Are Central Banks Issuing Digital Banking Licences to Counter the Threat of Fintechs and Big Techs? Rise of Digital Banking Licences Special Report Trendwatch

Are central banks issuing digital banking licences to counter the threat of fintechs and big techs? Rise of digital banking licences special report Trendwatch

Digital banks attract more capital as regulators open up markets

In Asia Pacific, South Korea’s Kakao Bank, Alibaba-backed MyBank and Judo Bank in Australia are the top three digital banks that have raised the most capital

ince the advent of financial technol- troduce regulatory sandboxes and open (2012), Moven (2013), Fidor (2015), Sogy (fintech) companies and incum- banking standards that allowed fintechs Monzo (2015), Revolut (2015) and bent institutions started to digitalise to experiment and compete with incum- Starling Bank (2017). their business, regulators have been on bent institutions. The European Union In Asia Pacific, the first generation the back foot of supervising the activities followed with Payment Service Directive of internet and direct banks were intro- of these new players. They worry more (PSD) 2 that further levelled the playing duced in Australia and Japan where ING about the disruption it will bring to field for new entrants. Direct and Japan Net Bank were respec- incumbent players and the impact on In the technologically focused mar- tively launched in 2000. However, when financial stability and soundness. Few ju- ket of the US, fintech players are flour- mobile and API technology came of age, risdictions foresaw, much less welcomed ishing as they are embraced by a hun- the landscape was transformed by Chi- the disruption to come that would be a gry and receptive investor community. nese tech giants such as Alibaba and catalyst of positive change – to enable They also face a generally ambivalent Tencent. WeBank, the digital banking financial inclusion, raise service level and regulatory environment comprising subsidiary of Tencent started operating improve overall experience of consumers, a plethora of different, sometimes in China back in 2015. among other benefits. competing financial regulators who As more jurisdictions recognise that However, there are a few front run- mainly deferred to the Securities and financial services will become increas- ners among them who saw the future and Exchange Commission and the Con- ingly digitalised, similar regulations have took steps to introduce regulation that sumer Financial Protection Bureau to also been issued in Hong Kong, South facilitated the growth of fintechs – espe- supervise this new generation of dig- Korea, Singapore and Taiwan. It is ex- cially the new breed of digital banks. For itally-enabled challengers. These were pected that more regulators in the region example, the Financial Conduct Author- introduced in the US and the UK with will follow suit as the interest in digital ity in the UK was among the first to in- the entry of players such as Simple financial services grows as reflected in

The Asian Banker Special Report http://www.theasianbanker.com 2 The top 10 digital banks in APAC have raised $6.7 billion in aggregate funding Figure 1. Total funding raised by digital banks in Asia Pacific ($, million)

Source: Asian Banker Research the funding attracted by players from the gest single funding round for a startup bank licences were issued in Hong Kong, private sector and venture capitalists. in Australia. South Korea and Taiwan last year and South Korea’s Kakao Bank has raised In aggregate, the four pure online up to 10 digital bank licences will be is- the most capital as of 4 March 2020, fol- banks in China raised the most capital sued in Singapore and Malaysia. Mean- lowed by Alibaba-backed MyBank and compared to other markets, with a total while, the Philippines is expected to re- Judo Bank in Australia. Kakao Bank funding of $2.72 billion. MyBank was lease the virtual banking regulation this increased its paid-in capital to $1.6 bil- launched in June 2015 on initial capital year. Thailand also intends to join other lion by issuing new shares worth $467 of $654 million, and it raised $367 mil- nations in licensing digital-only banks. million, after financial authorities ap- lion in early 2020, which has enabled Consequently, the capital raising outlook proved its application to become the the bank to provide better services to for digital banks in the region is expected bank’s largest shareholder with a 34% small businesses, especially when the to remain strong in the foreseeable fu- stake. On the contrary, the other inter- operations of small businesses have ture, which will help promote financial net-only bank in South Korea, K-Bank, been seriously affected by the outbreak inclusion, drive greater competition and only secured $447 million in funding. of COVID-19. foster innovation in the sector. KT Corp’s application to raise its stake Recently, Hong Kong’s WeLab raised in the bank was disapproved as it has $156 million to launch WeLab Bank and a history of violating fair trade regula- further expand internationally, while tions. Judo Bank in Australia has raised Singapore’s Tonik has received $6 mil- a total of $830 million in funding over lion in funding to launch its digital bank four rounds. In July 2019, the bank in the Philippines. More funds will be Foo Boon Ping raised $276 million, which is double the raised to launch the new digital banks in Managing Editor bank’s initial funding target and the big- the next two years, given that 12 digital The Asian Banker http://www.theasianbanker.com Special Report The Asian Banker 3 CO-PUBLISHED ARTICLE

The future is digital: Why financial institutions need to embrace digital banking Mambu’s Managing Director, APAC, Myles Bertrand, explains how traditional financial institutions can evolve to capitalise on the new era of digital banking

igital banking is the way of the future for the financial services industry in Asia Pacific. As Dmore countries throughout the region embrace this brand new world, financial institutions of all sizes need to consider the opportunities that digital banking can open up in terms of optimising operations and increasing new customer acquisitions. Many established institutions are realising that spending millions of dollars building a proprietary system and expecting it to last for the next decade is not a viable option. It is impera- tive that these institutions evolve. In fact, McKinsey & Company estimates that legacy financial institutions that fail to evolve will see profits decline by up to 60% by 2025. “The businesses that will truly thrive in this new decade are those that see change as an opportunity, and that are open to new ideas and ways of doing things,” said Myles Bertrand, Managing Director for Asia Pacific at Mambu, one of the leading cloud-native banking platforms. He gave four key reasons for launching a digital bank.

Why Launch a Digital Bank?

Integrate multiple products In a traditional, siloed banking system, individual functions such as a branch, internet platform and mobile app are all managed separately, with customer data withheld between functions. Switching to a digital platform and integrating these functions will give banks a single view of customer data, allowing them to shed their legacy infrastructure and gain the ability to digitise and automate their core processes, all while eliminating errors and duplication. Myles Bertrand, Managing Director, APAC, Mambu Become agile and responsive Digital banks are lean and agile, can grow and scale rapidly, and can be responsive to their customers, providing a best-in-class customer experience. To stay competitive, banks need to be able to roll out products and services at a rapid pace, adding new features to platforms, while enhancing existing ones. This kind of agility is next to impossible to achieve with most institutions’ legacy systems. However, composable banking architecture – the quick and flexible assembly of independent systems on a cloud platform – provides the opportunity for organisations to create a nimble platform with intuitive, responsive features that can be quickly and continuously updated.

Exceed customer expectations with customised products and services For a digital bank, holding deposits and facilitating digital payments is more than just a core function and revenue source; it’s a rich trove of priceless customer data. Today’s top digital banks set themselves apart by developing custom credit offerings based on this data. For example, a user looking for information on real estate or mortgage products can be presented with a home loan product and automated follow up. In the digital banking era, customers’ needs must be constantly anticipated, turning the bank into a trusted advisor who is always on the lookout for customers’ best interests.

Keep customer data safe and secure Businesses that make the transition from less secure legacy systems to cloud-based digital platforms, where security improvements are constantly made, can boast of greater peace of mind and set themselves ahead of competitors. With cloud technology, they can offer added security to customers while seizing upon ad- For more information, contact us: vanced analytics to automate and streamline decisions across the end-to-end banking value chain. Jonathan Yu “By partnering with a proven digital platform like Mambu, and encouraging broad developer collaborations, banks can build innovative integrations into any offerings for simple, streamlined [email protected] and automated customer experiences,” added Bertrand. Tel: +65 9688 3646 Institutions that can move at the pace of a technology company while remaining committed to strength, security and service will be the leaders of this new era.

The Asian Banker Special Report 4 Rise of Digital Banking Licences Special Report

Are central banks issuing digital banking licences to counter the threat of fintechs and big techs? Technology has enabled the world of finance to innovate and diversify rapidly in recent years — and regulators have struggled to keep pace until now By Ellen Hardy

our of the leading Asian Markets — as neo, virtual, and challenger banks SBI Net Bank, are operating under FSingapore, Hong Kong, Australia — licences across the Asia Pacific re- existing commercial banking licens- and China — have all adopted strong gion, questions are being raised about ing requirements. LINE Financial and digital licence frameworks, with other whether they are doing this to keep the Mizuho Financial Group established a countries in the region watching closely. ambitions of big tech firms, such as joint venture in May 2019 to prepare Regulators on the other hand, have China’s Tencent and Alibaba, and US for the launch of a new digital-only highlighted a desire to work together to tech giants such as Facebook, Google, bank by this year. establish global standards. Although to and Apple at bay. In Southeast Asia, Malaysia has is- date, different countries have been no- Financial regulators in Australia, sued its draft digital licensing frame- table in implementing their own distinct Hong Kong, China, India, Japan, South work, offering up to five digital licenc- regimes. However, it remains to be seen Korea and Taiwan have all recently is- es for conventional and Islamic banks, whether regulators will allow Chinese sued such new forms of licences, while while the Philippine monetary author- giants such as Tencent and Alibaba’s Ant Singapore is in the process of doing so. ity issued a rural banking licence for Financial to enter their markets, and The first internet bank in Japan, Japan Tonik Digital Bank, the first pure-play how they are going to manage the ambi- Net Bank, began its operations as early digital bank in the region, to start tions of big tech firms such as Facebook, as October 2000, driven by the finan- business this year alongside existing Google, and Apple. cial deregulation in the 1990s. Other virtual institutions CIMB Bank and As central banks begin issuing internet banks that were established, ING Bank. Both CIMB Bank and ING digital-only banking — also known such as Rakuten Bank and Sumishin Bank have commercial banking licens http://www.theasianbanker.com Special Report The Asian Banker 5 Rise of Digital Banking Licences Special Report es and have a digital platform business Area to create scale for their Hong cal fintech company in Hong Kong model with minimal physical touch Kong operations, and that gov- to be given a licence. We have 200 points through partner merchants. ernments in the region are keenly very experienced people in WeLab Once the virtual banking regulations aware of this. Hence, their position virtual bank. And we have Profes- have been released, the current digi- in the virtual bank market is criti- sor KC Chan, former secretary for tal banks will be given one year as a cal, as it has been estimated that financial services and the treasury transitional period to comply with the some 30% — $15 billion — of Hong of Hong Kong and former dean of regulations in order to get the virtual Kong’s total banking revenue could the Hong Kong University of Science banking licence. be up for grabs. and Technology, as chairman of the Authorities in Thailand are trying As of 9 May 2019, the HKMA bank and senior advisor to WeLab. to keep pace with their Asian coun- had issued banking licences to This is a validation of our business terparts, with the head of the central eight organisations, comprising model and industry standing. It will bank recently saying that it is looking joint ventures (JV) and consortium help open doors for our future rela- to introduce digital lending and other of mainly banks, telecommunica- tionships and to new markets.” services this year to promote competition and technology companies, to This means that WeLab has tion and meet the needs of its under- operate as virtual banks. now gained entry into the retail served banking population. Vietnam The first batch of three licences banking market. has also indicated that it is likely to was issued at the end of March to “The virtual bank licence in explore regulating digital banking in Livi VB Limited (JV between Bank Hong Kong is exactly the same as the near future. of China Hong Kong, JD Digits (for- for the commercial banks. There In a study of digital bank licence merly JD Finance), and Jardines), are no different classes of licences holders and regulators in Hong Kong, Mox Bank Limited (JV of StanChart, or restriction on activities based Singapore, Australia and China to sur- PCCW, HKT and Trip.com) and on whether it is a fintech, commer- vey the virtual bank landscape, we ZhongAn Virtual Finance Limited cial bank or consortium that holds found significant opportunities for (owned by ZA International). the licence. The licenced banks are this new era of finance — but they ap- In subsequent announce- not subject to a test period before pear geared towards countering com- ments, another five licences they become fully operating banks. petition from big tech competitors en- were granted to WeLab, Ant There is also no restriction and cap tering the finance market. SME Services (Hong Kong) Lim- on taking deposits and banks can ited (owned by ANT Financial), launch any retail banking products HKMA takes an active approach Infinium Limited (JV between and services, even join the existing while avoiding the China question Tencent, ICBC and Hillhouse ATM networks. The greatest advan- Hong Kong is catching up with Capital), Insight Fintech HK tage is that it allows banks, through China when it comes to online dis- Limited (JV between Xiaomi agreement between Hong Kong and ruption of finance, with its regulator, and AMTD Group) and Ping An Beijing. to access the 70 million the Hong Kong Monetary Authority OneConnect Company Limited population of the Greater Bay Area,” (HKMA), taking the approach that (owned by Ping An). stated Loong. the system can absorb the pressure of increasing competition. In con- trast to other markets, it is notable that two of the winning licence bids are joint ventures led by two major incumbent banks, namely, Bank of China (Hong Kong) and Standard Chartered, which are also two of the Simon Loong Norman Chan territory’s three note-issuing banks. Founder and Group CEO Former Chief Executive It has been argued that some Chi- WeLabSimo HKMANorman Chan, former chief execu nese fintechs are seeking to use a Hong Kong digital banking licence Simon Loong, founder and group Norman Chan, former chief execu as a springboard to expand into CEO of WeLab, expressed his sat- tive of the HKMA, sees the launch other Asian markets. In fact, many isfaction in receiving one of the li- of virtual banks as a key compo- would be leveraging off their access cences granted by HKMA, “We are nent of its Smart Banking Initiatives to southern China’s Greater Bay very proud that we are the only lo- that facilitate financial innovation,

The Asian Banker Special Report http://www.theasianbanker.com 6 enhanced customer experience and “Being a digital In terms of services, Güven said financial inclusion in the territory. that one of the features of the virtual The HKMA says it will closely moni- bank, our bank will be the way it is building tor the operations of virtual banks af- together and leveraging the strengths ter they have commenced business, in- customers need of JV partners, PCCW, HKT and Trip. cluding customers’ reactions to the new com. modes of delivery of financial services as greater confidence “We are thinking about how we well as the impact, if any, of these virtual that their data and can acquire customers and create a banks on the banking sector in general. new customer end-to-end acquisition The HKMA expects to be able to conduct privacy are being model with our partners, not simply a comprehensive assessment of the situ- creating traffic,” he said. ation about one year after the first virtual respected and He also hinted that a digital bank bank has launched its service. model was being built with a view to It added that it “adopts a risk-based protected so they exporting to other markets in the fu- and technology-neutral approach to ture. “Currently, we have a laser focus banking supervision,” which means feel genuinely safe on Hong Kong. After that, it’s impos- that, when developing regulatory frame- banking with us” sible to say where next. But with what works, it “will only base on the intrinsic we are building from tech and value characteristics of the financial activities commercial banking businesses un- proposition standpoints, everything or transactions, and the risks arising der proper regulatory and governance is possible,” revealed Güven. from them”. requirements. So we are combining The regulator is keen to oversee the a nimble technology infrastructure Australia looks to bring independent growing use of artificial intelligence, with a new business model,” stated players into the fold to challenge its recently publishing a set of high-level Loong. “big four” principles on the use of the technol- Deniz Güven, CEO of Mox, Stan- Meanwhile, Australia has taken ogy. This comes on the heels of ques- dard Chartered’s new virtual bank a different tack, with the bank- tions about the effectiveness of HKMA’s venture in Hong Kong, said that it being regulator providing licenses fintech sandbox, set up in 2016, which gan researching the project 18 months to new, independent players, in has been accused of helping banks ex- ago and focused on building it around part to provide more competition periment with fintech possibilities rather customer pain points instead of prod- for the “big four” banks that domi- than help new players enter the market. ucts and consumer behaviour instead nate the country’s finance market of demographics. and which were roundly criticised “Whether you call it a digital or in the 2017 royal commission in- virtual or neo bank, what we are quiry. trying to build is the future operating model. We are trying to build a new company and a new culture,” he said. “The aim of the digital bank Deniz Güven is building services instead of prod- CEO ucts. We are not going to sell a plas- Mox Bank Limited tic card, but a service from end-to- end to solve pain points affecting Melisande Waterford Developing a whole new customers right now. GM of Regulatory Affairs and Licensing bankingmodel, not simply a Güven believes that if the new vir- APRA digital bank tual bank wants to be impactful and To incumbent banks, the new vir- change the market, it has to focus on For their part, the Australian tual banking licence means adopting a a new operating model. He noted that Prudential Regulation Author- new way of operating. “The introduc- the bank’s priorities are customer on- ity (APRA) has said that while it tion of digital banking licences marks boarding within five minutes, being wants to encourage competition, it a convergence of two trends, commer- cloud-based, while maintaining pru- has no intention to treat challeng- cial banks wanting to be technology dent risk frameworks, policies, and er banks any differently from other companies and fintechs seeking to be culture. His staff now numbers 160 deposit taking institutions. “It’s licensed to operate the full range of people — half of whom are engineers. not APRA’s role to pick winners http://www.theasianbanker.com Special Report The Asian Banker 7 Rise of Digital Banking Licences Special Report and losers,” said Melisande Water- “These new digital challengers will also ford, general manager of regulatory affairs and licensing. “APRA is provide competition to spur existing keen to see new entrants succeed. APRA’s licensing ‘mission’ is not banks to continue to improve on their to license as many new banks as it can, as quickly as it can. Rath- digital offerings” er, our mission is to facilitate the launch of viable entities.” so they feel genuinely safe bank- If Facebook got its payment system The fourth licensee under ing with us. Ultimately, we hope up, a major Australian bank could APRA’s scheme, Xinja, was granted to offer configurable security op- be in trouble within 18 months.” its licence in September, joining tions to give our customers more Buckley also said that he fears Volt, Judo and 86 400. IN1 Bank control,” Wilson said. that not only is Australia’s digital became the fifth licensee under Wilson added that starting banking sector well behind Chi- APRA’s scheme, having been grant- from nothing means Xinja has na’s, but that the regulators do not ed a licence in December 2019. been able to build many of the have the institutional understand- Xinja CEO and founder Eric necessary compliance controls ing to be able to keep pace with Wilson said that the regulatory into the core products and expe- technology. process was stringent. In order to riences. They’re also seeking to navigate the regulatory process, he build gamification to their prod- Chinese fintechs continue to hired a number of key staff who ucts, rejecting “poorly segmented lead the world in imagination had previously worked at APRA. marketing messages” in favour of and scale a model where “personalisation As different jurisdictions look has to become the product”. to embrace the digital banking fu- These are issues that are not be- ture, it’s indisputable that every- ing properly addressed by the “big one has one eye on the big Chinese four” in Australia, said Ross Buck- players. The mainland has led the ley, a professor at the University of region generally, with four virtu- New South Wales. He believes that al banking licences issued since Eric Wilson the new wave of challenger banks 2014. CEO poses an “existential threat” to To look at the pioneering lead- Xinja their market dominance, especial- ership of WeBank, one of the orig- ly in light of the royal commission inal licence holders, is to under- “There were months where more that rocked public confidence. stand why many fear its ability to than 60% of our staff were work- completely shake up any new mar- ing on materials for our regulators ket that it enters. Alan Ko, head in one form or another, aiming for of fintech innovation at WeBank, the full licence. It’s probably cost agreed that his organisation takes us well in excess of $3.9 million a proactive approach to its opera- (AUD 6 million) in salaries and tions. consultants,” he said. “We work closely with our regu- As the only 100% cloud-based Ross Buckley lators to understand their require- bank in Australia, Xinja is aware Professor ments as well as the pain points, University of New South Wales that people will be watching how and co-build solutions to address it tackles data privacy and emerg- them through regtech. For exam- ing mobile security threats. “The simple fact is that a fintech ple, we have set up the Mailuo, a “We try to make our custom- can assess credit better than any regulatory big data platform for ers aware and not be afraid of our bank, as well as the advantages the China Banking and Insurance respective data and privacy ob- of a lower cost business model,” ligations. Being a digital bank, he said. “Banks are not coming Regulatory Commission (CBIRC), our customers need greater confi- to terms with the fact that in 200 which in cludes risk index moni- dence that their data and privacy years, banking has been a custom- toring and fund flow tracking sys- are being respected and protected er game, but now it is a data game. tems. We have also built a finan-

The Asian Banker Special Report http://www.theasianbanker.com 8 cial regulatory big data platform, “While these new a smart suggestions platform, and online voting and decision-making licensing regimes platform for Shenzhen Municipal will offer clarity and Financial Service Office.” WeBank’s approach to regula- opportunity, they tion is to not wait to be told what Alan Ko safeguards should be put in place, cannot solve the Head of Fintech Innovation WeBank but to show regulators that they fact that the lines are working on key challenges such In terms of fintech, Ko said as system integrity for peak trans- between technology that its strategy remains with in- action volumes that last totalled organisations vesting in AI, blockchain, cloud more than 300 million per day. computing, and big data — not “Our explorations-based API and financial only to support the business, but banking strategy is to connect institutions also to build fintech ecosystem more industries and scenarios, on top of these technologies. To embedding our banking services continue to become put its scale in perspective, it has into different contexts and provide released 10 open-source applica- seamless user experience to our increasingly tions , while its big data platform customers,” he explained. blurred” houses over 15 petabytes of data, http://www.theasianbanker.com Special Report The Asian Banker 9 Rise of Digital Banking Licences Special Report

Despite a low initial threshold, full digital banks in Singapore face the highest paid-up capital requirement Figure 1. Comparison of licensing regimes – operational, capital and liquidity framework

Australia China Hong Kong India Korea Malaysia Singapore Taiwan

Objectives To balance the objectives of enhancing competi- To provide access to capital and financial To promote fintech and innovation To further financial inclusion by providing small To promote financial innovation and sound competi- To offer banking products and services to To ensure that Singapore’s banking sector continues To keep up with development trend of digitisation tion and efficiency in the banking industry and to services to small and emerging com- and offer a new kind of customer savings accounts and payments/remittance services tion in the banking business and enhanced conveni- underserved or unserved market and to add to be resilient, competitive and vibrant and business opportunities and to encourage maintain high levels of financial safety and financial panies and to bring competition to the experience and to help promote to migrant labour workforce, low income households, ence of financial consumers dynamism to the banking landscape financial innovation and deepen financial inclusion system stability, and a broadly competitive, neutral state-dominated banking arena in order financial inclusion small businesses, other unorganised sector entities regulatory framework to create efficiency and other users

Scope of Restricted ADIs: • Covers personal banking, corporate Normally target the retail segment, • Acceptance of demand deposits up to $1,400 • Cannot loan to corporate bodies other than small Products offered should explain how it will 1. Digital full bank (DFB): retail and non-retail cus- Same as a conventional commercial bank business • Can continue to offer to the general public exist- banking and international banking including the small and medium-sized (INR 100,000) per customer or medium-sized enterprises address target segment needs tomer segments. ing products that were established before • Focus on lending to individuals and enterprises • Issuance of ATM/Debit Cards • Shall not loan more than 15% of its equity capital • During restricted phase, retail and non-retail • Can offer new lower risk banking business small businesses • Payments and remittance services to the same individual or corporation, nor 20% deposits with deposit cap $53,530 (SGD 75,000) products, including deposit products to a limited • Can only manage Type II Bank • Business Correspondent (BC) of another bank, of its equity capital to any persons or companies per individual and $35.7 million (SGD 50 million) number of customers Account and Type III Bank Account, subject to the RBI guidelines on BCs with whom the individual or corporation shares in aggregate; Cannot safeguard other financial • Deposit limit of $1.3 million (AUD 2 million) on the which restrict account holder services, • Distribution of non-risk sharing simple financial credit risk. Exemptions are provided for a change institutions’relevant money; Only be allowed to aggregate balance of all protected accounts and cap transaction and deposit limits, and products such as mutual fund units and insurance in the bank’s equity capital or the borrower’s grant a total unsecured credit limit of up to two deposit limit of $165,260 (AUD 250,000) on the does not allow incoming wire transfers products composition times of the individual’s monthly income; No aggregate balance of all protected accounts held • Cannot accept deposits from non-resident Indians • Shall not grant credit to its large shareholders proprietary trading activities by an individual account-holder • Cannot advance loans or issue credit cards 2. Digital wholesale bank (DWB): SMEs and other non- • Not allowed to setup subsidiaries for undertaking retail segments.SME and non-retail or retail fixed non-banking financial services deposits above $178,435 (SGD 250,000)

Number of 5 issued 4 issued 8 issued 11 “in-principle” licences issued 3 issued Up to 5 to be issued Up to 5 to be issued – 2 for DFB and 3 for DWB 3 issued licences Players • Volt Bank (2018: restricted; 2019: full) • WeBank (2014) • Livi VB (2019) • Airtel Payments Bank (2015, operational) • K-Bank (2017) N/A • 21 applications received (7 for DFB and 14 for • LINE Financial Taiwan (2019) • Xinja (2018: restricted; 2019: full) • MyBank (2015) • Mox (2019) • Fino Payments Bank (2015, operational) • Kakao Bank (2017) DWB) • Next Commercial Bank (2019) • Judo Bank (2019: full) • XW Bank (2016) • ZA Bank (2019) • Paytm Payments Bank (2015, operational) • Toss Bank (2019) • Ant Financial, a Grab and Singtel consortium, a • Rakuten International Commercial Bank (2019) • 86 400 (2019: full) • aiBank (2017) • WeLab Bank (2019) • Jio Payments Bank (2015, operational) Razer Fintech consortium, BEYOND consortium, • IN1Bank (2019: restricted) • Ant Bank (Hong Kong) (2019) • India Post Payments Bank (2015, operational) Validus Capital and AMTD led consortium consist- • Fusion Bank (2019) • NSDL Payments Bank (2015, operational) ing of Xiaomi, SP Group and Funding Societies are • Airstar Bank (2019) (Other players gave up on their licence or shut down among the applicants • Ping An OneConnect Bank (2019) their business)

Key Dates Revised guidelines issued in May 2018 Finalising the first rules to cover online- Revised Guidelines on Authorization of Guidelines for Licensing of Payments Banks pub- • Plan to introduce internet-only banks announced Exposure draft issued in December 2019, and • Extension of digital bank licences announced in • Policy for internet-only bank established in only banking operations Virtual Banks published in May 2018 lished in November 2014 in June 2015 finalised document expected by the first half June 2019 April 2018 • The Internet-Only Bank Act established in of 2020 • The successful applicants expected to be an- • Revised guidelines issued in November 2018 September 2018 nounced in June 2020

Phases • Direct route and restricted route to become an No No The “in-principle” licence is valid for 18 months No 3-5 years “Foundational Phase” and Post- • For DFB, includes restricted and full DFB No authorised deposit-taking institution (ADI) within which they have to fulfill all the requirements. Foundational Phase • Restricted DFB is further divided into entry stage • Restricted route: a maximum of two years to meet and progression stage the prudential framework in full

Minimum Restricted ADI: Required to maintain the higher of $285 million (RMB 2 billion) $38.6 million (HKD 300 million) $16 million (INR 1 billion) $20.6 million (KRW 25 billion) • Foundational phase: $24 million (MYR 100 2 DFB at $10.7 million (SGD 15 million) each with $329 million (TWD 10 billion), same as setting up paid-up $2 million (AUD 3 million) plus resolution reserve or million) progressive increase to $1.1 billion (SGD 1.5 billion): a conventional commercial bank capital 20% of adjusted assets. The resolution reserve is • Post-Foundational Phase (by end of 5th 3 DWB at $71.6 million (SGD 100 million) each typically set at $661,030 (AUD 1 million) year): $71 million (MYR 300 million)

Asset Restricted ADIs should not grow significantly beyond No specific requirement No specific requirement No specific requirement No specific requirement Foundation phase: $473 million (MYR 2 billion) No specific requirement No specific requirement Restriction a $66.1 million (AUD 100 million) balance sheet

Shareholding Ownership of ADIs is governed by the Financial Maximum shareholding limit: 30% • No foreign ownership restrictions • The promoter’s minimum initial contribution shall • A non-financial investor may hold not more than Single shareholder that owns >50% may be DFBs limited to applicants anchored and headquar- • At least one of the founders should be a Structure Sector (Shareholdings) Act 1998 which limits • If virtual bank is not owned by at least be 40% for the first five years 34% of the total outstanding voting stocks of an required to organise financial and financial tered and controlled by Singaporeans. DWB’s are bank or a financial holding company and its shareholdings of an individual shareholder, or group bank/FI, applicant to be held by • The foreign shareholding would be as per the internet-only bank related subsidiaries under a licensed institution open to foreign companies as long as they are locally shareholding should reach 25% of associated shareholders, to a defined percentage intermediate holding company Foreign Direct Investment policy for private sector • A company applying to possess more than a 10% or financial holding company incorporated • A non-financial corporation can take a majority of the ADI’s voting power in Hong Kong, under regulator banks as amended from time to time. At least stake in an internet-only bank must not have stake of up to 60% purview 26% of the paid-up capital will have to be held by violated laws related to fair trade or taxes in the • A foreign financial institution can be the residents past five years founder

Capital and • Restricted ADI: All regulatory capital must be held • Subject to the same regulatory • Subject to the same set of super- • Minimum CAR of 15%. Tier I capital should be at • Granted a two- to three-year grace period to During the foundational phase, subject to a • Capital: Same as domestic systemically important Subject to the same set of supervisory require- liquidity rules as Common Equity Tier 1 (CET1) Capital, except requirements as any existing banks visory requirements applicable to least 7.5%. Tier II capital should be limited to a implement Basel III regulations more simplified regulatory requirement banks - 6.5% CET1 ratio, 10% Total CAR, 2.5% ments applicable to conventional banks for mutually-owned RADIs which may hold capital • Minimum Core Tier 1 Capital Ad- conventional banks maximum of 100% of total Tier I capital. • Allowed to operate under Basel I capital regula- • CET1 ratio of 8% (foundation phase) capital conservation buffer, and up to 2.5% coun- as Tier 2 Capital equacy Ratio (CAR): 7.5%; Minimum • Maintain adequate capital com- • Should have a leverage ratio of not less than 3% tions in the first three years of operation • Shall hold an adequate stock of unencum- tercyclical capital buffer • Restricted ADI: Required to maintain a Minimum Tier 1 CAR: 8.5%; Minimum CAR: mensurate with the nature of their • Apart from Cash Reserve Ratio with RBI, they • LCR: 80% or above in the first year; 90% or bered Level 1 and Level 2A high-quality • Liquidity: Minimum Liquid Asset (MLA) or LCR Liquid Holdings (MLH) at the higher of 20% of 10.5% operations and the banking risks have to invest 75% minimum of their demand above in the second year; full implementation liquid assets equivalent to at least 25% of requirements liabilities; or the value of protected accounts and • Certain types of risk could be more deposits in government treasury/securities bills (100% or above) from the third year its total on-balance sheet liabilities stored value at risk (if applicable) plus an amount accentuated. Appropriate controls with maturity up to one year and hold maximum • NSFR/leverage ratio: full implementation (NSFR • Shall be exempted from the requirements equal to the resolution reserve to be set up for 8 basic risk types 25% in current and fixed deposits with other of 100% or above, leverage ratio of 3% or above) under the policy document on Stress Testing commercial banks since the fourth year

ATM access/ No physical branches No physical branches • Will need to negotiate access with • Permitted to set up outlets such as branches, Offline branches are approved only exceptionally • May participate in the Shared ATM Network • No access to ATMs/CDM network, but allowed to Apart from a head office and customer service Physical ATM operators ATMs, BCs, etc. to undertake only certain and other cash-out services offered by offer cashback services through EFTPOS terminals center, not allowed to set up physical branches Presence • Applicant must have physical restricted activities PayNet at retail merchants presence in Hong Kong and locally • At least 25% of physical access points including • Not allowed to establish any physical • One physical presence for DWB incorporated BCs in rural centres branches • No physical branches • A controlling office for a cluster of access points Note: As of 4 March, 2020 Source: Asian Banker Research

The Asian Banker Special Report http://www.theasianbanker.com 10 Australia China Hong Kong India Korea Malaysia Singapore Taiwan

http://www.theasianbanker.com Special Report The Asian Banker 11 Rise of Digital Banking Licences Special Report with over 300 thousand batch adopt different credit risk assessment Sure Global, Insignia Ventures Partners jobs processed daily. approaches to lend to under-served seg- and Carro. It has announced plans to WeBank has remained coy about ments, such as the young and micro en- launch Razer Youth Bank aimed at its intentions to move beyond the terprises,” a spokesperson for MAS said. younger customers. mainland, but Ko noted that in “These new digital challengers will also Other bidders include the BEYOND 2019 when it joined the Singapore provide competition to spur existing consortium led by V3 Group and EZ- banks to continue to improve on their Link, and partners such as Far East Or- FinTech Festival, it generated quite digital offerings.” ganization, Singapore Business Federa- a lot of interesting conversations MAS said that it received 21 appli- tion, Mitsui Sumitomo Insurance and with the fintech communities cations across the two schemes, with Heliconia Capital Management; Validus around the world”. seven for the digital full bank (DFB) li- Capital, a local SME financing plat- cence and 14 for the digital wholesale form, supported by Vertex Ventures Singapore takes a strong bank (DWB) licence. It will announce and Dutch development bank FMO; stance on profitability, capital, the successful applicants in June 2020, and a consortium led by UK-based and IT controls and they are expected to commence Enigma Group and partners that in- With Chinese fintechs such as We- business by mid-2021. clude Singapore-based companies, Bank taking a keen interest in Singa- According to MAS requirements, Qrypt Technologies, 2359 Media pore’s digital banking potential, the a DFB will commence operations as a and Blockchain Worx. Monetary Authority of Singapore (MAS) restricted DFB before becoming a full The consortium model emerged as a announced the biggest shake up to its functioning DFB. The pace of growth of key trend after MAS advised that appli- financial sector in two decades, with a restricted DFB will depend on its abil- cants must demonstrate how their large the introduction of up to five new digi- ity to meet its commitments and MAS’ user bases can help them generate prof- tal bank licences. supervisory considerations. its if they were to win a licence. They The scheme will enable non-financial However, it generally expects a DFB to have, apparently, also to taken into ac- players such as tech and e-commerce be fully functioning within three to five count the national interest when con- companies to offer banking services. years from commencement of business. sidering the licence application. Two of the five licences will be ‘full At the commencement of business, bank’ licences, which will include the a DFB will have to meet minimum paid Global regulator sends warning ability to take deposits from retail cus- up capital requirement of $11.13 mil- to big tech companies tomers, while the remaining three will lion (SGD 15 million) and deposit caps In general, regulators are trying to be digital wholesale licences to serve of $37.1 million (SGD 50 million) in balance the benefits of a digitised, glo- small and medium-sized enterprises aggregate, $55,650 (SGD 75,000) per balised world with the integrity and (SMEs) and other non-retail segments. individual and limit its scope of cus- stability of the financial system. Fer- MAS said that it has been driven to tomers from whom it can solicit de- nando Restoy, chairman of the Finan- licence virtual banks because of the posits. The minimum paid up capital cial Stability Institute at the Bank for “unique value propositions and to add requirements will be progressively in- International Settlements, outlined a diversity and choice to the market”. Of creased to $1.1 billion (SGD 1.5 billion) number of key challenges that need to the countries which have so far entered and the deposit caps will be eventually be considered when designing an ad- this regulatory sphere, Singapore has removed when it becomes a fully func- equate policy framework to safeguard established some of the toughest licens- tioning DFB. the orderly modernisation of the finan- ing requirements. Among the more notable of the 21 cial industry on a global scale. Entrants already face much stiffer bidders who have joined the race for the “Central banks do not typically rules than in markets such as Hong five digital banking licences are Ant Fi- have a mission to directly promote Kong, such as the requirements for full nancial; a Grab and Singtel consortium, the digitisation of financial institu- digital banks to have $1.5 billion in which is owned 60% and 40%, respec- tions. They should however contrib- capital as well as local control. Any new tively by the region’s leading ride hailing ute to efforts — together with other digital banking organisation may also and “super app” provider and telecom- authorities — to adjust or set up face margin pressures, as MAS expects munication group and a Razer Fintech a proportionate regulatory frame- it to attract customers by offering more consortium which is 60%-owned by work. The key challenge here is to attractive deposit and lending rates than the subsidiary of the Singapore-based maximise the benefits new technol- the incumbent banks. global e-gaming group Razer Inc. with ogies could bring while preserving “They may have access to more strategic equity partners that include the stability and functioning of the wide-ranging data sources and may Sheng Siong Holdings, FWD, Link- financial system,” Restoy said.

The Asian Banker Special Report http://www.theasianbanker.com 12 2019 saw a bumper crop of neobank licences issued in various Asia Pacific markets Figure 2. Key neobanks/digital banking services in Asia Pacific

JAPAN • Japan Net Bank (2000)# HONG KONG SOUTH KOREA • Seven Bank (2001)# • Livi VB (Granted a licence in 2019) • K-Bank (2017) • Rakuten Bank (2001)# • Mox (Granted a licence in 2019) • Kakao Bank (2017) • SBI Sumishin Net Bank (2007)# • ZA Bank (Granted a licence in 2019) • Toss Bank (Granted a licence in 2019) • Jibun Bank (2008)# • WeLab Bank (Granted a licence in 2019) • Ant Bank (Hong Kong) (Granted a licence in 2019) • Fusion Bank (Granted a licence in 2019) • Airstar Bank (Granted a licence in 2019) • Ping An OneConnect Bank (Granted a licence in 2019) CHINA • WeBank (2014)# • MyBank (2015)# THAILAND • XW Bank (2016)# • TMRW by UOB (2019)* • aiBank (2017)# • ME by TMB (2012)* TAIWAN INDIA • Richart! by Taishin International Bank (2016)* • Digibank by DBS (2016)* • O-Bank (2017)# • 811 by Kotak Mahindra Bank (2017)* MALAYSIA • KOKO by Cathay United Bank (2017)* • YONO by SBI (2018)* Up to five digital banking licences • LINE Financial Taiwan (Granted a licence in • Airtel Payments Bank (2016) to be issued 2019) • Fino Payments Bank (2017) • Next Commercial Bank (Granted a licence in • Paytm Payments Bank (2017) 2019) • Jio Payments Bank (2018) • Rakuten International Commercial Bank • India Post Payments Bank (2018) (Granted a licence in 2019) • NSDL Payments Bank (2018) CAMBODIA • Liiv KB Cambodia (2016)* AUSTRALIA • ING Bank (1999)# INDONESIA SINGAPORE • Ubank (2008)* • Jenius by BTPN (2017)* Up to two digital full bank (DFB) licences • UP by Bendigo and Adelaide Bank (2018)* • Digibank by DBS (2017)* and three digital wholesale bank (DWB) • Volt Bank (2018: Restricted; 2019: Full) • Tyme Digital by CBA (2017)* licences to be issued • Xinja (2018: Restricted; 2019: Full) • UOB Indonesia will launch TMRW in 2020* • Judo Bank (2019: Full) • 86 400 (2019: Full) PHILIPPINES • IN1Bank (2019: Restricted) • CIMB (2019)# VIETNAM • ING Bank (2019)# • Timo by VPBank (2016)* • Tonik Digital Bank (2020)# • OCTO by CIMB (2018)* • RCBC will launch RCBC Digital in 2020# • YOLO by VPBank (2018)*

Notes: # Standalone digital banks licenced to operate under existing commercial banking licensing requirements * Not standalone digital banks but digital banking services/brands introduced by existing licenced commercial banks under prevailing requirements Source: Asian Banker Research

types of institutions generate different risks been arguing to regulate the activities when performing the same activity. that they conduct in the space rather “Arguably, the risks created for the fi- than licensing them as institutions. nancial system not only depend on the ac- And while these new licensing re- tivity per se but also on the combination gimes will offer clarity and opportunity, of different activities on the balance sheet they cannot solve the fact that the lines Fernando Restoy of an institution,” he added. between technology organisations and Chairman, Financial Stability Institute Critically, in setting the tone for financial institutions continue to become Bank for International Settlements regulators, Restoy stated that “activity- increasingly blurred. based regulation cannot entirely sub- But no matter who is doing the innovat- He noted that the principle ‘same activ- stitute entity-based regulation”. This ing, both regulators and the banking and ity, same regulation’ has been frequently appears to be a shot across the bows of finance industry should take note of the used to stress the need for a level playing big tech firms, such as Alibaba, Apple, lessons learned from some of the problem- field between new fintech and big tech Facebook, and Google, who are increas- atic tech unicorns: namely that the people companies and traditional banks, however ingly active in the banking and finance policing the standards will often be several it must be acknowledged that different markets, and who by and large have steps behind the disrupters.

http://www.theasianbanker.com Special Report The Asian Banker 13 CO-PUBLISHED ARTICLE

Increasing certainty in a core banking transformation

Andrew Beatty, senior vice president and head of global banking solutions at FIS, discusses the foundation of a modern banking platform and ensuring certainty of success in a core banking transformation

he rise of digital-only banks is transforming the financial services landscape in Asia Pacific, Twhere regulators have of late been issuing licences that allow new virtual banks and fintech consortia to operate alongside of incumbent banks. These new players appear to have some advantages over their more traditional counterparts. Andrew Beatty, senior vice president and head of global banking solutions at FIS, identified some of these strengths: “They are unencumbered by costly branch networks, legacy technology stacks and outmoded thinking. Digital-only banks offer a fresh approach to banking with a total focus on the customer experience.”

The tipping point for change A closer look at these digital banks reveals that many are also doing things differently. He elaborated: “Often, they don’t run their own core technology, but rather rely on partners or third parties – sometimes even other banks. Ironically, this age of increased competition is also one of greater collaboration.” Beatty feels that there is an enormous opportunity for banks, whether neo or incumbent, to revisit first principles and core competencies as they confront the hard decision to redefine their core technology stack. A big part of the challenge has been about gaining the agility and flexibility needed to meet rising customer expectations, as well as competitive pressures and regulatory demands. From the technology perspective, this may require a new sustainable, modern banking platform that Andrew Beatty is built on a new core infrastructure that can function across channels, devices, in real-time that Head of Global Banking Solutions FIS enables the bank to become more agile and customer-centric.

Foundation of a modern banking platform Beatty explained: “A modern banking platform must be able to meet the unique challenges and opportunities of the digital age. And it means building on a number of key foundational elements. For instance, it entails core elements that can be exposed via application program interfaces (APIs) to be consumed by the bank and third parties, in order to support new business models and respond to evolving customer needs quickly and easily.” A cloud and open architecture-based core infrastructure platform that supports APIs and microservices is especially critical in this new digital landscape. And that also means enabling the bank to add new components and include third-party vendors as required to create unique digital offerings that add real customer value and aid retention. Another important foundation is for key platform components to be self-contained and de- veloped individually accordingly to open standards. “You can maintain and change anything where and when you want to, without affecting other core components,” he elaborated. Banks can also leverage technologies that utilise “moment in time” data that is live, and able to deliver continuous customer engagement. The foundation for this is event-based architecture (EBA) and event streaming. With an EBA approach in the technology stack, banks can deliver digital experiences tailored to their customers’ interactions (events) as they occur.

For more information, contact us: Certainty of success in core banking transformation Jennifer Lim However, detractors of core banking transformation will be quick to point out that it is a highly fraught undertaking and will cite the many high-profile projects that have failed despite the International Marketing, abundance of support, effort and resources dedicated to them. Banking Solutions Beatty believes that the answer to these concerns revolves around ensuring solution certainty Email: [email protected] and delivery certainty, and that invariably means “looking very hard for the proven track record of whatever and whoever it is that you are evaluating and selecting,” he remarked.

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