Digital Banking in Singapore – Quixotic or Illusion for SMEs

Digital Banking in Singapore – Quixotic or Illusion for SMEs

626 338 Shikha Sarkar

Digital Banking in Singapore – Access to capital markets; it’s the one condition which Singaporean SMEs have come to rely heavily on. During the recent US-China trade-war crisis, the country suffered a significant loss in terms of cash-flow, factoring outcomes, and interest rates. While the GDP shrank by 3.4% in Q2 of 2019, the volatility in lending rates continued to affect SMEs for the better part of the year. So, when it was announced by the Monetary Authority of Singapore (MAS) back in June 2019, that two digital full-bank licences and three digital wholesale bank licenses would be issued by mid – FY2020; SMEs showed visible optimism towards its possible benefits. Digital Banking for SMEs in similar South Asian countries like Indonesia and India has revealed promising outcomes. Here’s how digital banking in Singapore could turn out in the coming years.

Read the MAS official announcement and Virtual Banking License guidelines here.

Source: Fintech News

Need of Digital Banking in Singapore

While small and medium enterprises (SMEs) comprise over 99% of the Singapore trade market, the contribution of SMEs to the GDP still lingers close to 48% only. Several factors, including the labor market shift, global compliance, technology transformation, and ease of financial operations, influence this disparity. On why – does banking affect SMEs to this extent; here are some facts that one should know.

1. Uneven distribution of SME Loans

Back in 2014, SME loans in Singapore stood at US Dollars 57 Billion, while they contributed to 37% of the GDP. Such loans are mostly inclined (~53%) towards manufacturing, real estate, and other primary industries. Service and Trade industry need to have an even share of SME loans to ensure insulation from economic volatility. While they get fewer loans at harder rates, their share in the GDP is relatively better than the primary industries. Digital Banking in Singapore promises an even market for both mature and young businesses.

2. Accessibility to SME Finance: 

Close to 50% of SMEs in Singapore do not have full-access to SME finance. Competition, legal structures, and strict credit assessment policies in financial markets discourage SMEs from getting financial assistance. Restrictive financial inclusion breaks 41% to 8% of the total SMEs in terms of unserved and underserved enterprises respectively. Having essential financial services such as an overdraft facility is a luxury for some SMEs which do not have the required credit history. Automation via digital KYC (know-your-customer) compliance models and digitization of legal functions will help in mitigating the bottlenecks of financial accessibility for SMEs.

Read how underserved SMEs can write the success story of upcoming Digital banks in Singapore here.

3. Need of Working Capital

A survey by Singapore Business Federation revealed that 53% of SMEs claimed to be facing financial issues and 56% being troubled by expensive loans. Managing cash flow ranked as the 2nd highest priority of SMEs, at 31% of respondents seeking solutions for the same5. 48% of SMEs suffer from delay in payments owing to inefficiencies in the banking system, invoice handling processes, and payment procedure tangles. Digital Banking in Singapore can help cover the weak financial structure of SMEs via P2P lending, automated account performance monitors, and advanced factoring solutions.

4. Demographic reach of Digital Banking in Singapore

SMEs in Singapore have long felt the need of diversified banking solutions. While countries with similar purchasing models and business cohorts get more attribution points with their traditional banking service provider, SMEs in Singapore do not. 417 SMEs find themselves getting their banking services from 1 bank branch in Singapore. Compare this to 200 SMEs per branch in the Philippines and 36 in Australia. With the onset of full digital banks in Singapore, the reach of financial institutions will no longer be an issue for cash strapped SMEs.

Source: APPS TSN

How Digital Banking in Singapore helps SMEs?

SMEs in Singapore need a financial partner that helps in improving their loan volumes, increasing customer base, and provides them with scalable long-term solutions. Digital Full Banks offers the following features to tackle the top concerns raised by SMEs over the last years.

  • Providing alternative channels of funding to SMEs
    1. Supplier Credit
    2. Bank Credit
    3. Capital Lease
    4. Equity Financing
    5. Government Grant
  • Credit Assessment via Payments Data
    1. Using KYC Models
    2. Big data analytics for cash flow forecasting
  • SME outreach enhancement by Technology Solutions
    1. P2P lending
    2. Online payments
    3. International payments solutions
  • Solving Non-Financial needs by innovative product offerings
    1. Integrated accounting services
    2. Banking input cost reduction
    3. Reducing legal costs

‘Singtel Grab Digital Bank or Razer-The Youth Bank’ – know who is contending to become one of the first digital full banks of Singapore here.

Features of Full Digital Banks in Singapore

Between Grab and Singtel being the prime contenders for the full digital bank licenses and MatchMove being the latest one, the SME community is still to get all that it wants. Some of the contenders are already working in expected capacity as fintech leaders. However, Digital Banks, as perceived in the extended MAS Internet banking framework and DFB-DWB license announcement, have something far more significant to offer. Here’s what’s on the plate for SMEs with digital full-banks.

1. International Payment Solutions by Digital Banking in Singapore

37% of SMEs in the APAC (Asia-Pacific) region wish to explore more international markets. Digital full banks with their access to ‘international payments’ infrastructures can help these organizations in going global. Top challenges that SMEs suffer today with traditional banks are logistics cost, customized documentation for various countries, and inter-bank networking.

2. Forecasting models for AI-based SME banking

Fintech APIs for analyzing payments from all counterparties, robotic automation models for consolidating incremental data from cash-flow history, generating non-functional currency balance sheets from cloud dashboards; SME banking has a lot to achieve from Digital Banks. The S$ 225 Million fund allocated by the Monetary Authority of Singapore (MAS) for the Financial Sector Technology and Innovation (FSTI) scheme is going to get majorly used in the development of these services.

3. Bundle Solutions with SME Financing

31% of SMEs in Singapore have already switched their banking institution or have considered the same in the last 24 months. Reason: lack of diversified solutions to account for the multi-dimensional needs of the SME. Thus, applicants with experience in Infocomm digital transformation are going to be ace bidders in the virtual banking license wars. Virtual banks in Singapore may provide various bundled solutions to SMEs in terms of managing their financial and non-financial requirements.

●     Accounting Solutions – 36% of SMEs in Singapore were enthusiastic about getting a subscription-based invoicing and accounting solution SaaS along with their digital full bank account. Access to core banking functions via digital banking accounts, which might have unique SME-to-SME based applications, is an exclusive feature of Digital Banks.

●     Payment Solutions – 35% of SMEs suffer from late payments, invoice collection, and factoring solutions with their traditional banks. E-wallets, payment gateways, forex trading, payment collection systems are the need of the hour provided by Digital Banks.

●     Financial Security – Uninterrupted cash-flow is one of the great benefits that full digital banks might provide to SMEs. Prospective Virtual Banking License applicants like Grab Fintech have already tested their pay-as-you-go credit insurance models through their joint venture with Zhong An.

Challenges of Digital Banking in Singapore

SME Digital Credit business is an under-tapped (rather untapped!) business of US$ 5 Billion, which can fuel the Singaporean economy for the better part of the next few years. An average business transaction takes 9.1 hours in Singapore, and SMEs going into the next decade are more than looking for faster solutions.

As found by a 2019 survey, 39% of SMEs are looking for online solutions to fetch a line of credit. 12% out of these might even be looking for SME credit solutions on their mobile phones. The question is whether Digital Full Banks have the technical or financial ability to provide such extent of services. Among other challenges, here are the most critical challenges that digital full bank applicants face today.

1. Consumer outlook towards Virtual Banks

SMEs’ financial partnerships are relatively volatile in the country. Given the nature of financial transactions by SMEs in the last 24 months, one can say that at least 24,000 SMEs in Singapore would be looking for new banking partners in the next 24 months. Similarly, another survey shows that as much as 55% of SMEs required loans when asked about. As it turns out, 58% (additional 3%) of total SMEs never applied for a loan during the observation period. Most of them (38%) are reluctant to debt and critically online debt. Availability of branch supported banking remains a pivotal factor for conventional SMEs. Digital Banking in Singapore will need to influence an average SME owner of its benefits.

2. Capital and Cybersecurity of Digital Banks in Singapore

As the SMEs in the country ‘Go Digital,’ end-points and access to core banking services with administrative rights pose potent cyber-threats. Digital Banks which might provide non-banking solutions to SMEs will have to ensure that sufficient legacy systems along with cyber hygiene systems for open APIs, end-to-end encryption for shared transaction ledgers, and anti-DDoS measures gets established.

In terms of Full Digital Banking in Singapore being the ultimate financing solution for SMEs, ‘it’s still all relative.’ Singapore still pays an effective interest rate (EIR) of 9% to 30% per annum on P2P Lending, which is thrice of what conventional unsecured loans cost. Thus, applicants with previous banking exposure might do justice to the demands of the SME industry, while non-banking applicants with fintech partners might just have the right tools for the changing industry.

Shikha Sarkar

Shikha Sarkar, Director of Kit Kat Events & Marketing has more than 16 years of experience in international sales and marketing, and strong entrepreneurial skills, in-depth understanding of business, markets and customer needs. As the Ambassador of InterNations, a global expat network, Shikha supports a community of over 65,000 expats from 200 different countries living in Singapore. She loves adventure travel and wildlife photography.

All stories by:Shikha Sarkar
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Shikha Sarkar

Shikha Sarkar, Director of Kit Kat Events & Marketing has more than 16 years of experience in international sales and marketing, and strong entrepreneurial skills, in-depth understanding of business, markets and customer needs. As the Ambassador of InterNations, a global expat network, Shikha supports a community of over 65,000 expats from 200 different countries living in Singapore. She loves adventure travel and wildlife photography.

All stories by:Shikha Sarkar