Terms of Operations for Virtual Banks

Mr Saktiandi Supaat asked the Prime Minister (a) what are the operating terms for virtual banks as compared with traditional banks; (b) whether MAS will ensure that there is a level playing field for all; and (c) what is the impact of lower operational costs for virtual banks on consumers and the industry.

MAS has announced that it will be issuing up to five new digital bank licences, which will comprise up to two digital full bank licences that can access retail deposits, and up to three digital wholesale bank licences that will cater to small and medium enterprises (SMEs) and other non-retail segments. This is in addition to any digital banks that Singapore banking groups may establish under MAS' existing internet banking framework introduced in 2000.

The move will provide space in our banking system for innovative non-bank players, and help spur further innovation in banking. In the same vein, MAS had announced in September last year that non-bank payment institutions will be granted direct access to the real time payments network between banks, also known as Fast and Secure Transfer (FAST).

MAS' operating terms for the new digital banks will be calibrated to maintain the trust and stability that are the hallmarks of Singapore's banking system. Let me elaborate.

First, MAS will carefully evaluate the sustainability of applicants' business models. They must not engage in value-destructive competition to gain market share. MAS will monitor market dynamics and, where necessary, impose additional supervisory requirements or restrictions to deter such behaviour. The aim here is to avoid unsustainable banking practices, and to preserve a level playing field among banks.

Second, we will also preserve a level playing field in prudential requirements. The digital banks will have to meet the same capital and liquidity requirements as existing banks. They will be subject to the same consumer lending rules, such as limits on unsecured credit extended and loan-to-value ratios for mortgages. Digital full banks will also be required to participate in the deposit insurance scheme, which will cover an individual’s deposits of up to S$75,000.

Third, to minimise risks to retail depositors, MAS will phase in the permissible activities of digital full banks via a two-stage process. A digital full bank will commence as a restricted digital bank to build up its business model and internal processes, and gradually progress to become a full-fledged full bank. At the entry stage, a restricted bank will be subject to an aggregate deposit cap of S$50 million and an individual depositor cap of S$75,000. While digital wholesale banks are not subject to the two-stage process, MAS will impose appropriate activity restrictions in its initial years of operations to mitigate the risks of untested business models.

MAS' regulatory and supervisory frameworks support the stability of the system as a whole, and help preserve sound practices among individual banks. But MAS, like all financial regulators, cannot guarantee that individual banks will not fail, whether they are digital banks or otherwise. It hence remains important for consumers to be aware of the risks, and of the extent of protection that they will be accorded under the deposit insurance scheme if a bank fails.

Mr Saktiandi asked about the impact of digital banks' operational costs on consumers. Digital banks are likely to operate with new technology stacks and may have more nimble solutions that enable lower operational costs than traditional banks. This can potentially benefit customers and the broader economy.

New digital banks could potentially offer deposit accounts without imposing any minimum deposit amount or fall-below fees, as seen in the United Kingdom and Hong Kong.

Digital banks with access to more wide-ranging data sources could adopt different credit risk assessment approaches to lend to under-served segments of the economy like young and micro enterprises.

Further, the increased competition from digital banks is likely to spur existing banks to improve further on their own digital offerings.

We are confident that the calibrated opening of banking to new digital players will benefit consumers and businesses, while preserving stability. It should ensure that Singapore's banking sector continues to be resilient, competitive and vibrant.