How will virtual banks affect the financial industry landscape in Singapore?

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Virtual banks are coming to Singapore, but the biggest incumbents have little to fear. Singapore's top three lenders, DBS, UOB and OCBC, have plenty of cash to invest in fintech innovation. What they cannot build independently they can access through tie-ups with startups. For smaller lenders who lack the heavyweights' resources, the virtual banks could pose a tougher challenge. The scope of the challenge will depend on how much freedom the Monetary Authority of Singapore (MAS) gives the new entrants.

While supportive of fintech innovation, the MAS has thus far restricted fintechs from getting involved in lending and accepting deposits. The MAS is is working "to strike a balance between preserving financial stability and giving companies sufficient room to innovate," Simon Chen, a Moody's vice president and senior analyst, said in a June press release.

Piyush Gupta, CEO of DBS, has expressed confidence in the ability of traditional lenders to prevail amidst rising competition from digital upstarts. "With our digital transformation efforts well underway, Singapore banks can today hold our own," he said in a statement, adding: "It is also heartening that MAS is committed to creating a level playing field and is proceeding thoughtfully with the liberalization."

In June, the MAS said that it would issue up to five digital banking licenses - with the application process likely taking place in August - in a bid to provide more affordable banking services to underserved market segments. Two of the licenses will be full digital bank licenses, allowing the licensees to take deposits from retail customers and provide them with a wide range of financial services. The other three will be wholesale bank licenses. Holders will be permitted to serve SMEs and other non-retail segments. Traditional lenders in Singapore often hesitate to offer favorable lending terms to unproven small businesses.

A wide array of fintechs are likely to apply for the digital banking licenses, with an eye on using Singapore for a regional base of operations. While the licenses will only be valid in Singapore, digital banking is surging across Southeast Asia. A successful digital banking model in the city state could be reproduced elsewhere - provided regulators are amiable.

Among the fintechs expected to apply for a digital banking license in Singapore are ride-hailing giant Grab, gaming hardware manufacturer Razer, peer-to-peer lender Validus Capital, and the digital wallets Liquid Group, Xfers, Matchmove Pay and FOMO Pay. Telecoms giant Singtel is also reportedly interested in acquiring a digital banking license.

According to a July report in Singapore's Business Times, Liquid Group believes the license would bolster the expansion of its cross-border mobile payments business, which includes partnerships with banks in Hong Kong and Indonesia.

Xfers, whose business focuses on helping digital firms collect, store and send money, is reportedly eyeing a digital wholesale bank license. The company aims to serve SMEs and other non-retail segments, co-founder Samson Leo told Business Times.

The MAS is setting the bar high for would-be digital wholesale banks, ensuring that only established, well capitalized fintechs will be eligible. Per the MAS's requirements, digital wholesale bank license applicants must have a paid-in capital of S$100 million. Licensees will only be able to take fixed deposits of S$250,000 or more from individuals.