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Virtual banking is disrupting Asia's financial services


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Digital banking versus virtual banks

Most major banks around the world have gone digital to some degree. From simply checking a balance to getting cash at an ATM to managing complex payments, consumers have grown accustomed to choosing between going to the local branch or banking on their home phone, cell phone, or computer.

But virtual banks are a newer, more disruptive form of banking. Virtual banks differ from other forms of digital banking in that they only exist online. They have no branch offices within a community or a country.

Consumers expect virtual banks’ savings in facilities and staff to directly translate to receiving higher interest rates on savings and paying lower rates on loans. However, some consumers might miss the emotional comfort of visiting a local branch office, renting a safety deposit box, seeking a banker’s advice, or working with residents who support the local economy and local events.

Potential disruption in banking

The recent announcement by the Monetary Authority of Singapore (MAS) to grant five virtual banking licenses will inevitably have a disruptive effect on the local financial services industry.¹ Two of the new licenses will be for the full range of retail banking services, which means that, for the first time in Singapore, non-banks will be able to accept deposits from and provide financial services to retail customers. The remaining three licenses are intended for wholesale banking.

Virtual banking—and the innovation, inclusion, and customer choice it brings—is becoming prominent around the world. Hong Kong, South Korea, the United States, and United Kingdom have already opened the door to virtual banking. And some major Singapore banks are also gaining virtual banking experience, with DBS’ digibank in India, and UOB’s TMRW in Thailand.

Who are the new entrants?

Virtual banking changes what we traditionally think of as a bank. And new virtual banks in Singapore might diverge in their origin. They might be foreign banks looking for a way to break into the Singapore market without the expense of building branch offices. Or they might be payment companies, insurers, or fund houses seeking to expand the range of financial services they offer. There also could be interest from giant international digital retailers or telecommunications companies.

But whatever their origin, entry of non-banking players has the potential to accelerate current momentum to integrate banking and non-banking supply chains and ecosystems.

The impact of virtual banks

Virtual banks could pose a significant threat to the three largest Singaporean banks. New licensees are likely to be backed by benefactors with deep pockets. They will likely have significant “beyond-banking” strategies that might be hugely disruptive.

As an example, consider what is already happening in cross-border remittances. Monzo, a UK-based virtual bank, offers users international payments without additional fees or charges. And the bank does not charge extra fees for customers to withdraw up to GBP 200 per month from international ATMs.²

New entrants are likely to come in unpredictable ways. To increase competitive advantage, incumbent banks will need to leverage their customer bases, resources, and reputations more than ever. They will also need to sharpen their value propositions and, with the power of artificial intelligence (AI)-enabled hyper-personalization, become even more customer-centric.

For example, AI, which is rapidly moving from experimentation to scale, can augment banks’ ability to measure customer satisfaction and anticipate which clients are most likely to leave for a better offer. AI can help determine specific types of offers or “next best actions” that might help induce clients to remain loyal— or just remain.

¹ “Singapore to allow digital banks; MAS issuing up to 5 new licences: Tharman.” The Strait Times. June 28, 2019. https://www.straitstimes.com/business/singapore-to-allow-virtual-banks-mas-issuing-up-to-five-new-digital-bank-licences-tharman

² Weiss, Sabrina. “How Monzo, Revolut, Starling and N26 plan to topple legacy banks.” Wired. May 15, 2019. https://www.wired.co.uk/article/monzo-starling-revolut-n26-banking-apps

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Meet the authors:

Likhit Wagle

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, Global Industry General Manager, Banking & Financial Markets; Industry Academy Member;
Arun Biswas

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, Country Managing Partner, Singapore, IBM Global Services;
Nicholas Drury, Global Banking & Financial Markets, Leader, IBM Institute for Business Value

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