for Operation of Wholesale Banks published by the MAS on 31 July 2008.
(8) Non-retail customers refer to individuals who fall within the definition of "accredited investor" under the Securities and Futures Act 2001. MAS does not expect a DWB to serve retail customers, such as providing financial advice to these individuals. On an exceptional basis, MAS may allow such offerings, provided that there is a strong nexus and is necessary to the applicant’s core offering(s) to the non-retail segment. An applicant with plans to provide any of such offerings should highlight accordingly in its application, and explain how there is a strong nexus and is necessary to the specific core offering(s) to the non-retail segment.
(10) Wholesale deposits will not be subject to the aggregate deposit cap once the restricted full bank’s paid-up capital reaches $100m (in line with wholesale bank’s minimum paid-up capital).
(11) The Deposit Insurance Scheme will protect non-bank depositors (including individuals and sole proprietorships) in the event of a bank's failure by covering the SGD deposits placed with a member bank, for up to S$75,000 per depositor per member bank.
(12) 6.5% CET1 Capital Adequacy Ratio (CAR), 10% Total CAR, 2.5% capital conservation buffer (CCB), up to 2.5% countercyclical capital buffer (CCyB).
(13) 100% net stable funding ratio, 100% liquidity coverage ratio.
(14) Interested parties can refer to the Schedule to the Securities and Futures (Capital Markets Products) Regulations 2018 for potential scope of permissible investment products that can be offered.
(15) Interested parties can refer to MAS Notice 635 Unsecured Credit Facilities to Individuals and Banking (Credit Card and Charge Card) Regulations 2013 for reference.
(18) See Guidelines on Fit and Proper Criteria.
(19) “substantial shareholder” has the same meaning as in section 81 of the Companies Act. It generally refers to any person who will have a voting interest of at least 5% in the proposed digital bank.
(20) “12% controller” means a person, not being a 20% controller, who alone or together with his associates: (a) holds not less than 12% of the total number of issued shares in the proposed digital bank; or (b) is in a position to control voting power of not less than 12% in the proposed digital bank. Please refer to section 15B of the Banking Act.
(21) “executive officer”, in relation to a company, means any person, by whatever name described, who: (a) is in the direct employment of, or acting for or by arrangement with, the company; and (b) is concerned with or takes part in the management of the company on a day-to-day basis. Please refer to section 2 of the Banking Act.
(22) The proposed digital bank’s board of directors and team of executive officers need not be fully formed at time of application.
(24) Sections 15A and 15B of the Banking Act
(27) https://www.mas.gov.sg/regulation/notices/notice-626 and https://www.mas.gov.sg/regulation/guidelines/guidelines-to-notice-626-on-prevention-of-money-laundering-and-cft-for-banks
(34) Form 26- Notice of Commencement of Business lodged pursuant to Regulation 14(4) of the Securities and Futures (Licensing and Conduct of Business) Regulations by persons exempt from holding a Capital Markets Services License under section 99(1)(a), (b), ( c ) and (d) of the SFA
(35) Form 26 – Notice of Commencement of Business lodged pursuant to Regulation 37(1) of the Financial Advisers Regulations by persons exempt from holding a Financial Adviser's License under Section 23(1)(a), (b), (c), (d) and (e) of the FAA
(39) https://www.bnm.gov.my/documents/20124/938039/20201231_Licensing+Framework+for+Digital+Banks.pdf (40) https://www.bsp.gov.ph/Regulations/Issuances/2020/c1105.pdf